Microeconomics Exam 1 Study Guidance – Scarcity, Opportunity Cost, Comparative Advantage, Supply & Demand

Q1. If resources are “scarce,” what does this mean?

Background

Topic: Scarcity in Economics

This question tests your understanding of the fundamental economic problem of scarcity, which is central to microeconomics.

Key Terms:

• Scarcity: The condition where resources are limited and cannot satisfy all human wants and needs.

• Opportunity Cost: The value of the next best alternative forgone when making a choice.

Step-by-Step Guidance

1. Recall the definition of scarcity in economics: it refers to the limited nature of resources in comparison to unlimited human wants.

2. Consider what it means for resources to be unable to provide enough goods or services for everyone.

3. Eliminate options that suggest resources are unlimited or have no value.

4. Focus on the answer that best reflects the concept that not all wants can be satisfied due to limited resources.

Try solving on your own before revealing the answer!

Q2. Why is water considered a scarce good?

Background

Topic: Scarcity and Goods

This question asks you to apply the concept of scarcity to a real-world good, water.

Key Terms:

• Scarce Good: A good for which the quantity demanded exceeds the quantity supplied at a zero price.

Step-by-Step Guidance

1. Think about whether water is available in unlimited quantities for all uses and people.

2. Recall that scarcity does not mean rarity, but rather that there is not enough to satisfy all needs at no cost.

3. Identify the answer that reflects the idea that water is not available in sufficient quantity for all possible uses.

Try solving on your own before revealing the answer!

Q3. Which of the following is a positive economic statement?

Background

Topic: Positive vs. Normative Economics

This question tests your ability to distinguish between statements of fact (positive) and statements of opinion or value (normative).

Key Terms:

• Positive Statement: A statement that can be tested and validated; it describes "what is."

• Normative Statement: A statement that expresses a value judgment; it describes "what ought to be."

Step-by-Step Guidance

1. Review each statement and ask: Can this be tested or measured?

2. Identify which statements are opinions or recommendations (normative) and which are factual (positive).

3. Choose the statement that is descriptive and can be verified with data.

Try solving on your own before revealing the answer!

Q4. What is the opportunity cost of buying a bag of chips for $1 instead of a candy bar for $1?

Background

Topic: Opportunity Cost

This question tests your understanding of opportunity cost, a key concept in microeconomics.

Key Terms:

• Opportunity Cost: The value of the next best alternative forgone when a choice is made.

Step-by-Step Guidance

1. Identify the two options: buying chips or buying a candy bar, both costing $1.

2. Recall that opportunity cost is not just the money spent, but what you give up by not choosing the next best alternative.

3. Determine what you forgo by choosing the chips over the candy bar.

4. Look for the answer that reflects the enjoyment or benefit you would have received from the candy bar.

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Q5. What economic principle is illustrated when someone considers having a second glass of lemonade after already having one?

Background

Topic: Marginal Analysis

This question is about the marginal principle, which involves comparing the additional benefit and cost of consuming one more unit of a good or service.

Key Terms:

• Marginal Analysis: The process of comparing the additional (marginal) benefit and the additional (marginal) cost of an action.

Step-by-Step Guidance

1. Recognize that the decision to have another glass is based on weighing the extra benefit against the extra cost.

2. Recall the definition of marginal analysis and how it applies to everyday decisions.

3. Identify the answer that best matches this process of decision-making at the margin.

Try solving on your own before revealing the answer!

Q6. What does the principle of diminishing returns imply about output when one input increases and others are held fixed?

Background

Topic: Diminishing Returns

This question tests your understanding of how output changes as more of one input is added, holding other inputs constant.

Key Terms:

• Diminishing Returns: The property whereby the marginal product of an input declines as the quantity of the input increases, holding other inputs constant.

Step-by-Step Guidance

1. Recall the definition of diminishing returns and how it affects production.

2. Think about what happens to the rate of output increase as more of one input is used.

3. Identify the answer that describes output increasing, but at a decreasing rate.

Try solving on your own before revealing the answer!

Q7. What should be included in the opportunity cost of attending college?

Background

Topic: Opportunity Cost in Decision-Making

This question asks you to apply the concept of opportunity cost to the decision to attend college.

Key Terms:

• Opportunity Cost: The value of the next best alternative forgone.

Step-by-Step Guidance

1. List all the costs associated with attending college, including explicit and implicit costs.

2. Consider what you give up by attending college, such as potential earnings from working instead.

3. Identify which costs are directly related to the choice of attending college versus not attending.

Try solving on your own before revealing the answer!

Q8. What does it mean if an economy is producing on its production possibility frontier (PPF)?

Background

Topic: Production Possibility Frontier (PPF)

This question tests your understanding of efficiency and resource use in the context of the PPF.

Key Terms:

• Production Possibility Frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and technology.

• Efficiency: Using resources in such a way as to maximize the production of goods and services.

Step-by-Step Guidance

1. Recall what it means to be on the PPF versus inside or outside the PPF.

2. Consider whether resources are fully employed and used efficiently at a point on the PPF.

3. Identify the answer that reflects both full employment and efficiency.

Try solving on your own before revealing the answer!

Q9. How is an increase in productive inputs (like labor and capital) shown on the PPF?

Background

Topic: Shifts in the Production Possibility Frontier

This question tests your understanding of how changes in resources affect the PPF.

Key Terms:

• Productive Inputs: Resources such as labor and capital used in production.

• PPF Shift: An outward shift indicates economic growth; an inward shift indicates a reduction in productive capacity.

Step-by-Step Guidance

1. Recall what happens to the PPF when the economy gains more resources or better technology.

2. Visualize how the PPF would move if the economy can now produce more of both goods.

3. Identify the answer that describes this outward movement.

Try solving on your own before revealing the answer!

Q10. Laurence and Carrie Anne: Who has the comparative advantage in writing programs or making sunglasses?

Background

Topic: Comparative Advantage

This question tests your ability to calculate and compare opportunity costs to determine comparative advantage.

Key Terms and Formulas:

• Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.

• Opportunity Cost Formula:

$\text{Opportunity Cost of Good A} = \frac{\text{Amount of Good B forgone}}{\text{Amount of Good A produced}}$

Step-by-Step Guidance

1. Calculate the opportunity cost for each person for each good.

2. For Laurence: If he spends all night on programs, he writes 10; if on sunglasses, he makes 6. So, the opportunity cost of 1 program is how many sunglasses?

3. Repeat for Carrie Anne: 5 programs or 4 sunglasses. Find the opportunity cost of 1 program for her.

4. Compare the opportunity costs to determine who has the lower opportunity cost (comparative advantage) in each good.

Try solving on your own before revealing the answer!

Q11. George and Greta: Who has the absolute and comparative advantage in baking cakes?

Background

Topic: Absolute vs. Comparative Advantage

This question tests your understanding of the difference between absolute and comparative advantage.

Key Terms:

• Absolute Advantage: The ability to produce more of a good with the same resources.

• Comparative Advantage: The ability to produce a good at a lower opportunity cost.

Step-by-Step Guidance

1. Identify who can bake more cakes in a day (absolute advantage).

2. Calculate the opportunity cost for each person to bake a cake.

3. Compare opportunity costs to determine comparative advantage.

Try solving on your own before revealing the answer!

Q12. Which of the following is a normative economic statement?

Background

Topic: Positive vs. Normative Economics

This question asks you to identify a statement that expresses a value judgment rather than a testable fact.

Key Terms:

• Normative Statement: A statement about what ought to be, based on values or opinions.

Step-by-Step Guidance

1. Review each statement and look for words that indicate a recommendation or opinion (e.g., "should").

2. Distinguish between statements that can be tested and those that cannot.

3. Select the statement that is prescriptive rather than descriptive.

Try solving on your own before revealing the answer!

Q13. What happens to the demand or quantity demanded for eggs when the price decreases?

Background

Topic: Law of Demand

This question tests your understanding of the difference between a change in demand and a change in quantity demanded.

Key Terms:

• Quantity Demanded: The amount of a good that buyers are willing and able to purchase at a specific price.

• Demand: The relationship between price and quantity demanded, holding other factors constant.

Step-by-Step Guidance

1. Recall the law of demand: as price decreases, quantity demanded increases (movement along the demand curve).

2. Distinguish between a shift in the demand curve and a movement along the curve.

3. Identify the answer that reflects a movement along the demand curve due to a price change.

Try solving on your own before revealing the answer!

Q14. What is the likely cause of an increase in the market price of airline flights if the number of business travelers increases?

Background

Topic: Supply and Demand Shifts

This question tests your understanding of how changes in demand or supply affect market prices.

Key Terms:

• Demand Increase: A rightward shift of the demand curve, leading to a higher equilibrium price and quantity.

• Supply Increase: A rightward shift of the supply curve, leading to a lower equilibrium price.

Step-by-Step Guidance

1. Consider what happens to the demand for flights when more business travelers enter the market.

2. Recall that an increase in demand leads to a higher equilibrium price, all else equal.

3. Identify the answer that reflects a demand-side change rather than a supply-side change.

Try solving on your own before revealing the answer!

Q15. What happens to the supply curve for electricity if the price of oil increases?

Background

Topic: Supply Shifts Due to Input Prices

This question tests your understanding of how changes in input prices affect supply curves and market prices.

Key Terms:

• Input Price: The cost of resources used to produce a good.

• Supply Curve Shift: An increase in input prices shifts the supply curve to the left (decreases supply).

Step-by-Step Guidance

1. Recall that higher input prices make production more expensive, reducing supply.

2. Visualize the supply curve shifting to the left, leading to a higher equilibrium price.

3. Identify the answer that describes this leftward shift and its effect on price.

Try solving on your own before revealing the answer!

Q16. What would cause the demand for meals at Applebee's to shift to the left?

Background

Topic: Demand Shifts

This question tests your understanding of factors that shift the demand curve for a good or service.

Key Terms:

• Substitute Goods: Goods that can replace each other; a decrease in the price of a substitute decreases demand for the original good.

• Normal Good: A good for which demand increases as income increases.

Step-by-Step Guidance

1. Consider what happens to demand when a competitor offers a discount (substitute effect).

2. Recall that a leftward shift in demand means less is demanded at every price.

3. Identify the answer that describes a situation where demand for Applebee's meals would decrease.

Try solving on your own before revealing the answer!

Q17. What happens to the quantity supplied and supply of armchairs when the price increases?

Background

Topic: Law of Supply

This question tests your understanding of the difference between a change in quantity supplied and a change in supply.

Key Terms:

• Quantity Supplied: The amount of a good that sellers are willing to sell at a specific price.

• Supply: The relationship between price and quantity supplied, holding other factors constant.

Step-by-Step Guidance

1. Recall the law of supply: as price increases, quantity supplied increases (movement along the supply curve).

2. Distinguish between a movement along the supply curve and a shift of the supply curve.

3. Identify the answer that reflects a movement along the supply curve due to a price change.

Try solving on your own before revealing the answer!

Q18. What causes an increase in the supply of a good?

Background

Topic: Supply Shifts

This question tests your understanding of the factors that shift the supply curve to the right (increase supply).

Key Terms:

• Increase in Supply: A rightward shift of the supply curve, meaning more is supplied at every price.

Step-by-Step Guidance

1. Recall the main factors that shift supply: input prices, technology, number of sellers, and expectations.

2. Identify which option would lead to more sellers or lower costs, increasing supply.

3. Eliminate options that would decrease supply or only affect quantity supplied.

Try solving on your own before revealing the answer!

Q19. Jeanette's willingness to pay for shoes: How many pairs will she buy at $50 each, and what is her total consumer surplus?

Background

Topic: Consumer Surplus

This question tests your ability to calculate consumer surplus based on willingness to pay and market price.

Key Terms and Formulas:

• Consumer Surplus: The difference between what a consumer is willing to pay and what they actually pay.

$\text{Consumer Surplus} = \sum (\text{Willingness to Pay} - \text{Price Paid})$

Step-by-Step Guidance

1. List Jeanette's willingness to pay for each pair: $100, $80, $50, $30.

2. Determine how many pairs she will buy by comparing her willingness to pay to the price ($50).

3. Calculate the consumer surplus for each pair she buys (willingness to pay minus price).

4. Add up the consumer surplus for all pairs purchased.

Try solving on your own before revealing the answer!

Q20. What is producer surplus for an individual seller?

Background

Topic: Producer Surplus

This question tests your understanding of the concept of producer surplus in microeconomics.

Key Terms and Formulas:

• Producer Surplus: The difference between the price a seller receives and the marginal cost of production.

$\text{Producer Surplus} = \text{Price Received} - \text{Marginal Cost}$

Step-by-Step Guidance

1. Recall the definition of producer surplus and how it is calculated for each unit sold.

2. Identify the answer that matches the formula above.

Try solving on your own before revealing the answer!

Short Answer 1: What is the marginal principle? Give an example of how you can use the marginal principle in your everyday life as a student at CSUS.

Background

Topic: Marginal Principle

This question asks you to define the marginal principle and apply it to a real-life situation.

Key Terms:

• Marginal Principle: The idea that optimal decisions are made at the margin by comparing marginal benefits and marginal costs.

Step-by-Step Guidance

1. Define the marginal principle in your own words.

2. Think of a daily decision you make as a student (e.g., studying an extra hour, buying another coffee).

3. Explain how you weigh the additional benefit and cost of that decision.

4. Keep your explanation concise (3-5 sentences).

Try writing your answer before checking the sample response!

Short Answer 2: What is a shortage? How could an economist alleviate food shortages after a disaster like the Haiti earthquake?

Background

Topic: Shortages and Market Solutions

This question asks you to define a shortage and suggest economic solutions to alleviate it.

Key Terms:

• Shortage: A situation where quantity demanded exceeds quantity supplied at the current price.

Step-by-Step Guidance

1. Define what a shortage is in economic terms.

2. Think about what causes shortages (e.g., price controls, supply disruptions).

3. Suggest ways an economist might address shortages (e.g., raising prices, increasing supply, improving distribution).

4. Keep your explanation concise (3-5 sentences).

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Short Answer 3: USA and Canada can produce maple syrup and pancakes. Find an acceptable trading price for one pound of pancakes and identify who will sell.

Background

Topic: Comparative Advantage and Terms of Trade

This question tests your ability to calculate opportunity costs and determine mutually beneficial terms of trade.

Key Terms and Formulas:

• Comparative Advantage: The ability to produce a good at a lower opportunity cost.

• Terms of Trade: The rate at which one good is exchanged for another between countries.

$\text{Opportunity Cost of Pancakes in USA} = \frac{8 \text{ gallons maple syrup}}{4 \text{ pounds pancakes}} = 2 \text{ gallons per pound}$

$\text{Opportunity Cost of Pancakes in Canada} = \frac{2 \text{ gallons maple syrup}}{3 \text{ pounds pancakes}} \approx 0.67 \text{ gallons per pound}$

Step-by-Step Guidance

1. Calculate the opportunity cost of producing one pound of pancakes in each country.

2. Determine which country has the lower opportunity cost for pancakes (comparative advantage).

3. Set up the range of acceptable trading prices for one pound of pancakes (must be between the two opportunity costs).

4. Identify which country will sell pancakes based on comparative advantage.

Try solving on your own before revealing the answer!

Short Answer 4: Draw a supply and demand diagram for houses. Show how the diagram changes if carpenter wages increase. Label all axes.

Background

Topic: Supply and Demand Diagrams; Input Costs

This question tests your ability to illustrate supply and demand and show the effect of a change in input costs.

Key Terms:

• Supply Curve: Shows the relationship between price and quantity supplied.

• Demand Curve: Shows the relationship between price and quantity demanded.

• Input Cost: The cost of resources used in production (e.g., wages for carpenters).

Step-by-Step Guidance

1. Draw a standard supply and demand diagram with price on the vertical axis and quantity on the horizontal axis.

2. Label the supply curve (S) and demand curve (D).

3. Show the initial equilibrium price and quantity where S and D intersect.

4. Indicate how an increase in carpenter wages (an input cost) shifts the supply curve (leftward).

5. Label the new supply curve and show the new equilibrium.

Try drawing and labeling your diagram before checking the sample!