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ECO 3100 - Midterm (CH. 1-6) questions and answers
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ECO 3100 - Midterm (CH. 1-6) questions and answers
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ECO 3100 - Midterm(CH. 1-6) questions
and answers
Chapter 1 - answer Chapter 1
What is Economics? - answer Economics is the study of the allocation of
scarce resources among alternative uses.
What is Microeconomics? - answer Microeconomics is the study of the
economic choices individuals and firms make and how these choices create
markets.
Economic Models - answer A model is a simple theoretical description that
captures the essentials of how the economy works. It is simple since it
does not capture every detail but lets you see the overall picture and
answer the relevant question.
PPF (Production Possibilities Frontier) - answer A PPF shows the possible
combination of two goods an economy can produce with a fixed amount of
resources.
The PPF and Five Basic Principles - answer We want to use this model to
illustrate five basic principles,
Scarce resources - answer - Scarcity involves opportunity costs
- Increasing opportunity costs
- Incentives matter
- Inefficiency has real costs
,PPF & Five Basic Principles, Principle 1 - answer Scarce Resources are
Points outside the frontier are unattainable since we don't have enough
resources to produce them. (Example: We can make 4 food and 12 clothing
but not 4 good and 14 clothing)
PPF & Five Basic Principles, Principle 2 - answer Scarcity involves
opportunity cost. Opportunity cost is the cost of a producing a good
measured by the alternative uses that are foregone producing it. If I am
on the PPF the opportunity cost of more clothing is less food.
PPF & Five Basic Principles, Principle 3 - answer Scarcity involves
opportunity costs. Opportunity costs are increasing. As you produce more
and more of one good, its opportunity cost in terms of the other good
foregone increases. To produce more and more clothing, you would have
to give up increasing amounts of food. The law of diminishing marginal
returns.
The law of diminishing marginal returns - answer As more of a variable
resource is added to a given amount of a fixed resource, marginal product
eventually declines and could become negative
PPF & Five Basic Principles, Principle 4 - answer Incentives Matter. People
will make decisions based on opportunity costs. When the opportunity
cost of some activity increases, people are more likely to engage in that
activity. Sometimes it is difficult to see the true opportunity costs of the
activity.
PPF & Five Basic Principles, Principle - answer Inefficiencies involve real
costs. Points inside the PPF are inefficient because we could produce more
clothing without giving up any food, or more food without giving up
clothing or make more of both goods.
Supply-Demand Model - answer is a model that describes how a good's
price is determined by the behavior of the people who buy the good and of
the firms that sell the good. The model relates buyers' preferences
(demand) to production costs (supply).
, Adam Smith and the Invisible Hand - answer According to Adam Smith, the
invisible hand directed resources to where they would be most valuable.
Prices act as signals because prices in the market tell buyers and sellers
the relative value of goods. This enables them to make efficient choices.
Adam Smith's Model - answer •The price for a good depended SOLELY on
the relative cost of labor used to produce it.
•The relative cost of labor was constant: It remained the same, regardless
of how much of a good was produced.
If it takes twice as long to make clothing as to grow food, one unit of
clothing should trade for _______ units of food. - answer If it takes twice as
long to make clothing as to grow food, one unit of clothing should trade
for TWO units of food.
- So any number of units of clothing can be produce for two units of food.
Adam Smith's Model of Supply and Demand - answer - Demand: As price
falls, consumers are willing to buy more, which reflects decreasing
marginal value.
Supply: As price rises, firms are able to produce more, which reflects
increasing marginal costs.
- Market Equilibrium: The equilibrium price is the price at which the
quantity demanded is equal to the quantity supplied.
Marshall's Model of Supply and Demand - answer *
David Ricardo's Model of Supply and Demand - answer *
Diminishing returns - answer The cost of producing one more unit of a
good rises as more of that good is produced. Consistent with the idea of
increasing opportunity costs. As we produce more clothing, the price of
clothing in terms of food should rise.
What are the problems with Smith's and Ricardo's models? - answer -
Smith's model ignores rising opportunity costs.
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