Homework Set #1 - ECN 212 - Fall 2014 - Dr. RobertsHomework Set #1 must be submitted online no later thanSunday, September 14 @ 5:00 p.m.1. Which of the following will notresult in an outward shift of the production possibilities curve?[A] An increase in the quantity of resources[B] The work force becomes more literate[C] Existing capital is used more efficiently.[D] An increase in population.[E] A technical or technological breakthroughPriceQuantity DemandedQuantity Supplied$45350050300555250506020010065150150701002002. Refer to the table above. If the market is originally in equilibrium and a price ceiling of $50 is imposed, which of the following is incorrect?[A] Net surplus in the economy will decrease.[B] Producer surplus will decrease.[C] Demand will increase.[D] Consumers will purchase less than they would at the equilibrium price.[E] Producers will sell less than they would at the equilibrium price.3. Assume that at the current market price of $4 per unit of a good, you are willing and able to buy 20 units. Last year at a price of $4 per unit, you would have purchased 30 units. What has most likely happened over the last year?[A] Supply has decreased.[B] Quantity supplied has decreased.[C] Demand has decreased.[D] Supply has increased.[E] Demand has increased.
ECN 212 Final Exam Study Guide
A good economist thinks with their head and not their heart.
Week 1: Opportunity Costs, Demand
(Exam #1, Homework #1)
● nothing is
● normative vs. positive statements
○ positive statements can be tested, normative statements are opinion based
Higher taxes on cigarettes are good because they discourage people from
is a normative statement. → who is to say what is ‘good’ or
● in order to analyze a problem, you have to look at both the costs and the benefits.
○ ‘costs’ don’t always have a price tag
(OC) involve the loss of
potential gain from alternatives when another alternative is chosen.
if you buy a salad for lunch, the OC includes the loss of happiness you might
have felt if you bought a burger instead.
● In a good market economy, there are:
1. welldefined property rights → what’s yours is yours, what’s mine is mine.
2. incentives → people rationalize decision making
● DecisionMaking Assumptions:
1. selfinterest hypothesis: people act in their own best interest
Mother Teresa helped people in India
because she liked it
2. ceteris paribus (CP): everything else is held constant when testing 2 variables
When testing to see how enrollment would be affected if ASU were to raise
tuition, ONLY enrollment and tuition should be considered; all other factors
should be ignored.
3. cause/effect fallacy: just because 2 things happen together, doesn’t mean one
caused the other
In 2000, bankruptcy went up 10x and tubing tripled → how could these two
events possibly be related?
4. fallacy of composition: just because something is true for one part, doesn’t mean
it’s true for the whole
if everyone showed up to class every day and studied for 2 hours a night, not
everyone is guaranteed an A in the class.
● Production Possibilities Curve (PPC)
○ represents what a producer can produce when they exert all their resources and
all of their technology
■ anything outside the curve, the producer doesn’t have enough resources
■ anything inside the curve, the producer isn’t using all of their resources
(and can/should produce more!)
○ number of resources (including capital, labor, technology, etc.) affects the size of
a producer’s PPC
■ an increase in resources causes an expansion of their PPC
■ a decrease in resources causes the PPC to shrink
● Demand is a consumer phenomena, based on the preferences of consumers despite
what a producer is actually able to create.
● consumers want to maximize utility (happiness)
● Law of Demand: as price of a product increases and everything else is held constant
(CP), quantity demanded decreases (and vice versa)
if the price of your favorite cereal increased by three times as much, would you still
be willing to buy it?
● Determinants of Demand
a. normal goods → a good whose demand increases because of an
increase in income; determined by the individual
b. inferior goods → a good whose demand decreases because of an
increase in income; determined by the market
College students buy ramen noodles because they’re cheap. If students have
an increase in income, they’d be more likely to buy more mac ‘n’ cheese, which is
more expensive. This would cause a decrease in the demand for ramen noodles.
In this scenario ramen would be an
good, and mac ‘n’ cheese would be a
If the government announced they were to increase the sales tax on
Mercedes cars in a month, the demand for Mercedes cars would increase in that
month because of the expectation that after that month, the car would cost much
5. changes in the price in the price of:
a. substitute goods → goods that can be bought in place of another
If the price of Coke went up, Qd would decrease and some of those
consumers would buy a substitute like Pepsi instead.
b. complementary goods → goods that are bought to be used with another
If the price of tennis balls increased, people would stretch out the life
of their rackets and the demand for rackets would decrease.
● movement between two points on a demand curve is considered a change in quantity
demanded → only affected by price
● movement of the entire curve is considered a change in demand → affected by all other
Week 2: Supply, Equilibrium
(Exam #1, Homework #1)
Supply is a producer phenomena, based on what a producer is able to create, despite
the preferences of consumers.
● producers want to maximize profits
○ not greedy! → without profits, there would be no production
● Law of Supply: as price increases, and everything else is held constant (CP), quantity
supplied increases (and vice versa)
as price increases, producers earn more profits, thus are able to spend more money
to create more output.
● Determinants of Supply
1. number of suppliers
2. price of
(resource labor, technology, capital, etc.)
4. change in price of a related good (substitute/complementary goods)
If oats turn up a bigger profit, some wheat farmers will switch to oats, causing
a decrease in supply.
5. producers’ expectations
● the point where the demand curve crosses the supply curve is the market’s equilibrium
○ represents the optimal price consumers are willing and able to pay and the
optimal quantity producers can supply
○ “clears the market” → no surplus, no shortage
● consumer’s surplus (CS) occurs when a consumer pays less for a product than they
value it (area on the graph between the equilibrium price and the demand curve)
● producer’s surplus (PS) occurs when a producer sells a product for more than they value
it (area on the graph between the equilibrium price and the supply curve)
● Things that can ruin a market equilibrium:
○ a price ceiling is when the government imposes a max. price a good can be
exchanged between buyer and seller (meant to help consumers, so that
producers don’t “overcharge”)
○ a price floor is when the government imposes a minimum price producers and
consumers can exchange a good (meant to help producers, so that consumers
Week 3/4: Elasticity, Consumer Choice
(Exam #1, Homework #2)
● elasticity represents the market’s sensitivity to price, therefore it depends on the
○ elastic graphs = more responsive, elastic graphs = less responsive
○ a perfectly inelastic graph would be vertical
● What Determines Elasticity
1. Number of substitutes → the greater the number, the greater the elasticity
2. luxury vs. necessity (how much the consumer needs the item)
3. portion of a person’s budget the item consumes
● 4 Measures of Elasticity
1. price elasticity of demand
a. between 0 and 1 = inelastic, between 1 and infinity = elastic (always