Dr. Duffy Microeconomics

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Dr. Duffy Microeconomics

• Exam 1 review
• CHAPTERS 1-3
• Frank and Bernanke

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Exam Format Rules

• 35 multiple choice, 2 points each
• 30 points for short problems, similar to homework
  problems
  
• You do not need a Scantron
• You may use a calculator but Andrew or I must
  check it first. It can't have a memory function.
  It must be a simple calculator, not a scientific
  or business calculator.
• No cell phones on desks.
• We must be able to see your ears at all times.

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Major Concepts

• Opportunity Costs
• Sunk Costs
• Marginal and Average Benefit
• Marginal and Average Cost
• Cost-Benefit Principle
• Scarcity Principle
• "Low Hanging Fruit" (e.g. increased opportunity
  costs to produce more of a product)
  
• Comparative versus Absolute Advantage
• PPF
• Exchange
• Supply and Demand
• Equilibrium, Surplus, Shortage

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Sunk Cost Problem
Sunk Cost Problem I purchased a computer in 20
06 for 2,000 and it now has a retail value of
500. How much is the sunk cost? (Cost I can't
recover.)
Sunk cost 2000-500 1500.
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Opportunity Cost Problem
Jane has a voucher, good for one domestic
airfare, that must be used by January 10, 2008.
She could use the voucher to attend a friend's
wedding in October, or save it to use to go home
in December (a trip she must make.) She values
attending the wedding at 800. Airfare to the
wedding, if she buys it, is 400 and all other
costs would equal 600. Her airfare home in
December would cost 300. Should she attend the
wedding?
No. Benefit 800 Cost 600 300 900 (w
ith voucher) 600 400 1000 (with
out)
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Opportunity Cost Problem, revisited
Jane has a voucher, good for one domestic
airfare, that must be used by January 10, 2008.
She could use the voucher to attend a friend's
wedding in October, or save it to use to go home
in December (a trip she must make.) She values
attending the wedding at 1200. Airfare to the
wedding, if she buys it, is 400 and all other
costs would equal 600. Her airfare home in
December would cost 300.
Yes. Benefit 1200 Cost 600 300 900
(with voucher) 600 400 1000 (wi
thout) She will use the voucher for the wedding b
ecause the flight home is cheaper than the flight
to the wedding.
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Comparative Advantage
In one hour, Chris can knit six
hats or sew three shirts. In one
hour, John can knit five hats or
sew two shirts. Who has the comparative advant
age at hats? At shirts?
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Comparative Advantage
In one hour, Chris can knit six hats or sew three
shirts. In one hour, John can knit five hats or
sew two shirts. Chris gives up 2 hats for ever
y shirt. John gives up 2.5 hats for every
shirt. Chris has the comparative advantage at
shirts (lower opportunity cost). John must have
the comparative advantage for hats.
Chris has the absolute advantage for both.
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Trade
Chris gives up two hats for every shirt. He wou
ld be willing to trade a shirt for 2 or more
hats. John would be willing to pay no more than
2.5 hats (his opportunity cost) to get a shirt.
Trade could take place at a rate between 2 and 2.
5 hats per shirt.
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Fallacies

• Angie is happy to get a 2.00 discount on a 10
  item, but spurns a 5.00 discount on a 1000
  item.
  
• Bob believes that by going to the dentist twice a
  year, he is preventing 5000 worth of dental work
  in the future. He reasons that if he goes four
  times per year, he will prevent 10,000 of future
  work.

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Fallacies

• Jill spent 10 hours in line to get a ticket to
  see a rock concert. She paid 40 cash and tells
  everyone that is her full cost of the ticket.
  
• Bill spent 20 (non-refundable) to hire a tennis
  pro for Friday afternoon. But he finds out he
  has the opportunity to get free tutoring that
  afternoon. He values the free tutoring at 50,
  but won't get tutoring because he has already
  paid for the tennis pro's time.

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What happened?

• The price of tomatoes has gone up and the
  quantity sold has fallen.
  
• The price of TVs has fallen and the quantity sold
  has increased.
  
• The price of CDs has fallen and so has the amount
  sold.
  
• The price of beef has increased and so has the
  amount sold.
  

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What will happen to price and quantity?

• A drought hits the Southeast, damaging the peach
  crop.
  
• Grapes are a substitute in consumption for
  peaches. What happens in that market?
  
• The health benefits of corn are announced in the
  news. What happens to corn prices and quantity
  sold?
  
• Corn is used in chicken feed (an input in
  production). What happens in this market?
  

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Surplus Which if the following will cause a
surplus of tuna?

• Demand for tuna decreases because of news about
  mercury levels.
  
• Supply of tuna increases because of better
  fishing measures.
  
• The government regulates the price of tuna and
  sets it above market equilibrium.
  
• The government regulates the price of tuna and
  sets it below market equilibrium.
  

15
Shortage Which if the following will cause a
shortage of gasoline?

• Demand for gasoline increases because people are
  commuting longer distances.
  
• Supply of gasoline decreases because of trouble
  in the Middle East.
  
• The government regulates the price of gasoline
  and sets it above market equilibrium.
  
• The government regulates the price of gasoline
  and sets it below market equilibrium.
  

16
Moving two curves at the same time.
Assume the demand for corn increases, and the su
pply also decreases. What will happen to price
? Quantity? Draw a graph and see what you fin
d out. Draw different magnitudes
of the two shifts and see if anything
is consistent.
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Moving two curves at once.

• If demand increases and supply increases at the
  same time, we know for certainty that quantity
  will increase.
  
• If demand increases and supply decreases, we know
  for certainty that price will increase.
  
• If demand decreases and supply decreases, we know
  for certainty that quantity will decrease.
  
• If demand decreases and supply increases, we know
  for certainty that price will decrease.