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Study guide for exam 1
1. Introductory material
 Scarcity
 What is economics?
 Microeconomics vs. Macroeconomics
 How do positive and normative economic statements differ?
2. Opportunity Cost (definition, use, examples)
3. Production Possibilities Frontier
 Definition, graph, the meaning of points relative to their location on the graph
 Law of Increasing Opportunity Cost
 Reasons sometimes operate inside the PPF
 Economic Growth
4. Ideas on free market vs. government intervention
 What are the beliefs of Smith, Marx, and Keynes
 What is Laissez Faire? What is the Invisible Hand?
5. Supply and Demand
 Be able to graph S and D and show what happens to equilibrium p and q when things
change
 What factors shift each curve, and in which direction does the curve shift due to each
factor.
 What happens to the equilibrium price and quantity as the D or S shifts?
 How do changes in quantity (movements along the curve) differ from shifts in the curve?
What is the law of demand?
 What is equilibrium?
 How do price ceilings and price floors affect the quantity exchanged? Do they result in
surpluses or shortages?
Note: This is just a list of highlights from lecture. Be sure to study your lecture notes and any
problems done in class or in the book. Also, make sure you are familiar with key terms (listed in
the book). You should check out the online quizzes on the book’s website & the sample exam
on this website for more practice with multiple choice questions. See the sample problems on
the following page for practice with those types of questions.
Sample Problems:
1.
Western is trying to decide between 3 building projects that all will run about $1 million. Their first choice is to
build a Journalism building. The second choice is to build a new parking deck. The third choice is to build a
new arena. What is the opportunity cost of building the journalism building?
2. Suppose that in one hour Gilligan can gather the following quantities of coconuts or bunches of berries.
Coconuts
Berries
0
30
1
28
2
21
3
12
4
0
a. Draw his production possibilities frontier.
b. What is the opportunity cost of the 1st coconut?
c. What can we say about the point where Gilligan gathers 2 coconuts and 14 bunches of berries? What
about a point where he would gather 2 coconuts and 20 bunches of berries?
d. What is happening to his opportunity cost as he gathers more and more coconuts?
e. How would the PPF look different if instead of the above chart, Gilligan gave up 1 coconut for every 3
bunches of berries, no matter how many of each he gathers? How has his opportunity cost now
changed?
3. Suppose that the quantity demanded and the quantity supplied of DVD players at different prices are given
below.
Price
Quantity Supplied
Quantity Demanded
$50
3,000
12,000
100
4,000
10,000
150
5,000
8,000
200
6,000
6,000
250
7,000
4,000
300
8,000
2,000
a. What is the equilibrium quantity and price of DVD players exchanged without any government
intervention?
b. Suppose the government has established a price ceiling of $100. What will the price and quantity of
DVD players demanded and supplied be? What is happening as a result of this price ceiling?
c. Explain what will happen if the price ceiling is abolished. Be specific. What will happen to the quantity
of DVD players demanded and supplied? To the price of DVD players? Why?
d. Graph the supply and demand curves for DVD players. Be sure to show the equilibrium p and q.
e. What factors might cause the S to shift? demand?
4. Explain what would happen to the Supply or Demand and to the equilibrium P and Q in the corvette industry if
each of the following occurred:
a. new technology was invented to cheapen the production of corvettes
b. the economy goes into recession and people’s incomes fall
c. wages for corvette manufacturers increase and at the same time the population doubles
d. a consumer report is released which says driving a corvette increases your risk of death in an automobile
accident
5. Explain what would happen to the Supply or Demand and to the equilibrium P and Q in the personal desktop
computer industry if each of the following occurred:
a. new technology was invented to cheapen the production of PC’s
b. the economy is booming and people’s incomes are rising (computers are normal goods)
c. wages for computer manufacturers have decreased and at the same time the population doubles
d. A consumer report is released which says owning a computer increases your child’s IQ scores by 10%.
e. The price of notebook computers falls
6. The demand and supply of sunglasses (measured in millions) in the Republic of Rayban is given by the following
equations.
a. Find the equilibrium quantity and price of sunglasses. Include a graphical analysis of the equilibrium
including at least 2 points on each curve.
D: P = 120 - 8Q
S: P = 30 + 2Q
b. Suppose a price floor of $50 is set by the Republic of Rayban. What is the Excess Demand or Excess
Supply? What is the quantity of sunglasses sold? Draw the price floor on the graph.
c. Suppose a price ceiling of $40 is set by the Republic of Rayban. What is the Excess Demand or Excess
Supply? What is the quantity of sunglasses sold? Draw the price ceiling on the graph.
d. Suppose a price ceiling of $55 is set by the Republic of Rayban. What is the Excess Demand or Excess
Supply? What is the quantity of sunglasses sold? Draw the price ceiling on the graph.
7. Suppose the following is my production possibilities frontier for cooking toast and pancakes in one hour.
Pancakes
Toast
0
40
2
39
4
37
6
33
8
27
10
20
12
11
14
0
a. Graph my production possibilities frontier. What can be said about the point 30 toast, 8 pancakes?
What can be said about the point 10 toast, 12 pancakes?
What happens to the Production Possibilities
frontier if I get a new griddle that speeds up production of pancakes?
b. What is the opportunity cost of the first pancake approximately? Of the first piece of toast? Does the
law of increasing opportunity costs apply here?