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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?