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Midterm

ECON-2120 Study Guide - Midterm Guide: Prescription Drug, Socalled, Opportunity CostExam


Department
Economics
Course Code
ECON-2120
Professor
Tyler Francis
Study Guide
Midterm

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Exam 1 Study Guide: Practice Questions
Your exam will consist of 8 short-answer questions and 20 multiple choice questions.
The short-answer questions will require between 1-3 sentences to adequately
answer, depending on the difficulty of the question. On your study guides, I will
provide you only with short answer questions to practice with. This is because, if you
are able to satisfactorily answer all of these short answer questions, you should
receive a good grade on my actual exams (since the actual exam should feel
relatively easy in comparison to the study guide).
1. Countries with so-called “good” institutions, such as private property rights, market
economies, and democratic elections, tend to be wealthier and better off relative to
countries with so-called “bad” institutions, such as a lack of private property rights,
centrally-planned economy, and an authoritarian government. What is the
explanation for this? (Hint: the answer involves how institutions affect incentives)
“Good” institutions align self-interest with social interest, while “bad”
institutions do not. This is why countries with good institutions, such as
private property rights and market economies, tend to be wealthier and
better off relative to countries with so-called bad institutions.
2. Your friend, an engineering major, receives job offers from NASA, Boeing, SpaceX,
and Lockheed Martin and must choose one prior to when they graduate from school
in May. While discussing their thought process with you, they explain, “NASA has
always been my dream job, but I’d rank the other four offers in the following order:
Boeing, Lockheed Martin, and SpaceX. While I’m inclined to accept the job at NASA,
the fact that the opportunity cost of accepting the job at NASA includes all the
potential jobs of Boeing, Lockheed Martin, and SpaceX makes me nervous about my
decision.” Since you are an economics major rather than an engineering major, you
notice that your friend said something that is incorrect at the end of her statement.
What did she say that was incorrect, and how would you correct her?
Your friend misunderstands the definition of opportunity cost. The
opportunity cost is the next best alternative foregone, so it does not include all
of the other jobs your friend could takethe opportunity cost is only the job
she could take at Boeing.
3. Suppose a new prescription drug meant to treat alzheimers was introduced to the
market in the US 3 months ago. Since its introduction to the market, 90 of the 10,000
patients being treated with the drug have developed severe, unanticipated side
effects, including hearing loss, temporary blindness, and insomnia. In response to
the news that the drug has generated unintended side effects in its users, US Senator
Chuck Boomer goes on CNBC and declares “we absolutely MUST increase the

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amount of regulations and testing required for new prescription drugs to be
approved. This is unacceptable, and we need to ensure all of our citizens that the
drugs they take are completely free from unintended side effects. There can truly be
no such thing as too much safety when it comes to regulation of prescription drugs.”
While unintended, severe side effects of prescription drugs are undoubtedly a bad
thing, why is Senator Boomer incorrect in his claim that there is no such thing as too
much safety?
Boomer is incorrect in his claim that there is no such thing as too much safety
because he is not acknowledging the trade-off between the safety of
prescription drugs and their accessibility to the drug users. When more
regulations are added to prescription drugs, it does make them safer upon
introduction to the market, but it also means that some people that could have
their lives saved by new, innovative drugs end up dying before they have the
chance to take them.
4. Mumblerapper Lil beep decides he is going to take 18 shots of Gatorade for his 18th
birthday. He would prefer to take shots of actual liquor, but since he is not 21 yet
and no one under 21 ever drinks alcohol, he is forced to resort to Gatorade. Once he
begins taking his 18 shots of Gatorade, he notices a trend: he enjoys his 1st shot of
Gatorade more than his 2nd, his 2nd shot of Gatorade more than his 3rd, and his 4th
shot of Gatorade more than his 5th. What is the economic principle that explains why
Lil beep enjoys each successive shot of Gatorade less than the previous shot?
The reason Lil beep enjoys each shot of Gatorade less than the previous shot is
because of the property of diminishing marginal benefits of consumption.
5. Provide some reasons why the opportunity cost of studying for one specific subject
is increasing in the amount of time you spend studying for that subject. Two reasons
would be sufficient.
One reason why the opportunity cost of studying for one specific subject is
increasing in the amount of time you spend studying for that subject is
because each minute you spend studying for that subject, you are foregoing
the opportunity to study for an alternative subject. Alternatively, another
reason is because each minute you spend studying for that subject, you are
foregoing the opportunity to sleep and be well rested for the exam.
Since the opportunity cost of doing something (in this case, studying) is the
next best alternative foregone, whether the opportunity cost in this case is the
studying you could be doing in another subject or sleeping would depend on
which one you would rather be doing. If you plan on staying up all night

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anyways, and studying for a different subject is your next best alternative, that
would be the opportunity cost. If you have no other exams coming up and you
are exhausted, then sleeping would be the opportunity cost.
6. Your friend texts you the night before the exam in this class and asks you what the
definition of comparative advantage is. What would you tell him?
By definition, a country (or person, if we are discussing trade between two
individuals rather than trade between two countries) has a comparative
advantage in the production of a good or service if they can produce it at the
lowest opportunity cost.
7. Suppose that Future and A$AP Ferg are teamed up to do group projects in English
and Biology classes. They initially agree upon allocating the work between the two
projects in the way that is the most efficient (Hint: this means each will do whatever
subject they have the comparative advantage in). It would take Future 12 hours to
do the English project and 8 hours to do the biology project, while it would take
A$AP Ferg 3 hours to do the English project and 4 hours to do the biology project.
Given this information, Future argues that A$AP should do both of the projects
because he could do both of them by himself in less time than it would take Future
to do just the biology project. However, since this method of allocating the work
does not make use of comparative advantage, it is inefficient. Calculate the
opportunity cost of doing the English project for both Future and A$AP, and use
your calculation of the opportunity cost to tell them who should do which project
(Future is unlikely to be pleased with what you tell him, but that’s too bad).
For Future, the opportunity cost of doing the English project is 1.5 biology
projects and for A$AP Ferg the opportunity cost of doing the English project is
¾ of a biology project. Since A$AP Ferg has the lower opportunity cost for
doing English, he should do English and Future should do biology.
8. Suppose that you are trying to determine which good the US and China should
specialize in given the following information: given each country’s productive
capabilities, the US could produce either 1200 cases of Samuel Adams or 1000 cars
while China could produce either 400 cases of Samuel Adams or 2000 cars. Based off
of this information, you can determine which country has the comparative
advantage in each good without going through the algebra. So, who has the
comparative advantage in what? (Hint: the answer has to do with analyzing the
distinct case in which each country has the absolute advantage in the production of
one of the two goods).
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