[ECON 202] - Midterm Exam Guide - Comprehensive Notes for the exam (62 pages long!)

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7 Feb 2017
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Western Kentucky University
ECON 202
MIDTERM EXAM
STUDY GUIDE
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Chapter 1 End Questions
1. Apple decides to make iTunes freely available in unlimited quantities.
a. Does this change the incentives that people face- An incentive is a reward that
encourages an action, or a penalty that discourages. Choices respond to incentives.
People undertake activities in which the marginal benefit exceeds the marginal cost. We
are incentivized to do certain things based on the benefit that we can receive from it. So
we are encouraged to buy more songs because the incentive of freeness encourages that.
It increases people incentive to take advantage of this.
b. Apple’s decision is an example of a microeconomic issue because it examines the choices
between an individual and a business.
2. Explain how these headlines concern self-interest and social-interest.
a. Starbucks Expands into China- Starbucks as a company is expanding into China because
they are interested in making a profit for their company. China is allowing Starbucks to
do so because they value the good that Starbucks is offering. In the social interest, the
economy of China is likely to expand, which relatively speaking, should make everyone
better off, except competing coffee companies.
b. McDonald’s Moves into Gourmet Coffee- McDonald’s is expanding because they believe
they can make a profit in this sector. The coffee bean supplier and the consumer
encourage this because the supplier wants trade, and the consumer wants fancy coffee.
c. Food Must Be Labeled with Nutrition Data- This is made in the social interest to
encourage healthier eating habits. It doesn’t reflect any singular firm’s decision, so it isn’t
a self-interest decision.
3. The night before an economics exam, you go to the movies instead of studying. You receive a
50%, instead of the 70% you normally score.
a. Did you face a tradeoff- Yes! You gave up studying to go to the movies. You gave up
something to do something else.
b. Opportunity cost of evening at movie- a 20% decrease in your grade
4. The regeneration of London for the Olympics is going to be expensive for taxpayers. Is this cost
an opportunity cost of hosting the 2012 Olympics?
a. Yes it is an opportunity cost, but only if there weren’t already plans to regenerate it.
5. Which of the following statements are normative, positive, and can be tested?
a. US should cut its imports- normative
b. China is the largest trading partner of the USA- positive and can be tested
c. Price of drugs increase, HIV/AIDS sufferers will decrease drug use- normative and can
be tested
6. Hundreds of Eminem fans lined up for a chance to score free tickets to his concert. What is free
and what is scarce?
a. The actual number of available tickets are scarce, and the time that fans waited in line is
scarce as well. The publicity that Eminem received was free. Not even the free tickets are
free. Nothing is free.
7. How does the creation of a successful movie influence what, how, and for whom goods and
services are produced?
a. The creation of a successful good is going to attempted to be repeated. The what of the
good will influence spin offs in the future. How it is produced- through land, labor,
capital, and entrepreneurship, will be influenced as well, depending on special effects.
Also, the who, the producers and movie stars, will have higher incomes
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8. A successful movie illustrates self-interested choices that are also in the social interest because
the self-interested decisions of making a profit are enhanced by the publics enjoyment of a movie.
9. Robert Downey Jr. was a big success after Ironman, after only being kind of successful.
a. The success of Ironman is going to increase the opportunity cost of hiring RDJ. He is
going to be more expensive, and greater goods are going to have to be forgone in favor of
hiring him
b. The incentives to hire RDJ have changed because now there is more of a reward from
hiring him. The marginal benefit of him is greater now than it was because he is famous.
But, because he is more expensive to hire, producer’s incentive to do so decreased.
Chapter 2 Section 1
1. The production possibilities frontier illustrates scarcity
because the points outside the frontier are
unattainable. They illustrate wants that cannot be
satisfied, which is the definition of scarcity.
2. The production possibilities frontier illustrates
production efficiency (producing goods and services at
the lowest possible cost) at every point along the
curve.
3. The production possibilities frontier shows that every choice involves a tradeoff (doing more of
something but having to do less of something else) through movements along the points. We can
produce more pizza at one point, but we are going to have to produce less cola.
4. The production possibilities frontier illustrates opportunity cost through the bow shape of the
curve. When we produce large quantities of one good and small quantities of the other, a given
increase in the good costs a large decrease in the other.
5. Opportunity cost is a ratio because it measures the decrease in one good by the increase in the
other. They are measured by the change in each other.
6. The PPF bows outward because resources are not equally productive in all activities. This implies
that the relationship between quantity produced and opportunity cost is positive- the more we try
to produce of any one good, the more resources that we use, and the greater the opportunity cost.
Chapter 2 Section 2
1. Marginal cost- opportunity cost of producing one more unit of a good.
This is calculated from the slope of the PPF. As the quantity of good
produced increases, the marginal cost of that good increases as well.
increasing op cost of pizza means increasing marginal cost
2. Marginal benefit- benefit received from consuming one more unit of it.
Depends on peoples preferences (contrasted to production possibilities
which just describes what is feasible). Measured by the marginal benefit
curve, which shows the relationship between the marginal benefit and
quantity consumed of that good- UNRELATED TO PPF. Measured by
the most that people are willing to pay for an additional unit of it. The
most you are willing to pay (give up in terms of other goods) for
something is its marginal benefit.
3. The marginal benefit of a good changes as the quantity produced changes
because the more we have of something, the smaller its marginal benefit is. (principle of
decreasing marginal benefit)
PPF Production Efficiency
Scarcity/Unattainable
Inefficient
Attainable
Cola
Pizza
Produce more,
cost more
Pizzas
Marginal Cost
Marginal Benefit
Pizzas
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