ECON 301 EXAM 1

the government implementing a sales tax would shift the:

• demand curve rightwards

• demand curve leftwards

• supply curve leftwards

• supply curve rightwards

Answer explanation

• This is a leftward shift as taxes reduce demand for goods and services. Notice with the horizontal line on the graph that at 30¢, the pre-tax demand is 4 cups, but after-tax the demand is only 2 cups

Suppose the government removes a $10 excise tax. This would lead to equilibrium quantity ___________ and equilibrium price _____________

• Increasing ; increasing

• Increasing ; decreasing

• Decreasing ; increasing

• Decreasing ; decreasing

Answer explanation

3. Which is an example of relative price?

• $20 for toothpaste

• France is more efficient in producing riot shields compared to Italy

• The marginal utility you get from consuming a good

• 4 steaks is worth 37 hot dogs

Answer explanation

1. $20 for toothpaste - This is absolute price 

2. France is more efficient in producing riot shields compared to Italy - This has to do with comparative advantage

3. The marginal utility you get from consuming a good - Junk answer I threw on here

4. Relative price is measuring goods in-terms of other goods

4. Suppose you’re deciding what to do tonight. You rank your preference as:  1) swimming 2) playing hockey  3) writing Twilight fan-fiction  4) studying  5) discovering if birds are real. 

You decide to go swimming since the hockey rink is closed, and - lucky for us - you don’t feel like writing. What is your opportunity cost? 

• Hockey and writing

• Studying

• Studying and discovering if birds are real

• Hockey

Answer explanation

• Opportunity cost: Next best alternative forgone. There is only one opportunity cost. If you count all of your forgone opportunity, it’s double counting since there’s likely no end to what else/what if’s you could’ve done. Similarly, hockey and writing aren’t options since you had no opportunity to do those activities. 

For example, the opportunity cost of me not teaching a class is sleep. I wish it was ‘be a millionaire’ but that’s not even an option unless I scam a lot of people but that’s a terrible decision

The equation I/Px can be described as:

• The marginal price of good X

• The good not counted in the composite convention

• Slope of the budget curve

• The amount of good X you could buy if you spent none of your income on good Y

Answer explanation

This is showing you the intercept on the y- and x-axis by taking your income (I) and dividing it by the price of the good (Py). For example, you earn $40 and beef sticks is $5 ; 40/5 = 8 meaning that if you spent all $40 on $5 beef sticks, you could buy 8 of them

6. When the government implements a sales tax, consumers should be paying the full amount. This is known as ______. 

When demanders and suppliers both pay a portion of the sales tax, this is known as ______.   

• Legal incidence ; elasticity of incidence

• Legal incidence ; economic incidence

• Public incidence ; an equilibrium movement

• conomic incidence ; legal equilibrium

Answer explanation

• Economic Incidence: The division of a tax burden according to who actually pays the tax

• Legal Incidence: The division of a tax burden according to who is required under the law to pay the tax 

A downward sloping convex indifference curve shows: 

• The marginal utility trade-off between two goods

• A ranking of preferences along the curve

• Your opportunity from different baskets of goods

• The optimum point of utility

Answer explanation

• Your indifference curve shows that you gain the same level of utility (satisfaction) all along a single line

• The trade-off in marginal utility occurs because as you move along the indifference curve, you’re being shown how consuming one more unit of good X vs. good Y changes the amount of utility you gain. 

  • This is why you equate the budget line slope with the derivative of the indifference curve. 

  • You’re trying to figure out the best place to maximize your utility between consuming good X and good Y (Derivative of indifference curve or MUx/MUy) vs. the relative price you are able to afford from consuming one more unit of good X vs. good Y (Budget line slope)

If a consumer's income increases while the prices of both goods remain constant, how will the budget line change?

• Parallel shift leftwards

• Parallel shift rightwards

• It will pivot outwards along the y-axis

• It will pivot outwards along the x-axis

Answer explanation

• Higher income means you can purchase more of both good

When a consumer is on the budget line and maximizing utility, which of the following must be true?

• All the points along the indifference curve is equal to the budget curve

• The marginal utility is equal to the slope of the budget line

• Relative price is equal to the budget line

• Relative price is equal to the corner solution of an upward sloping indifference curve

Answer explanation

• This is the optimum point where the slope of the indifference curve and slope of the budget line is equal

Comparative advantage is based on which of the following principles?

• Producing what you're best at, regardless of opportunity costs.

• Producing goods and services that have the highest market demand.

• Producing to meet demands of trade

• Producing goods and services with the lowest opportunity cost.

Answer explanation

• Comparative advantage is based on countries doing what they are the most efficient in which means they have to figure out what they can produce with the lowest sacrifice (opportunity cost)