Scenarios Flashcards
(7 cards)
Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers.
Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat.
Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat.
Freedonia will now be able to consume a maximum of:
a. 30 units of corn and 30 units of wheat.
b. 40 units of corn and 30 units of wheat.
c. 40 units of corn and 20 units of wheat.
d. 10 units of corn and 40 units of wheat.
a. 30 units of corn and 30 units of wheat.
OpportunityCostofGoodX=OutputofGoodY/OutputofGoodX
Consider an indifference curve and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases:
a. The substitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is less than the income effect.
b. The substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is greater than the income effect.
c. The substitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is greater than the income effect.
d. The substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.
d. The substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.
In the work-leisure model, suppose consumption and leisure are both normal goods. The income effect and substitution effect of a wage increase result in the worker choosing to:
a. work less than before.
b. work more than before.
c. possibly work more or less than before.
d. work more with a higher level of consumption.
a. work less than before.
The substitution effect from an increase in wages is evident in:
a. decrease in labor demand.
b. desire to consume less leisure.
c. desire to consume more leisure.
d. backward-bending labor supply curve.
b. desire to consume less leisure.
If the interest rate on savings increases, then:
a. Scott will decrease savings in the work period if the income effect is greater than the substitution effect for him.
b. Scott will increase savings in the work period if the income effect is greater than the substitution effect for him.
c. Scott will increase savings in the work period if the substitution effect is greater than the income effect for him.
d. Both a and c are correct.
d. Both a and c are correct.
Michael faces trade-offs between consuming in the current period when he is young and consuming in a future period when he is old. Michael experiences a decrease in the current interest rate he earns on his savings. Michael will:
a. save less in the current period if the substitution effect is greater than the income effect.
b. save less in the current period if the income effect is greater than the substitution effect.
c. save more in the current period if the substitution effect is greater than the income effect.
d. save more in the current period, regardless of the sizes of the income and substitution effects.
a. save less in the current period if the substitution effect is greater than the income effect.
GDP and its components
In each of the following cases, determine how much GDP and each of its components is affected (if at all):
A. Debbie spends $300 to buy her husband dinner at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer.
D. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.
A. Debbie spends $300 to buy her husband dinner at the finest restaurant in Boston.
Effect on GDP: GDP increases by $300.
Component of GDP: This is part of Consumption (C) because it is spending on a final service provided by a restaurant.
B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China.
Effect on GDP: GDP is not affected because the laptop was imported.
Component of GDP:
Investment (I): $1800 is added to business investment.
Net Exports (NX): $1800 is subtracted from net exports because it is an import.
Net effect on GDP = $0.
C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer.
Effect on GDP: GDP increases by $1200.
Component of GDP: This is part of Investment (I) because the computer is used for business purposes. It was produced domestically, so it contributes to GDP.
D. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.
Effect on GDP: GDP increases by $500 million.
Component of GDP:
Consumption (C): $470 million (purchased by consumers).
Investment (I): $30 million (unsold inventory, which counts as inventory investment).
Total contribution to GDP = $500 million.
