Study Questions For The First Exam
ECON 361
These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
MAKE SURE - you use your notes, the in-class exercises and the homework when you study -- some problems on the exam will be very similar.
Also read the handouts assigned. There will be questions from the Koch chapter and the other handouts - so make sure you have read them.
We might not get through all of this material before the exam.
Another Comparative Advantage Practice Problem is Below
TOPIC: Introduction and Review of Concepts
How did we define economics in this class?
What does purposeful behavior mean?
What does rational behavior mean to an economist?
Economists assume people always act how?
What are the two basic economic problems and why do they exist? These problems exist both for society as a whole as for the firm.
What model do economists use to try to address these problems? What is assumed about human behavior in the model? Koch assumes the same model can be used inside the firm -- why?
How did we define wealth in this class?
Why can't we talk about efficiency for a firm (or for society) without talking about consumer value?
What is a model? Koch says that a model must not be too complicated but also must not ____________________?
Ceteris paribus means?
According to Koch, managers must always embrace change -- what two theories (from what two people) did Koch use to talk about embracing change? Explain the two theories or concepts.
Explain why a market is considered a "spontaneous order." Why does the order or coordination happen in a market?
Why does trade increase wealth?
What does opportunity cost mean?
Apply opportunity cost to the broken window fallacy?
What does marginal mean?
What is a sunk cost?
What are variable and fixed costs? Inputs?
What is the definition of the short run according to economists? Long run?
If a firm losing money is trying to decided if it should shut down or not in the short run -- what costs should be considered (relative to marginal revenue)?
Adam Smith said that division and specialization will increase productivity. What were his three reasons?
What does absolute advantage mean?
What does comparative advantage mean?
Be able to do a problem similar to the one you did in the homework regarding comparative advantage.
Explain how delegation is a good example of using the theory of comparative advantage inside a firm.
TOPIC: Demand Analysis -
Markets ration what to whom?
What is meant by "revealed or demonstrated preference"? (Koch talked about this as well)
What is a demand curve?
Why must someone have both the willingness and ability to demand? Explain.
Explain diminishing marginal utility and how it relates to the downward sloping demand curve.
What are two other theories (besides diminishing marginal utility) that explain why a demand curve is downward sloping?
Know the factors that determine or change demand and how to show the changes in the demand curve (graphically).
What is the difference between a change in quantity demanded and a change in demand?
What is consumer surplus? Show this on a graph.
Given some data that gives you a demand function (such as Quantity Demanded = 9 - 4P), be able to graph a demand curve.
From the same function as above, be able to show what would happen to the demand curve if the price (P) changed.
From the same function as above, find the inverse demand or solve for the price equation.
After adding in variables such as income or the price of a substitute or the price of a complement into a demand function, be able to find the new equation for quantity demanded and the inverse demand.
Be able to show how that demand curve would change with a change in the value of one of the variables (such as income). Be able to graph these changes too.
Understand what the signs on the variables in a demand function mean.
How would a manager use the information given in a demand function?
What is a reservation price?
Be able to determine the amount (in $) of consumer surplus from a demand function and a given market price.
How might a manager use this information? How might a firm try to capture some consumer surplus?
Another Comparative Advantage Practice Problem - We will go over the answers in class - BUT do it on your own first!!
Assume there are two plants within a firm and there is only one factor of production, labor. It takes 10 labor hours to produce 1 pound of corn, and 6 labor hours to produce 1 pound of grain in Plant One. It takes 6 labor hours to produce 1 pound of corn and 2 labor hours to produce 1 pound of grain in Plant Two.
1. Which Plant has an absolute advantage in the production of corn? Explain your answer.
2. Which Plant has a comparative advantage in the production of corn? Explain your answer.
Now assume there are 2000 labor hours available in each plant and these hours are divided equally between producing corn and grain. Therefore, there are 1000 labor hours available for producing each good in both plants.
3. What is total production of both grain and corn at this point?
Corn:
Grain:
Now Plant One specializes in producing corn and produces 100 marginal pounds and sends them to Plant Two.
Assume a trading ratio (or transfer price) of 2 pounds of grain to 1 pound of corn.
4. What is total production of both after specialization and trade? Has total production increased? Hint: in this problem total production of one good stays the same but it goes up for the other good.
Corn:
Grain: