Econ Practice ProblemsSet 1 1. Use the graph above to answer the following questions. a. Why is the curve showing the MB of eating pizza downward sloping? b. How many slices of pizza should be eaten? Why? 2. Tell whether each of the following is a positive or normative statement. a. The federal government should reduce spending. b. The federal government's budget deficit for 2014 is 2.8% of GDP, down from 4.1% in 2013. 3. Use the PPF above to answer the following questions. a. Which point(s) are efficient? Inefficient? Unattainable? b. What is the opportunity cost of 1 unit of milk when moving from A to B? c. What is the opportunity cost of 1 unit of milk when moving from B to E? d. What is the opportunity cost of 1 unit of orange juice when moving from B to A? e. Does the PPF exhibit constant or increasing opportunity costs? What does this tell us about the resources used for milk and OJ? 4. Explain the difference between an increase in quantity demanded and an increase in demand. 5. Suppose your income increases, and as a result, you buy more Royals baseball tickets. What type of good do you consider Royals tickets? 6. If cereal and milk are complements, what effect will an increase in the price of milk have on the demand for cereal? 7. Why is the supply curve upward sloping? 8. Suppose the price of wheat increases sharply. How will this affect the supply of bread? 9. Suppose there is an increase in the number of sellers in a market. What effect will this have on the equilibrium price and quantity in the market?

10. Suppose strawberries and raspberries are substitutes, and the price of strawberries increases. What effect will this have on the equilibrium price and quantity in the raspberry market? 11. Refer to the graph above. Would a price of $12 cause a shortage or a surplus? How much would the shortage/surplus be? Answers: 1. a. The marginal (additional) benefit of each additional slice of pizza decreases as we eat more pizza. b. 3; MB = MC at 3 slices of pizza--the net benefits are maximized. If fewer than 3 slices are eaten, benefits are not maximized (we could be better off). If more than 3 slices are eaten, the cost is greater than the benefit. 2. a. Normative b. Positive 3. a. Efficient: A, B, E; Inefficient: C; Unattainable: D b. 2 units of OJ c. 4 units of OJ d. unit of milk e. Increasing opportunity coststhe resources used in the production of milk and OJ are specialized (not equally suited for the production of both goods) 4. An increase in quantity demanded is a movement downward and to the right along the demand curve caused by a change in the price of the good. An increase in demand is a shift to the right of the demand curve caused by a change in something other than the price of the good. 5. Normal good 6. The demand for cereal would decrease (shift left). 7. There is a positive relationship between price and quantity supplied. Sellers are more willing to supply the market when prices are high, since this generates more profits for the business. 8. The supply of bread would decrease (shift left). 9. Supply would increase (shift right) causing a decrease in equilibrium price and an increase in equilibrium quantity. 10. Demand for raspberries would increase (shift right) causing an increase in equilibrium price and an increase in equilibrium quantity. 11. Surplus; 20 units S D 10 20 30 40 50 60 70 80 90 quantity 2 4 6 8 10 12 14 16 18