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ECON 102


1. Opportunity Cost
What you lose from doing one thing/choosing one option instead of another one.

Girl choosing between going to work ($60), Writing a paper ($40), or going out with friends
($80). Opportunity cost of writing paper is $80.

2. Net Marginal Benefits Principle
How to decide what class to study? Econ question takes 13 minutes, math question takes 18

What really matter is how long the next question takes you. How efficiently are you learning,
how are the questions getting more difficult, etc.

Dont rely on the average.

3. The Trade Principle
When people are able to trade, the TOTAL value for everybody should increase.
Include barter trade, simple purchase (with $)

4. The Invisible Hand Principle

Old car or new car? Trying to protect the environment, cannot afford new car.
Old(environmentally unfriendly): $100/yr + 20mi/gal over 7000 mi/yr. = $450
New(environmentally friendly): $600 + 40mi/gal over 7000 mi/yr. = $775

Even though the new car is environmentally friendly, the better option for the environment
would actually be the old car. Why?

If you (who dont drive often) drive the old car, then someone else who drives more wont be
able to. Therefore, you are actually protecting the environment, and allowing someone else who
drives more to drive a more environmentally friendly car.

How to make new car more desirable? You can lower rental cost or raise gas prices.

BE SELFISH. Good of one is good of many.


Q1: Suppose you have a very efficient study system. As you increase the hours you study for an
ECON exam, the opportunity cost of studying for the exam (increase, decrease, stay the same, may
increase or decrease)

A: Increase

1. What does it mean to be efficient? How do economists define efficiency?

Doing the best you can with all the resources you have.

Round 1: 2 Airplanes, 5 Bands
Round 2: 3 Airplanes, 1 Band
Round 3: 1 Airplane, 10 Bands

Being forced to use goods for one activity, even when they are better performing in other areas, is
what increases the cost of production/opportunity cost.

Paper planes on X axis
Paper bands on Y axis

Slope of curve closer to the origin is shallower than further away.

Current Events: National Security vs. Privacy

2. What is the effect of technological change?

Increases possibilities shifts PPF out (further from origin)


Specialization and Trade

Trade Creates Value

Example: Sally can type 100 words per minute, while David can type 200 wpm. Would society be better
if David or Sally was employed as a typist?

It depends on David and Sallys other skills. If David has other skills while Sally does not, then Sally
should be the typist so that David can utilize his other skills.

Can specialization and trade increase production?

Example: Susan studying for two classes ECON and MATH. She takes 4 minutes to do and econ
problem, but 2 to do a math problem. John takes 5 minutes to do an econ problem, and 10
minutes to do a math problem. Together, they get credit for as many problems as they can turn

If they each spend half the time doing each topic, Susan solves 5 econ and 10 math, John solves
4 econ and 2 math, for a total of 9 econ problems and 12 math problems.

When they distribute the problems like this, the total problems for each of them can increase.
They should trade Sally gives 3 math problems to John, and John fives 3 econ problems to

When this, Susan will have 6 econ and 11 math problems, and John will have 5 econ and 3 math
problems. They both win!

Example: For Susan, the opportunity cost of solving 1 Econ problem is: 2 math problems

Econ Math Time E Time M Num E Num M
Susan 4 2 12 28 3 14
John 5 10 40 0 8 0
11 14

How are market prices determined?

As the number of girls at the local pub increase, the quality of pick-up lines used by the guys will
(assuming the number of guys does not change):
Decrease (someone has to say yes eventually)

More girls, less guys guys can use lamer pick-up lines.
More guys, less girls guys actually have to do well.

Say the pub begins showing the championship game on TV. If nothing else changed at the pub
(#girls/#guys same) we can predict that the quality of the pick-up lines used by guys will
(assuming girls dont like basketball)
Decrease less competition between guys


Supply & Demand

Example: As the male : female ratio of college students falls, we would expect college men to
C: pay less to have sex with women

HOW to use supply and demand to predict changes in prices?

Example: If women in Kenya were able to negotiate higher wages for their labor (collecting
roses), the supplies for roses would
B. decreased (higher marginal cost per flower)

Example: If profs at UIUC begin giving As to students in exchange for roses, we would expect
the price of roses to ________ and the quantity sold of roses to _______.
a) Increase, increase

Example: Say someone invents a machine capable of helping women harvest the roses in the
field. The effect of this invention would be to ______ the wage women receive from their labor
a) Increase

Example: Barley is one of the basic ingredients of beer. If the price of barley increase, the
equilibrium price of beer will _____ and the equilibrium price of pizza will ______.
Price of beer rises, some people might not buy pizza because beer is more expensive.
Demand for pizza decreases, so equilibrium price of pizza decreases.
c) Rise, fall

Example: The Chicago Cubs win the MLB championship, and the team management increases
the salaries of all the Chicago Cubs players. Holding everything else constant, we would expect
the price of next seasons Cubs tickets to _____ and the quantity of tickets to _______.
c) Increase, unknown change



The student center on campus has burritos, bagels, or burgers for lunch, and they all cost the same.
You decide to have a burger today, but if they were out of burgers, you would have bought a bagel.
Your opportunity cost of the burger is:
a) Your enjoyment of the bagel and burrito
b) Your enjoyment of the bagel
c) Your enjoyment of the bagel or the burrito
d) Your enjoyment of the burrito

You are deciding whether to stay home to do your laundry rather than work at your job and make $60. If
you are willing to pay %80 to have someone else do your laundry, what would be the opportunity cost
of : going out and drinking with your friends?
a) $0
b) $20
c) $60
d) $80
e) $140

The table below shows the production possibilities for two countries. If they were going to open trade,
then the North:

a) Specializes in both things
b) Specializes in apps and the South specializes in cars
c) Specializes in cars and South specializes in apps
d) Does not specialize in either good
e) Should really produce alien spaceships

Opportunity cost:

The following would be a trade beneficial to both regions:
a) 3 cars for 3 apps
b) 12 cars for 4 apps
c) 6 cars for 4 apps
d) 15 cars for 3 apps

To calculate benefit of trade, find how much one country would pay to get thing from other
2cars/1app < P > 4cars/1app

Cars Apps
North 10 20
South 15 60
Cars Apps
North .5 apps 2 cars
South .25 apps 4 cars
An increase in demand and an increase in supply will lead to a(n) _______ in equilibrium quantity and
a(n) _______ in equilibrium price.
a) Increase, indeterminate change
b) Indeterminate change, decrease
c) Decrease, decrease
d) Indeterminate change, increase

A decrease in the price of bagels will _______ the market price and _______ the market quantity of
cream cheese, a complement of bagels.
a) Increase, decrease
b) Decrease, decrease
c) Decrease, increase
d) Increase, increase
e) None of the other choices are correct


Example: Milk is an input in the production of cheese, and cheese and bagels are complements.
An increase in the price of milk will ______ the total surplus in the market for bagels.

Are markets efficient?
Encourage people to trade, and trade creates value.

Consider the market for John Mayers music. What would result in an increase in consumer
A: An increase in market supply of John Mayer albums.

What are the market effects of government intervention?
1) Government set prices (or at least max prices) e.g. taxi cabs
a. Taxi cab: get same price in expensive areas as you do in poor, crime-ridden areas.
Obviously taxis are going to drive in expensive area, means good doesnt make it to
poorer areas

Suppose the government sets the maximum price for a normal doctors visit at $20 but the current
market price is $40. As a result of this government action, doctors will see:
a) Fewer patients: some doctors will go out of business at lower price, means less doctors
will be available and fewer doctors will be seen. (high demand, low supply)
b) The same number of patients
c) More patients

Suppose the government sets the maximum price for a BMW Z4 at $10K, but the current market price is
$50K. As a result of this government action, BMW car dealers will sell:
a) More Z4s
b) The same amount of Z4s
c) Fewer Z4s


Price Elasticity

Goods are ________ when the cross-price elasticity of demand is positive and ________ when the
cross-price elasticity of demand is negative.
Substitutes, complements

In your college town real estate developers are building thousands of new student friendly
apartments close to campus. If you want to pay the lowest rent possible should you hope that
demand for apartments is elastic or inelastic?
Inelastic (builders build apartments for the same amount of people reduce price)

Say you were advising the CEO of apple who was considering decreasing the price of the iPad by 30%.
If you know the price elasticity for iPads was -1.3, what would be your advice to the CEO?
Decrease the price

Say the supply for labor increase in the industry you work. (IMMIGRATION!!!) What field would you
rather be: a field where the demand for labor is elastic or a field where the demand for labor is
Elastic (not as much change in wage)

Change in market affects wage inelastic
Change in market affects quantity elastic

Price elasticity of Demand = (%Change in Qx)/(%Change in Px)
Cross Elasticity of Demand = (%Change in Qx)/(%Change in Py)
Income elasticity of Demand = (%Change in Qx)/(%Change in I)

If Pizza and Beer were considered complements, then the cross-price elasticity between pizza and
beer will be:
Increase in price of beer will prevent some people from buying pizza
Price of one increase, demand for other goes down (inverse relationship)

Abortions normal good or inferior good?
Inferior good people with higher incomes are more likely to have access to birth control and
health care less likely to NEED the abortion, can AFFORD children
Normal good people with higher incomes are more likely to be able to afford abortions when
they need them, therefore demand increases with income.

Which of these two goods has a more price inelastic supply?
Episode of Friends

Exam 2 Review:


Price is $1 and total revenue is $200. If price increases to $2 and total revenue increases to $400 you
know that the demand for the product is:
Elastic: increase in price leads to decrease in revenue
Inelastic: increase in price leads to increase in revenue

Perfectly Inelastic: price increases, quantity stays the same

P = 1, TR = 200, Q = 200
P = 2, TR = 400, Q = 200

Assume the supply curve shifts to the right by a given amount at each price. Price in the market will
decline the most in demand is more price:
The more inelastic the supply/demand is, the less the effect of changing price will be felt in
quantity, more it will be felt in price

Inelastic demand: Vertical line on PQ graph

Demand more elastic: change in price is reduced, change in quantity is inceased

Demand is more price-inelastic and supply is more price-inelastic

Which factor is the most important in determining the price elasticity of the supply?
The time period the producer has to adjust inputs and outputs

Does not have to do with consumer/consumer choice.

Which of the following will lead to a decrease in total revenue?
Price increase, demand elastic (more money every time sell, sell less)
Price decreases, price inelastic (less money every time sell, sell the same)

The price increases and demand is price-elastic


Supply the price elasticity of demand for fishing lures equals 1 in South Carolina and .63 in Alabama. To
increase revenue, fishing lure manufacturers should:
South Carolina: Demand is unitary leave prices same
Raise prices in Alabama

A restaurant manager sees that when he has too many servers on the floor, the servers get in each
others way and fewer people get served. This shows that concept of:
Diminishing marginal product

Arlene makes earrings in the shape of the mascot of a local university. Last year Arlene made 250 pairs
of earrings, which she sold to the university bookstore for $10 each. Arlene works out of home, so her
only cost is $3 per pair for materials and $85 for tax help. If Arlene didnt produce earrings, she would
spend her time babysitting her nephews and make about $500 per year.

TR = 250*10
Acc Cost = 3*250 + 85 = 835
Acc Profit = 2500 835 = 1665
Opp Cost = 500
Econ Profit = Acc Profit Opp Cost = 1165

To pursue a goal of being a business owner, Mary left a job that paid $40,000 a year. At the end of her
first year in business, her cash revenues summer up to $90,000 and her explicit costs were $50,000.
Also, in order to fund her business startup, Mary cashed in a $20,000 certificate of deposit that was
providing a yield of 5%. Ceteris paribus, Marys economic profit is:

Opp Cost = 40,000+1,000= 41,000
TR = 90,000
Acc Cost = 50,000
Total = 91,000

Economic Profit = TR Total = -1000

John uses funds from a savings account to pay off his equipment loan. The interest rate John pays on the
equipment loan is the same as interest rate he can earn on the savings account. Johns accounting profit
_____ and his economic profit _______.

Account Profit doesnt include opp cost
Acc Profit = Revenue Acc Cost
Econ Profit = Revenue Acc Cost Opp cost

Interest Rate = Acc Cost
Interest Received = Opps Cost

Pays off loan, Acc cost goes down: acc profit increases
Econ profit stays same, reduction of acc cost is same as increase in opp cost

Rises, stays the same

Maria has a business printing Tshirts selling 200 tshirts per month. Her monthly total fixed costs are
$400 and her monthly total variable costs are $1000. If for some reason, Marias fixed cost increased to
$1000, then her:
Marginal cost = change in Total cost/Change in output
Fixed costs dont change when you change output
Fixed cost wont change marginal cost
Average fixed cost will increase

When marginal cost is below average variable cost, average variable cost must be:

The slope of a long-run average total cost curve exhibiting increasing returns to scale is:


The marginal product of labor is:

The slope of the total product of labor curve
The ________ curve continually declines as more output is produced in the short run.

Average fixed cost

The short run is the period of time in which:

At least one input is fixed

If two firms are identical in all respects expect that one has more capital than another, the marginal
product curve for the firm with more capital:

Marginal product curve

The long run is a period that is:
long enough in which to vary the quantities of all factors of production.

Which of the following would result in higher price elasticity?
Longer time period

If total revenue goes down when price falls, the price elasticity of demand is said to be:

If a 10 percent increase in the price of cotton leads to an 8 percent increase in the quantity of cotton
supplied, then the price elasticity of supply of cotton is:

The price elasticity of demand along a demand curve with a constant slope:
Increases in absolute value as price rises

Demand is inelastic when the absolute value of the price elasticity of demand is:

Less than 1


You work as a tutor for ECON 102. You sell your services at $15/hr, and you can only tutor one person at
a time. If you did not work as a tutor, you could work as a bartender for $12/hr . Finally, your fixed costs
are $50 and you can only work three hours. In the short-run, should you shut down your operation?

In the short run, shutdown only if: P < AVC

The fact that the owner of the Black Dog decided to continue with the business even whe he was making
no income probably means that

Operating in the short run, starting cost were very high, and opportunity costs were low

Assuming the BBQ shop continues to make profits, we should expect the price of BBQ sandwiches in the
longrun to:

Seeing other people succeed in BBQ will cause other entrepreneurs to open BBQ shops,
pushing the prices down

Housing Market 2007: Prices of houses crashhh

You work as a tutor for ECON102. You sell your services at $12/hr, and you can only tutor one person at
a time. F you did not work as a tutor, you could work as a bartender for $12/hr. Finally, you can only
work three hours. In the long run, you should
a. Expand
b. Stay
c. Quit

0 economic profits: making the same money that you would make working ( basically, include
opportunity cost)

No reason to expand: making no profits

Assuming the tablet market to be competitive, we can expect the price of tablets such as the iPad Mini
(eg, kindle fire, Samsung nexus, etc) in the long-run to
b. Increase
c. Decrease
d. Not change
e. We cant tell

A price making firm is producing at the output level where average total cost equals $40, marginal
revenue is $40, and the price is $50. If ATC is at its maximum level and the ATC curve is U-shaped, in
order to maximize profits, this firm should:
b) Do nothing already maximizing profits
Atc = revenue <- best option

A monopolist should produce more output than a competitive firm facing the same marginal costs.
After all, if youre making a profit, you want to sell as much as you can.
b) false can only increase quantity by reducing price, which might lower revenue

Which of the following is not an example of price discrimination:
a. Street vendors increasing the price of umbrellas when its raining
b. Ladies receiving free admission into clubs while men must pay
c. Country clubs requiring members to pay annual dues, but receiving discounted golf
(two different products, one for membership, one for golf)
d. College students receiving discount at ice cream store

The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this
pricing strategy increases the profits of the bus system we can conclude that senior citizens must have a
_______ for bus service than other passengers.
c) More elastic demand

Two classmates, Richard and Felice, are assigned an extra credit group project. Each student can chose
to Shirk or Work.
-if one or more players chooses to work, the project is completed and provides each with extra
credit valued at 4 payoff units
-the cost of completing the project is that 6 total units of effort (measured in payoff units) are
divided equally among all players who choose to work and this is subtracted from their payoff
-if both shirk, they do not have to expend any effort but the project is not completed, giving
each a payoff of 0
-the teacher can only tell whether the project is completed and not which student contributed
to it

At the start of the game each firm charges a low price and each earns a profit of 7. Suppose W and T
both advertise that they will match the lowest price offered by another competitor. The purpose of such
a strategy is to signal to each other:
b) They intend to charge the high price

In the game described in the figure above, Darrens dominant strategy is
d) Neither east or west

North South
Darren East D = 1, t = 0 D = 1, t = 2
west D = 1, t = 1 D = 2, t = 3