Answer Key: 2000 Great Plains ECONOMICS CHALLENGE
ROUND 1: MICROECONOMICS

2. C, the economic problem is limited resources and unlimited wants. Consumers must make choices about the best, or most efficient, use of the scarce resources

3. D, income rose and the demand for the good increased. This means that bicycles are a normal good.

4. C, the basic economic problem is scarce resources and unlimited wants. Whenever a consumer makes a choice they are dealing with the problem of scarcity.

5. C, one general characteristic of the short run is that there is at least one fixed resource. Adding a variable resource, such as labor, to a fixed resource will eventually result in diminishing output for each additional person that is hired. The kitchen is the fixed resource and the variable resource is labor. Adding more labor to the kitchen results in decreased output from each cook. If too many cooks are hired they spoil the broth. The last cook could add a negative to the broth, which is spoiling the broth.

6. A, the definition of total economic profit is total sales revenue (P x Q) minus total cost. Total cost includes a normal rate of return on the investment.

7. A, the definition of marginal cost is the additional cost of producing or purchasing an additional unit of a good. The first can of soup costs $1.50 and two cans cost $2.50. What was the cost of the second can of soup? It was the difference between buying one can and two cans, which is $I.

8. D, in a market economy, free of any controls, a shortage of milk will cause milk prices to increase. Higher milk prices will decrease quantity demanded and increase quantity supplied, resulting in a market-clearing price. However, if the government fixes the price below equilibrium, a shortage will result. If demand and supply do not change, then the shortage will be prolonged.

9. C, in a market economy prices are the coordinating mechanism in the economy. In a planned economy the coordinating mechanism are central planners.

10. B, if firms are maximizing profits where MC=MR, and they are earning an economic profit, then it means that P>ATC. Economic profits attract new firms to the industry which shifts out the industry supply curve and reduces equilibrium price.

11. C, the MC=MR rule applies to firms profit maximization decision making in both the short and long run.

12. A, a rebate is a form of price reduction by car sellers. Car sellers are lowering prices to increase sales because of surplus cars on the market.

13. C, in the short run all firms face diminishing returns. This goes back to the idea that in the short run at least one resource is fixed and as you add more of a variable resource to fixed resources, diminishing returns will set in after some point. Diminishing returns have set in so each additional person hired produces less than the previous person hired. If the fifth worker produced 20 frames, then the sixth worker must produce less that 20 frames.

14. B, a market price above minimum ATC will result in economic profits for firms in the industry. Economic profits will attract new firms. As new firms enter the industry, equilibrium price falls and each firm experiences a lower price.