Ch. 1-3 Midterm Study Guide
Define the marginal net benefit of a one-unit change in output, (Q). That is, the MNB(Q) -[MB(Q)/MC(Q)] -MC(Q) - MB(Q) -MB(Q) - MC(Q) -MB(Q) + MC(Q)
-MB(Q)-MC(Q)
informative advertising
Advertising often provides consumers with information about the existence or quality of a product, which in turn induces more consumers to buy the product
law of supply
As the price of a good rises (falls) and other things remain constant, the quantity supplied of the good rises (falls)
Total Revenue Test
If demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total revenue. If demand is inelastic, an increase (decrease) in price will lead to an increase (decrease) in total revenue. Finally, total revenue is maximized at the point where demand is unitary elastic.
If the price of a good or service is less than the equilibrium price, a _________exists. As a result, the price tends to ________.
Shortage, rise
manager
a person who directs resources to achieve a stated goal
When demand is elastic
a price increase (decrease) leads to a decrease (increase) in total revenue. This is an inverse relationship
when demand is inelastic
a price increase (decrease) leads to an increase (decrease) in total revenue.
Persuasive advertising
advertising that promotes the latest fad in clothing may increase the demand for a specific fashion item by making consumers perceive it as "the" thing to buy
If elasticity is negative
an decrease in S leads to a decrease in G
If elasticity is positive
an increase in S leads to an increase in G
Consumer surplus equals
area above the price determined. Since this is a right triangle, use base x height /2 to calculate the area. This is also the consumer surplus
suppose that demand is linear and given by: Qxd=Ao-axPx+ayPy+amM+ahH. Own price elasticity is given by
ax(Px/Qx)
advertising elasticity measures
changes in consumption due to changes in advertising
what type of analysis studies the movement from one equilibrium to another? -market analysis -comparative static analysis -consumer theory analysis -static comparison analysis
comparative static analysis
when cross price elasticity is negative the goods are
complements
a decision maker's ability to achieve a goal will be affected by the ____________she faces
constraints
the availability of technology costs and input prices are often considered ____________ that interfere with managerial goals -constraints -factors of production -sunk costs -opportunity costs
constraints
which relationship best describes the following statement: buyers are trying to rip off sellers and sellers are trying to gouge buyers -consumer-consumer rivalry -utility minimization -loss minimization -consumer-producer rivalry -producer-producer rivalry
consumer-producer rivalry
responsiveness of demand for a good due to changes in the price of a related good is measured using: -own-price elasticity -income elasticity -complement elasticity -cross-price elasticity
cross-price elasticity
When price elasticity of demand (eta) = 0
demand is perfectly inelastic and the demand curve is vertical. Quantity demanded is the same at all prices
What is true of demand for a good that has few close substitutes: -demand is a compliment -demand is inferior -demand is relatively inelastic -demand is relatively elastic
demand is relatively inelastic
If the absolute value of elasticity is >1, then demand is said to be _________
elastic
the primary analytic tool used to evaluate the responsiveness of one variable to change in another variable is called _________.
elasticity
Which of the following is among the five forces that impact the sustainability of industry profits, according to Michael Porter? -entry -firm size -industry rivalry -power of buyers
entry, industry rivalry, power of buyers
The slopes of the total benefits curve and the total cost curve are _____________ when benefits are maximized -negative -indeterminate -positive -equal
equal
Which of the following occur(s) when the supply of a good or service decreases? -equilibrium price decreases -equilibrium price increases -equilibrium quantity decreases -equilibrium quantity increases
equilibrium price increases and equilibrium quantity decreases
what can we predict about the market for craft beer if both demand and quantity decrease simultaneously? -equilibrium quantity decreases -equilibrium price increases -equilibrium price decreases -equilibrium quantity increases
equilibrium quantity decreases
When a surplus exists, there is a tendency for price to ______in order to equate quantity demanded and quantity supplied
fall
True or False: wealthy people do not face scarcity
false
According to the "Five Forces Framework", market entry can erode the sustainability of profits for existing firms. This is due to (select all that apply): -formation of new companies -added labor costs -increased competition -introduction of new products
formation of new companies; increased competition; introduction of new products
the __________ the F-statistic, the better the overall fit of the regression line through the actual data
greater
the parameter estimate is statistically different from zero when the absolute value of the t-statistic is -less than 2 -equal to 2 -greater or equal to 2
greater or equal to 2
The opportunity cost of producing a good or service is generally _______ than the accounting cost -equal to -less than -greater than
greater than
demand is perfectly inelastic when
he own price elasticity of demand is zero.
Own price elasticity of demand use and application
helps firms to know the right price to charge and make forecasts
price elasticity can be measured at an interval (or arc) along demand, or at a specific point on the demand curve
if the price change is relatively small, a point calculation is suitable. If the price change spans a sizable arc along the demand curve, the interval calculation provides a better measure
opportunity cost
includes both the explicit (accounting) cost of the resource and the implicit cost of giving up the best alternative use of the resource.
If the absolute value of elasticity is <1, an increase in the price of the good will _________ total revenue
increase
An increase in consumer income __________ the demand for normal goods and __________ the demand for inferior goods
increases, decreases
In the case of yes or no managerial decisions, which of the following refers to the additional costs derived from a decision? -incremental costs -explicit costs -average costs -continuous costs
incremental costs
profits are a
signal to resource holders where resources are most highly valued by society
When the absolute value of the t-statistic is large, the standard error of the parameter estimate is ________ relative to the absolute value of the parameter estimate
small
when the absolute value of the t-statistic is large, the standard error of the parameter estimate is _____ relative to the absolute value of the parameter estimate
small
the smaller the standard error of an estimated coefficient, the _________ the variation in the estimate
smaller
when cross price elasticity is positive the goods are
substitutes
what happens to the supply of canned craft beer if brewers adopt a new technology that allows them to can more craft beer at a lower cost? -supply increases -quantity supplied decreases -nothing. this is a demand side effect
supply increases
If the price of a good or service exceeds the equilibrium price, a ________exists. As a result, price tends to __________.
surplus, fall
what is the coefficient of determination? -the t-statistic -the confidence interval -the P-value -the R-Square
the R-square
Which area forms consumer surplus? -the area below the supply curve and below the price -the area above the supply curve and below the price -the area below the demand curve and above the price -the area above the demand curve and below the price
the area below the demand curve and above the price
Total supplier revenue equals
the area of the price x quantity demanded at that price
availability of consumption substitutes
the better & more numerous the substitutes for a good, the more elastic the demand is. Think cross-price elasticity of demand
economic profits
the difference between the total revenue and the total opportunity cost of producing the firm's goods or services
What can be said about good X and Y if the cross-price elasticity between X and Y is negative -they are complements -they are substitutes -they are inferior goods -the two goods are unrelated
they are complements
%change in Qx/%change in Qy = Cross price elasticity
to calculate the change use difference/avg.
when demand is unitary elastic
total revenue is maximized
Any time you decrease (increase) the price when in the elastic range of the demand curve
total revenue will increase (decrease); Elasticity of demand is greater than 1
Any time you increase (decrease) the price when in the inelastic or lower part of the demand curve
total revenue will increase (decrease); elasticity of demand is less than 1
true or false: Managerial economics includes analysis of household decision-making
true
total revenue is maximized at a point where demand is -unitary elastic -elastic -partially elastic -inelastic
unitary elastic
which of the following principles comprise effective management? (Select all that apply) -use marginal analysis -recognize the importance of profits -understand indifference curves and budget constraints -identify firm goals and constraints
use marginal analysis; recognize the importance of profits; identify firm goals and constraints
price floor
when set above equilibrium, the price floor artificially inflates price of the good. This causes the demand to decrease but supply to increase. Subtract quantity supplied from quantity demanded to calculate the surplus
unitary elastic
when the absolute value of elasticity = 1
when the t-statistic for a parameter estimate is large in absolute value, you can be reasonable sure that the true parameter is not: -zero -one -large -small
zero
when the t-statistic is large in absolute value, then we can be confident that the true parameter is not equal to ________
zero
total revenue is maximized when marginal revenue equals______
zero; 0
Consider the following relationship between marginal revenue and elasticity of demand MR=Px((1+E)/E). If elasticity is unitary, marginal revenue is __________ and total revenue is____________
zero; maximized
What is the formula of price elasticity of demand for a good
%changeQdx/%changePx
cross-price elasticity is give by what expression?
%changeQdx/%changePy
what is considered an expression for income elasticity?
(1) %changeQxd/%changeM; (2) (SigmaQxd/sigmaM) x (M/Qx)
an effective manager must
(1) identify goals and constraints, (2) recognize the nature and importance of profits, (3) understand incentives, (4) understand markets, (5) recognize the time value of money, and (6) use marginal analysis
the five forces (by Michael Porter)
(1)entry, (2) power of input suppliers, (3) power of buyers, (4) industry rivalry, and (5) substitutes and complements
given the demand function Qdx=f(Px,Py,M,H), define own price elasticity
(SigmaQdx/SigmaPx) x (Px/Qx)
Which of the following describes supply and demand analysis? Select all that apply: -a forecasting tool -use to predict pricing trends -a qualitative tool -mostly quantitative
-a forecasting tool -use to predict pricing trends -a qualitative tool
A decrease in supply is shown by which of the following -a movement down along the demand curve -a leftward shift of the supply curve -a rightward shift of the supply curve -a movement up along the supply curve
-a leftward shift of the supply curve
If elasticity is given by Exy = %changeX/%changeY then elasticity is positive when -a change in X has no effect on Y -an increase Y leads to an increase in X -an increase in X leads to a decrease in Y -a decrease in Y leads to a decrease in X
-an increase in Y leads to an increase in X -A decrease in Y leads to a decrease in X
if elasticity is given by Exy=%changeX/%changeY, the elasticity is negative when -an increase in Y produces a decrease in X -an increase in X produces an increase in Y -a decrease in Y produces an increase in X -a decrease in X has no effect on Y
-an increase in Y produces a decrease in X -a decrease in Y produces an increase in X
Which of the following is true according to the law of demand? select all that apply -as market price increases, quantity demanded also increases -as market price increases, quantity demanded decreases -as market price decreases, quantity demanded also decreases -as market price decreases, quantity demanded increases
-as market price increases, quantity demanded decreases -as market price decreases, quantity demanded increases price and quantity demanded have an INVERSE relationship
define marginal analysis -comparing labor costs with total output -comparing incremental benefits with incremental costs -comparing total costs with total benefits -comparing total revenue with total costs
-comparing incremental benefits with incremental costs
a drawback to R-Square is that it cannot -decrease when additional variables are removed -decrease when additional variables are introduced -increase when additional variables are removed -increase when additional variables are introduced
-decrease when additional variables are introduced
Which of the following occur(s) when the supply of a good or service increases but the demand remains the same? -equilibrium quantity increases -equilibrium quantity decreases -equilibrium price increases -equilibrium price decreases
-equilibrium quantity increases -equilibrium price decreases
which of the following occur(s) when the supply of a good or service increases but demand remains the same? select all that apply -equilibrium quantity decreases -equilibrium price increases -equilibrium quantity increases -equilibrium price decreases
-equilibrium quantity increases -equilibrium price decreases
When demand for a good or service increases, which of the following occur(s) -equilibrium quantity increases -equilibrium price increases -equilibrium price decreases -equilibrium quantity is unchanged
-equilibrium quantity increases -equilibrium price increases
The law of demand analyzes the relationship between price and quantity demanded holding which of the following variables constant? select all that apply: -taxes and substitutes -income -prices of inputs -prices of related goods
-income -prices of related goods
When demand for a good decreases, then: -less is demanded at all prices -quantity demanded increases -more is demanded at all prices -quantity supplied increases
-less is demanded at all prices
Consider the following relationship between marginal revenue and elasticity MR=Px((1+E)/E). If demand is inelastic, what is the value of marginal revenue? -marginal revenue equals zero -marginal revenue is negative -marginal revenue is positive
-marginal revenue is negative
Comparative static analysis assumes which of the following? -no price ceilings -no price floors -goods are allocated by quantity -good are allocated by price
-no price ceilings -no price floors -good are allocated by price
In the following linear demand function where Px is the price of related goods, M is income, and H is other factors, the value of am is (select all that apply): Qxd=A0+AxPx+Am*M+Ah*H -positive if good X is normal -positive if X & Y are compliments -negative if X is inferior -negative if X and Y are substitutes
-positive if good X is normal -negative if good X is inferior
the law of demand analyzes the relationship between price and quantity demanded holding which of the following variables constant? select all that apply -price of inputs -price of related goods -taxes and subsidies -income
-price of related goods -income taxes and subsidies are generally associated with supply
Define surplus - demand exceeds supply -supply exceeds demand -quantity demanded exceeds quantity supplied -quantity demanded is less than quantity supplied
-quantity demanded is less than quantity supplied
when consumers have more time to react to a price change of a good (select all that apply) -the demand for the good becomes relatively less elastic -the consumers are able to locate more substitutes -the consumers seek out fewer complements -the demand for the good becomes relatively more elastic
-the consumers are able to locate more substitutes -the demand for the good becomes relatively more elastic
The demand function indicates that the quantity of a good consumed depends on (select all that apply): -the price of inputs -the income of buyers -the price of the good -the effect of the demand shifters
-the income of buyers (a change in income is a demand shifter) -the price of the good -the effect of the demand shifters
Time/duration of purchase horizon
-the longer the time period consumers have to adjust to price changes, the more elastic demand is. A long run demand curve will generally be more elastic than a short run curve. As the time period lengthens, consumers find ways to adjust to the price change, via substitution or shifting consumption.
The supply functions (QxS= f(Px,Pt,W,H)) shows that the quantity produced in a market depends on the price of the good Px and (select all that apply): -the price of other supply shifters such as taxes -the price of inputs such as labor costs -the price of technology and technology-related goods -the number of buyers in the market
-the price of other supply shifters such as taxes -the price of inputs such as labor costs -the price of technology and technology-related goods
If the interest rate is 8%, the expected growth rate of the firm for the foreseeable future is 6% and the current profits are $60 million, then the value of a firm on the ex-dividend date is $_________ million
3180
absolute value of elasticity is >1
G is highly responsive to changes in S
If the absolute value of elasticity is <1 (1.5) elastic
G is slightly responsive to changes in S (0.5) Inelastic
Consider the following demand function: Qd=900-15P Solve for the inverse demand function
P=60-(1/15)Qd
Consider the following function: QxS = 15Px - 300. Determine the inverse supply function
Px=20+(1/15)QxS
price ceiling
This is when the government artificially deflates the price below the equilibrium price and quantity. This creates an increase in demand and a decrease in supply. In this case less people will be able to purchase the good due to scarcity. Calculate the shortage by subtracting quantity demanded from quantity supplied
determiniants of Own Price Elasticity of Demand
Time/Duration of purchase horizon availability of consumption substitutes expenditure share of consumers' budgets
Income elasticity of demand determinants
Type of product, the level of income in the market because the theory alone cannot tell us whether a product is in a certain category
supply shifters
Variables that affect the position of the supply curve such as the prices of inputs, the level of technology, the number of firms in the market, taxes, and producer expectations
In the case of yes or no managerial decisions, which of the following refers to the additional revenues derived from a decision? -net revenues -average revenues -discrete revenues -incremental revenues
incremental revenues
what are "iid normal" random variables?
independently and identically distributed normal random variables
When it comes to determining where resources are most highly values by society, profits the role of a(n)
indicator
If the absolute value of elasticity is <1, then demand is said to be _______
inelastic
products tend to be elastic when
it is a luxury good, there are many substitutes, there is a lot of time to compare prices, is a small portion of your budget
products tend to be inelastic when
it is a necessity, there are few substitutes, little time to find comparative products, it is a large portion of your budget
the line that minimizes the squared deviations between the line and the actual data points is called the ________ _________ regression line
least squares
suppose elasticity is given by Exy=%changeX/%changeY. The absolute value of elasticity will be ________ than 1 when the change in X is small relative to the change in Y
less
Maximizing short-term profits is the same as maximizing long-term profits when the growth rate in profits is -more than the interest rate and both are constant -less than the interest rate and both are constant -less than the interest rate and both vary over time -more than the interest rate and both vary over time
less than the interest rate and both are constant
demand tends to be _______ elastic for goods that require a relatively small portion of consumers' budgets and _____ elastic for goods that require a relative large portion of consumers' budgets
less, more
consider the following relationship between marginal revenue and elasticity MR=Px((1+E)/E). If demand is unitary elastic, what is the value of marginal revenue? -marginal revenue equals zero -marginal revenue is positive -marginal revenue is negative
marginal revenue equals zero
In general, a firm manager is most interested in -decreasing revenues -minimizing worker contributions -maximizing capital contributions -maximizing profits
maximizing profits
A price ceiling is defined as the _________ legal price that can be charged in the market -minimum -equilibrium -maximum -competitive
maximum
Income elasticity
measures responsiveness of a percent change in demand for good X due to a percent change in income. If income elasticity is greater than or equal to zero and less than or equal to 1, then X is a normal good. If income elasticity is <0, then X is an inferior good. If income elasticity is greater than 1, it is a superior good
Cross-price elasticity
measures responsiveness of a percent change in demand for good X due to a percentage change in the price of good Y; if cross price elasticity is >0 then X and Y are substitutes. If cross price elasticity is <0, the X and Y are complements
elasticity
measures the percentage change in one factor given a small (marginal) percentage change in another factor; %change in Quantity/%change in Price
demand elasticity
measures the percentage change in quantity demanded given a small (marginal) change in another factor that is related to demand
own price elasticity of demand
measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price
According to Adam Smith, by pursuing its self-interest (maximizing profits), a firm tends to -meet the needs of society -push smaller firms out of business -grow indefinitely -exploit non-unionized workers
meet the needs of society
In general, firm managers face constraints that affect his or her ability to (select all that apply): -minimize costs -calculate input ratios -maximize profits -maximize output
minimize costs, maximize profits, maximize output
Which of the following is an example of a price floor? -rent control -tobacco taxes -salary caps -minimum wage
minimum wage
Suppose elasticity is given by Exy = %changeX/%changeY. The absolute value of elasticity will be _______ than 1 when the change in X is large relative to the change in Y
more
demand tends to be ___________(more/less) elastic when consumers have more time to react to price changes
more
If income elasticity of good X is positive (Eqx,M>0) then good X is considered a __________ good
normal
Income elasticity tells us whether goods are -normal or inferior -perfectly competitive -taxed or subsidized -substitutes or complements
normal or inferior
A strong incentive structure (Select all that apply) -offers bonuses to managers based on firm performance -should be implemented by the firm's board of directors -requires constant oversight by owners -aligns worker self interest with firms' interest
offers bonuses to managers based on firm performance; aligns worker self interest with firms' interest
economic costs are ___________and include___________costs -opportunity costs; explicit and implicit -sunk costs; explicit and implicit -explicit costs; sunk -marginal costs; explicit and implicit
opportunity costs; explicit and implicit
If demand is perfectly inelastic, which of the following is correct? -own price elasticity equals zero -own-price elasticity is infinite -own price elasticity is between zero and one -own price elasticity equals one
own price elasticity equals zero
When elasticity demand (eta) = -infinity, demand is
perfectly elastic and the demand curve is horizontal. Price is the same for all quantities demanded. If price rises, quantity demanded falls to zero. If price falls, quantity demanded increases without limit
The job of an econometrician is to find a smooth curve or line that does a good job of approximating the ___________ from a dataset
points
When the government purchases the surplus generated by a price floor it is called________. -price support -government buyout -government bailout -price ceiling
price support
the difference between the market price and the amount at which producers are willing and able to sell a good is called __________ surplus
producer surplus
according to the law of supply, as the price of a good decreases: -quantity supplied increases -quantity supplied decreases -supply increases -supply decreases
quantity supplied decreases
As price decreases
revenue rises when demand is elastic. Revenue falls when it is inelastic. Revenue reaches its peak if elasticity = 1 (demand and marginal revenue)
successful managers understand how to structure incentives in order to overcome which economic condition? -opportunity cost -philanthropy -elasticity -self interest
self interest
A binding price floor tends to create what type of condition in the market? -surplus -equity -shortage -efficiency
shortage
Indicate which of the following events occur(s) in the market for dark chocolate when the government imposes a strict tariff on imported cocoa AND researchers release a credible study identifying huge health benefits to moderate, dark-chocolate consumption -equilibrium quantity increases -the effect on equilibrium price is unclear -the effect on equilibrium quantity is unclear -equilibrium price increases
the effect on equilibrium quantity is unclear and equilibrium price increases
Expenditure share of consumers' budgets
the greater the percentage of the consumer's budget spent on the good, the more elastic is demand
demand is perfectly elastic when
the own price elasticity of demand is infinite in absolute value
what is the t-statistic of a parameter estimate? -the ratio of the standard error to the value of the estimate -the ratio of the value of the estimate to its standard error -the normally distributed regression -the 95% confidence interval
the ratio of the value of the estimate to its standard error
economics
the science of making decisions in the presence of scarce resources
Managerial economics is best defined as -the study of how to allocate scarce resources to achieve managerial goals -a branch of economics that studies how firm managers develop new products -the general analysis of pricing structures and profits -a field that estimates the effect of managerial decisions on households
the study of how to allocate scarce resources to achieve managerial goals
managerial economics
the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
A function that describes the relationship between output and various prices of that output, prices of inputs, and values of other variables is called -the supply schedule -the supply function -the demand curve -the demand function
the supply function
producer surplus
the the difference between the price the supplier is prepared to supply at and the market price. This is the area below the equilibrium price to the x axis. Since this is a right triangle, use base x height/2 to calculate. This will likely look like the opposite of consumer surplus.
accounting profits
the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services
