Eco 01 Hw 3 (Ch 10, 11, 12, & 15)
The law of diminishing marginal utility
consumers experience diminishing additional satisfaction as they consume more of a good or service.
variable costs
costs that are affected by the level of output produced
allocative efficiency
describes a state of the economy in which production reflects consumer preferences
Natural monopoly
develops automatically due to economies of scale.
marginal product of labor
difference between output values
The lease payment she makes to her landlord who owns the building where her store is located is a ____ cost
fixed cost
The payment she makes on her fire insurance policy is a ______ cost.
fixed cost
The $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a ____ cost.
fixed cost
Total profit on a graph
represents the rectangle of the length til the MC curve intersects with the demand line and the ATC curve intersects with the demand curve until the y=0 line of the origin.
Profit on a graph
represents the vertical distance between the demand line and the ATC curve
Minimum efficient scale is
the level of output at which the long minus run average cost of production no longer decreases with output.
Average product of labor
total output divided by the number of workers
The payment she makes to buy pizza dough is a _____ cost.
variable cost
The wages she pays her workers is a ____ cost.
variable cost
Diseconomies of scale is
when a firm's long-run average costs increase with output.
Shut down point for a firm is
when the demand line intersects the AVC curve at the lowest possible point.
profit maximizing point
where the MC curve intersects the MR line and then follow it up to the demand line
A firm cuts its workforce and is able to maintain its initial level of output.
IS an example of positive technological change.
A training program makes a firm's workers more productive.
IS an example of positive technological change.
An exercise program makes a firm's workers more healthy and productive.
IS an example of positive technological change.
Natural monopolies are ____ public franchise
NOT
public franchise are ____ natural monopolies
NOT
A firm is able to cut each worker's wage rate by 10 percent and still produce the same level of output.
NOT an example of positive technological change.
A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before.
NOT an example of positive technological change.
Constructing New homes
Not perfectly competitive Few firms Differentiated product low ease of entry
Sub sandwich shops
Not perfectly competitive Many firms differentiated product high ease of entry
manufacturing cell phones
Not perfectly competitive few firms Differentiated product Low ease of entry
Example Corn Farming
Perfectly competitive Many Firms Identicial product High ease of entry
Suppose it is October 1. You have paid $10,000 in tuition and have been attending college classes. However, you are offered a full-time job paying $22,500 for the next two months. If you take the job, you'll have to stop attending classes and withdraw from college for the semester. Unfortunately, at this point in the semester, tuition is no longer refundable. You must decide whether to remain enrolled in college. What is the relevant cost of staying in school?
$22,500
How are implicit costs different from explicit costs? A. An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost. B. An explicit cost is not an opportunity cost, while an implicit cost is an opportunity cost. C. An explicit cost is a cost incurred as output changesas output changes, while an implicit cost is a cost incurred holding output constantholding output constant. D. An explicit cost is a cost incurred in the longlong run, while an implicit cost is a cost incurred in the shortshort run. E. Both a and b.
A. An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
The following excerpt is from a letter sent to a financial advice columnist: "My wife and I are trying to decide how to invest a $250,000 windfall. She wants to pay off our $114,000 mortgage, but I'm not eager to do that because we refinanced only nine months ago, paying $3,000 in fees and costs." Source: Liz Pulliam, Los Angeles Times advice column, March 24, 2004. How should the $3,000 in fees and costs be considered? A. It is a sunk cost and should not be taken into account when deciding to pay off the mortgage. B. It is an explicit cost of paying off the mortgage. C. It should be taken into consideration in the decision as to whether or not to pay off the mortgage. D. It is a sunk cost and should be taken into account when deciding to pay off the mortgage
A. It is a sunk cost and should not be taken into account when deciding to pay off the mortgage.
If you own the only hardware store in a small town, do you have a monopoly? A. Yes. You would have a monopoly if your profits are not competed away in the long run. B. Yes. You have a monopoly because there are no substitutes for hardware. C. No. You do not have a monopoly because there are substitutes for hardware. D. No. You would not have a monopoly if you could not ignore the actions of competitors. E. Both a and b.
A. Yes. You would have a monopoly if your profits are not competed away in the long run.
When a monopoly maximizes profit, deadweight loss will be larger if demand is A. inelastic because price will be farther from marginal cost. B. inelastic because less surplus will be transferred from consumers to producers. C. elastic because price will be farther from marginal cost. D. elastic because more surplus will be transferred from consumers to producers. E. both a and b
A. inelastic because price will be farther from marginal cost.
Why might a monopoly arise? One firm will be present when A. only one firm has control of a key raw material necessary to produce a good. B. it can supply the entire market at lower average fixedaverage fixed cost than can two or more firms. C. the possibility for product differentiation is limited to only a couple of other firmsthe possibility for product differentiation is limited to only a couple of other firms. D. there exists no possibility for network externalities with other firms. E. All of the above.
A. only one firm has control of a key raw material necessary to produce a good
The average total cost curve and the marginal cost curve are related in that A. the MC curve passes through the minimum point of the ATC curve. .B. the ATC curve passes through the minimum point of the MC curve. C. the ATC and MC curves both rise and fall together. D. the MC curve rises when the ATC curve falls.
A. the MC curve passes through the minimum point of the ATC curve.
A firm that does not reach its minimum efficient scale A. will lose money if it remains in business. B. will be experiencing constant returns to scale. C. will earn positive profits if it remains in business. D. will become a natural monopoly. E. both a and b.
A. will lose money if it remains in business.
Average Variable Cost
ATC-AFC
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens? A. It sells more units and receives higher revenue per unit. B. It sells more units but receives lower revenue per unit. C. It sells fewer units and receives lower revenue per unit. D. It sells fewer units but receives higher revenue per unit
B. It sells more units but receives lower revenue per unit.
Las Vegas is one of the most popular tourist destinations in the United States. In November 2008, the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to $5.99 for local residents, while keeping the regular price of $14.99 for nonlocals. Source: Las Vegas Advisor, November, 2008. Why would the restaurant do this? A. They wanted to appear unfair to tourists. B. They were willing to trade off some profits to keep their regular customers happy. C. They had a more difficult time raising prices when it was justified by cost increases. D. Tourists will return often to the restaurants.
B. They were willing to trade off some profits to keep their regular customers happy.
Are perfectly competitive markets allocativelyallocatively efficient in the long run? A. Yes comma because firms produce at the lowest average cost possibleYes, because firms produce at the lowest average cost possible. B. Yes comma because firms produce where the marginal benefit to consumers equals the marginal cost of production C. No, because firms earn zero economic profits. D. No, because firms will not shut down unless price is less than the average variable cost of production. E. Both a and b.
B. Yes comma because firms produce where the marginal benefit to consumers equals the marginal cost of production
The long-run supply curve is A. an upward-sloping line equal to the sum of each firm's supply curve. B. a horizontal line equal to the minimum point on the typical firm's average total cost curve. YoC. an upward-sloping line equal to the sum of each firm's marginal cost curve. D. a horizontal line equal to the minimum point on the typical firm's average variable cost curve. E. an upward-sloping line equal to the sum of the portion of each firm's marginal cost curve that is above minimum average variable cost.
B. a horizontal line equal to the minimum point on the typical firm's average total cost curve.
For a market to be perfectly competitive, there must be A. many buyers and a small number of firms that compete, selling identicalidentical products, and barriers to new firms entering the market. B. many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market. C. many buyers and sellers, with firms selling similar but not identical products, with low barriers to new firms entering the market. D. many buyers and one seller, with the firm producing a product that has no close substitutes, and barriers to new firms entering the market. E. many buyers andnothingsellers, with all firms selling identical products, and substantialsubstantial barriers to new firms entering the
B. many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
Marginal utility is more useful than total utility in consumer decision making because A. it is possible to measure marginal utility but not total utility. B. optimal decisions are made at the margin. C. consumers maximize utility by maximizing marginal utility from each good. D. optimal decisions are made by consuming until marginal utility becomes negative. E. consumers maximize utility by equalizing marginal utility from each good.
B. optimal decisions are made at the margin.
Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical firm? A. decreasing-cost industry B. productive efficiency C. allocative efficiency D. competitive markdown
B. productive efficiency
Which of the following products is most likely to have significant network externalities? A. LCD television sets B. smartphones C. 3D television sets D. Dog food
B. smartphones
Which of the following rights is given to the holder of a patent? A. control over a key resource used in production of a good or service B. the exclusive right to a new product for a limited period .C. a public franchise D. the right to earn profits from creation of the product indefinitely
B. the exclusive right to a new product for a limited period
Economies of scale occur A. when the marginal product of labor increases with output. B. when a firm's long-run average costs decrease with output. C. when a firm's long-run average costs increase with output. D. when the marginal cost of production decreases with output.
B. when a firm's long-run average costs decrease with output.
What is the relationship between a monopolist's demand curve and the market demand curve? A. A monopolist's demand curve is upwardupward sloping and the market demand curve is downwarddownward sloping. B. The market demand curve is the sum of the demand curves for all firms in the market. C. A monopolist's demand curve is the same as the market demand curve. .D. The market demand curve has twice the slope of a monopolist's demand curve. E. A monopolist's demand curve is greater than the market demand curve.
C. A monopolist's demand curve is the same as the market demand curve.
What is the relationship between a monopolist's demand curve and its marginal revenue curve? A. A monopolist's marginal revenue curve has twice the slope of its demand curve due to economies of scaleeconomies of scale. B. A monopolist's marginal revenue curve has half the slope of its demand curve, because to sell more output, a monopoly must lower price. C. A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price. D. A monopolist's demand curve is downward sloping and its marginal revenue curve is horizontalhorizontal. E. A monopolist's demand curve is the same as its marginal revenue curve.
C. A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price.
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory? A. Fixed costs become too large. B. Firms exhaust the benefits of specialization. C. Firms have difficulty coordinating production. D. The marginal product of labor begins to decrease according to the law of diminishing returns. E. Higher output levels result in lower market prices.
C. Firms have difficulty coordinating production.
Is it possible for technological change to be negative? If so, give an example. A. No. Technological change is always positive because it refers to the development of new products. B. No. Technological change is neither positive or negative because it refers to a process. C. It is possible for technological change to be negative. An example is when a firm hires less minus skilled workers D. It is possible for technological change to be negative. An example is when a firm installs faster machinerya firm installs faster machinery. E. It is possible for technological change to be negative. An example is when a firm installs more reliable equipment.
C. It is possible for technological change to be negative. An example is when a firm hires less−skilled workers.
In the figure to the right, Sacha Gillette reduces her output from 7000 to 5000 dozen eggs when the price falls to $1.80 At this price and this output level, she is operating at a loss. What option does Gillette have in this situation? A. Continue producing 7000 dozen eggs. B. Raise her price back up to $2.05. C. Try to cut her costs of production to decrease the loss in the short run. D. Increase the quantity produced.
C. Try to cut her costs of production to decrease the loss in the short run.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if A. it produces a largelarge quantity. B. it is a price taker. C. it earns profits in the long run. D. it achieves allocativeallocative efficiency. E. its production decisions are unresponsive to price.
C. it earns profits in the long run.
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are: A. antitrust legislation, control of a key resource, no close substitutes, and economies of scale. B. antitrust legislation, control of a key resource, arbitrage, and economies of scale. C. the government blocks entry, control of a key resource, network externalities, and economies of scale. .D. the lack of patents and copyrights, control of a key resource, network externalities, and economies of scale. E. the government blocks entry, control of a key resource, network externalities, and diseconomies of scale.
C. the government blocks entry, control of a key resource, network externalities, and economies of scale.
Marginal Cost (MC)
Change in total cost divided by change in quantity (MC = ∆TC/∆Q)
Which of the following are effects of monopoly? A. Monopoly causes a reduction in economic efficiency. B. Monopoly causes an increase in producer surplus. C. Monopoly causes a reduction in consumer surplus. D. All of the above are effects of monopoly.
D. All of the above are effects of monopoly.
For which of the following reason(s) may firms experience economies of scale? A. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. B. Firm's production may increase with a smaller proportional increase in at least one input. C. Both managers and workers may become more specialized and hence more productive as output expands. D. All of the above.
D. All of the above.
The government can block the entry to a market through A. granting a patent. B. granting a public franchise. C. granting a copyright. D. All of the above.
D. All of the above.
Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the graph? A. The marginal product of labor initially increases due to specializationspecialization and then decreases due to diminishing returns. B. Whenever the marginal product of labor is lessless than the average product of labor, it pulls the average product of labor downdown. C. The average product of labor equals the marginal product of labor when the marginal product of labor is at its maximum. D. Both a and b. .E. All of the above.
D. Both a and b.
In deciding between consuming more goods now or saving money, consumers should do which of the following? A. Allocate their spending to which of the two they like best. B. Choose an amount of current spending which gives them the highest total utility. C. Weigh the additional utility they get from consumption. D. Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal.
D. Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal.
What is the difference between technology and technological change? A. Technology is the development of new products, while technological change is when a firm is able to produce more output with the same inputs. B. Technology is the development of new products, while technological change is when a firm is able to produce the same output with fewer inputs. C. Technology is the process of using inputs to make output, while technological change is when a firm is able to produce more output using more inputs. D. Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs. E. Technology is when a firm is able to produce moremore output using the samethe same inputs, while technological change is the process of using inputs to make output.
D. Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs.
What would need to be true for a demand curve to be upward sloping? A. The income effect would have to be larger (in absolute value) than the substitution effect. B. The good would have to be an inferior good, and the income effect would have to be smaller (in absolute value) than the substitution effect. C. The good would have to be an inferior goodwould have to be an inferior good. D. The good would have to be an inferior good, and the income effect would have to be larger (in absolute value) than the substitution effect. E. The good would have to be a normal good, and the substitutionsubstitution effect would have to be smallersmaller (in absolute value) than the incomeincome effect.
D. The good would have to be an inferior good, and the income effect would have to be larger (in absolute value) than the substitution effect.
The average total cost curve and the marginal cost curve are A. horizontal. B. L shaped. C. upward sloping. D. U shaped.
D. U shaped.
What role does economic research suggest fairness plays in consumer choices? Research suggests that fairness plays A. no role because consumers do not tip at restaurants they'll never visit again. B. a role only when it is required. C. a role only when it provides a financial benefit. D. a role because consumers donate money to charity. E. a role because it generates network externalities.
D. a role because consumers donate money to charity.
According to behavioral economists, why might consumers or businesses not act rationally? People might not act rationally because they A. are too realistic about their future behavior. B. account for monetary costs. C. ignore sunk costsignore sunk costs. D. ignore non-monetary opportunity costs E. experience no endowment effect.
D. ignore non-monetary opportunity costs
When the price of a product changes, A. it changes the relative price of the product causing a network effect and at the same time it changes the purchasing power of the buyer causing an income effect as well. B. it only causes an income effect by changing the purchasing power of the consumer. C. it only causes a substitution effect by changing the relative price of the product. D. it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.
D. it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.
A monopolist is a price maker because A. when price makers raise their prices, they lose all customers. B. a monopolist can charge any price it wants, regardless of demand. C. a monopolist's price and marginal revenue are the same. D. when a monpolist raises its prices, it loses some but not all customers.
D. when a monpolist raises its prices, it loses some but not all customers.
What affects the desirability of a product? Products become more desirable when A. movie starsmovie stars use a product because consumers who use the same product may feel more fashionable. B. celebritiescelebrities use a product because consumers who use the same product may feel closer to famous people. C. professional athletesprofessional athletes use a product because consumers perceive them to be particularly knowledgeable about it. D. both a and b. E. all of the above.
E. all of the above.
Perfect competition leads to allocative and productive efficiency A. because prices reflect consumer preferences. B. because firms are motivated by profit. C. under the planning of government bureaucrats. D. under the direction of associations of firms. E. both a and b.
E. both a and b.
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) A monopolist A. does not have a supply curve because it does not maximize profits. B. has a supply curve equal to its marginal cost curve. C. has a supply curve equal to its marginal revenue curve. D. does not have a supply curve because it does not have a demand curve. E. does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
E. does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
A firm is likely to be a price taker when A. firms in the industry collude. B. it has market power. C. barriers to entry are substantial. D. it sells a differentiated productit sells a differentiated product. E. it represents a small fraction of the total market
E. it represents a small fraction of the total market
Maximizing Utility
Solve for MU/P and find the value which the two products are equal and make sure it equals the total number of products/price allotted.
marginal utility
The change in utility from consuming an additional unit of a good or service
Network externalities
This situation where the usefulness of a product increases with the number of consumers who use it.
Average total cost (ATC)
Total cost divided by quantity (ATC= TC/Q)
public franchise
a firm designated by the government as the only legal provider of a good or service.
monopoly
a firm that is the only seller of a good or service that does not have a close substitute.
A price taker is
a firm that is unable to affect the market price.
Implicit cost
a non-monetary opportunity cost.
explicit cost
all costs involving money
Long-run equilibrium in perfect competition results in
allocative and productive efficiency