ECON-101: Principles of Microeconomics FINAL

Beer and pretzels are normal goods. When the price of beer falls, the substitution effect (by itself) causes

pretzels to be relatively more expensive, so the consumer buys less pretzels.

Whenever the quantity demanded is not equal to the quantity supplied, the quantity that is actually sold in the market is

the smaller of the quantity demanded and the quantity supplied

1 out of 1 points You own one share of Disney stock that is worth $50. There is a 50 percent chance that the share price will be $51 next week and a 50 percent chance that the share price will be $49 next week. What's the expected value of the share price next week?

$50

Suppose a drug store increases the price of tissues from $2 per box to $2.50 per box. The result is a reduction in quantity demanded from 2,000 boxes to 1,800 boxes. What is the arc elasticity of demand for boxes of tissue (with respect to price)?

-0.47

Suppose Amazon.com discovers that when it increases book prices by 5 percent, book sales fall by 4 percent. What is the price elasticity of demand for books?

-0.8

A car dealer decreases the price of a sedan from $22,000 to $18,000. The result is an increase in the quantity of sedans demanded from 50 to 74. What is the arc elasticity of demand for sedans at the car dealership?

-1.94

An excise tax on suppliers:

increases the price at which suppliers are willing to sell.

If the price elasticity of demand is -0.4, then we say that demand is

inelastic with respect to price

Suppose you want to start a business that tends to succeed in recessions (when people's incomes fall). What type of good should you consider making and selling?

inferior goods

In insurance markets, "asymmetric information" refers to the fact that

insurance companies and customers do not know the same things about customer-specific risk.

Insurance markets illustrate the principle that "Trade can make everyone better off", because:

insurance companies are better at coping with risk than individual people are.

Insurance companies find it easier to assume (take on) their policyholders' risks than their policyholders do, because

insurance companies are typically larger and pool together risks that balance one another.

Utility

is an ordinal way of describing an individual's preferences

the length of the short run

is different for different types of firms

The marginal utility

is the additional utility provided by one additional unit of consumption.

The monthly premium that a customer pays to an auto insurance company:

is the price the customer pays to avoid having to make sudden large payments to auto body shops by herself.

Moral hazard:

is the tendency of insurance to discourage policy-holders from spending effort to reduce risks.

The government will be able to restrict fishing activities to license holders if

it enforces high enough fines that the cost of fishing without a license is greater than the benefits.

Adverse selection in auto insurance markets can be a problem for SAFE drivers because:

it means they will be unlikely to get insurance: only dangerous drivers will.

Adverse selection in auto insurance markets can be a problem for DANGEROUS drivers because:

it will raise the price they have to pay for an insurance policy.

Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of

lemons and sugar

A "risk-averse" customer faces an expected monthly loss of $350. The customer will buy an insurance policy that covers 100 percent of the loss if and only if the monthly insurance premium is

less than some value greater than $350.

Which of the following is an example of an excise tax?

Federal tax of $1 per pack of cigarettes.

The demand curve slopes downward, because

as the market price decreases, more consumers are willing to buy the good.

The demand curve slopes downward, because...

as the market price increases, fewer consumers are willing to buy the good

The supply curve slopes upward, because

as the market price increases, more producers find it worthwhile to sell their products.

A market comprised of a downward sloping demand curve that intersects an upward sloping supply curve will reach an equilibrium because

at any price other than equilibrium, forces in the market move price towards the equilibrium

Which of the following expressions is correct?

average total cost = (total cost)/(quantity of output)

When marginal cost exceeds average total cost,

average total cost must be rising with output

When there are many other fishing boats, the effect of your boat fishing more on the long-run sustainability of the salmon stock is:

close to zero

Suppose that whenever the price of good A goes down, the quantity demanded of good B goes up. These two goods are

complements

The demand curve (most specifically) describes preferences and behavior of

consumers (buyers)

The marginal cost of fishing LESS is:

foregone revenue

A "risk-neutral" customer is offered an insurance policy with a monthly premium of $100. She will buy the insurance if and only if the expected loss per month is

greater than $100

Bill spends all of his food allowances on beer and nuts. If his present consumption pattern is such that his marginal utility of beer is 6 (per can) and his marginal utility for nuts is 4 (per packet).

he should buy more beer and fewer nuts if the price of beer is $1.50 per can and the price of nuts is $1.20 per packet.

Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic

in the short run, but not the long run

An excise tax of $1 per unit on suppliers will always cause the market price to

none of the above

In order to understand how the price of a good is determined in the free market, one must account for the desires of:

purchasers and sellers

Suppose a good's elasticity of demand is perfectly inelastic with respect to its price. This means that if the good's suppliers increase its price by 50 percent, then

quantity demanded will not change

The consumer who most values auto insurance policies (is most willing to pay) is:

risk-averse and dangerous driver

Auto insurance companies can't make profits if consumers are all

risk-neutral

The price elasticity of demand for ovens is probably greater in absolute value (more elastic) than the price elasticity of demand for scissors, because

scissors account for a much smaller share of consumer budgets than ovens.

If the price elasticity of demand is -0.2, then an increase in price will cause total revenue to

increase, since the size of the percent change in quantity demanded will be less than the percent change in price.

If the price elasticity of demand is -1, then we say that demand is

unit elastic with respect to price

At high output levels (when Q is large), marginal cost tends to increase

when the quantity of production is increased.

Holding other things equal, a person who pays the full cost of an action:

will do less of that action than someone who pays only part of its cost

In the module, when more boats fish longer,

you catch fewer fish per hour

The supply curve (most specifically) describes the behavior of

producers (sellers)

You enter a raffle (lottery). One winning ticket will be randomly selected out of 1,000 tickets, and the winning ticket-holder will get $100. What is the expected value of your winnings if you hold 2 tickets?

$0.20

Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal

$110

Jim is maximizing total utility while consuming food and clothing. His marginal utility from food is 50 and his marginal utility from clothing is 25. If clothing is priced at $10 per unit, the price of food must be

$20

On a piece of paper, draw a supply curve with an upward (but not vertical) slope and a perfectly price inelastic demand curve. Show a $4 per unit tax on suppliers. The new market price is:

$4 higher than the pre-tax equilibrium price.

If the marginal utility to Sarah of one onion exceeds that of one bunch of garlic, and if Sarah is maximizing her utility, then

An onion must cost more than a bunch of garlic.

Your local cookie store is selling yesterday's cookies at a reduced price. Why might that be?

At the original price, quantity supplied was greater than quantity demanded

On a piece of paper, draw a supply curve with an upward (but not vertical) slope and a demand curve with a downward (but not vertical) slope. Show a $4 per unit tax on suppliers. Next show an $8 per unit tax on suppliers. Which of the following is true?

Consumers buy a lower quantity when the tax is $8 than when the tax is $4.

Joe's Garage operates in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation,

Joe's should shut down immediately

Suppose you're in charge of taxation for the government and you want to raise revenue but impose as little deadweight loss as possible. How should you look for goods to tax?

Look for goods with low price elasticities of supply and demand ("inelastic"), so the tax will not change the amount consumed much.

When choosing how many hours to fish, you probably started without much hope that your first choice was the best one. But then you probably added or subtracted one hour and compared the outcome. Which principle of microeconomics does this process best represent?

Rational people think at the margin

What was the primary motivation used by Henry George and William Vickery to advocate the taxation of land?

Supply of land is price inelastic.

On a piece of paper, draw a supply curve with an upward (but not vertical) slope and a demand curve with a downward (but not vertical) slope. Show a $4 per unit tax on suppliers, and call this Graph A. Next, draw a supply curve with an upward (but not vertical) slope and a perfectly price inelastic demand curve. Show a $4 per unit tax on suppliers, and call this Graph B. Which of the following is correct?

There isn't a deadweight loss in Graph B but there is in Graph A.

A typical response to higher prices is that a person chooses to consume less of the product with the higher prices

This occurs because a change in relative prices encourages the person to buy cheaper alternatives and the purchasing power of income falls.

Most economists would agree

a carbon tax offers a cost-effective way to reduce carbon dioxide emissions and address a well-known market failure.

An "excise tax" is:

a payment per unit sold that suppliers are required to give the government.

In the module, "Commons" refers to:

a resource that many people collectively own or influence.

A new excise tax can be represented on the supply and demand graph as

a vertical shift up of the supply curve.

The supply curve slopes upward, because...

as the market price decreases, fewer producers find it worthwhile to sell their products.

The difference between "accounting profit" and "economic profit" is that

accounting profit ignores foregone earnings.

Marginal cost tells us the

amount by which total cost rises when output is increased by one unit

Why spend money to go to college during a recession?

because if you are unemployment (or underemployed), the opportunity cost of your time is low.

As the number of fishing boats gets smaller, the influence of your fishing boat on the return to fishing:

becomes greater

As the number of fishing boats gets smaller, the influence of your fishing boat on the strategic behavior of the others remaining:

becomes greater

On a piece of paper, draw a supply curve with an upward (but not vertical) slope and a demand curve with a downward (but not vertical) slope. Show a $3 per unit tax on suppliers. The new market price is:

between $0 and $3 higher than the pre-tax equilibrium price.

Jane spends all of her money on warm-up suits and running shoes, and the price of a pair of shoes is four times the price of a warm-up suit. In order to maximize total utility, Jane should

buy both items until the marginal utility of a pair of shoes is four times the marginal utility of a warm-up suit.

How did you solve the collective action problem in the module?

by merging into a single unit that shares benefits and costs

Costs are called "sunk" when they

cannot be avoided

When sellers of string increase their prices, the demand for pipe cleaners falls. This is a statement about which of the following types of relationship?

cross-price elasticity of demand

When there is quantity supplied is greater than the quantity demanded, the price setter who wants to maximize the number of packages sold should

decrease price

If the price elasticity of demand is -2.5, then an increase in price will cause total revenue to

decrease, since the size of the percent change in quantity demanded will be greater than the percent change in price.

In a free market, if the price of a good is below the equilibrium price, then

demanders, to acquire the good, will bid the price higher

The article from CNBC suggests that people should spend more on experiences. Most economists would say

each to his own taste

If the price elasticity of demand is -5, then we say that demand is

elastic with respect to price

If a small business owner's economic profit is zero, then her accounting profit is

equal to foregone earnings of resources the owner uses for the business.

Consider the number of people who want to buy packages and the number of packages for sale. When you increased the price

fewer people showed up to buy packages, and more packages showed up for sale

Various author's have suggested that between $75,000 and $95,000 a year is an ideal salary. This may be the case because

marginal utility of income falls quickly after this rate

A budgeting rule that assigns a specific amount of money to different categories of expenditure

means that the price elasticity of demand for goods in those categories is equal to one.

A government policy mandating that all people have insurance coverage:

might break the cycle of insurers raising prices, more adverse selection raising insurers' costs, and insurers having to raise their prices again.

Consider the number of people who want to buy packages and the number of packages for sale . When you decreased the price

more people showed up to buy packages, and fewer packages showed up for sale

Suppose the government introduces a $4 per unit tax on the supply of automobile tires (suppliers are responsible for submitting the tax payment). The effect of the tax on the market price for tires will depend most directly upon:

price elasticities of supply and demand

The accountants hired by Davis Golf Course have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, Davis Golf Course should

stay open because shutting down would be more expensive

Suppose that whenever the price of good A goes up, the quantity demanded of good B goes up. These two goods are

substitutes

Before an excise tax is imposed, there is producer surplus in the market (the area between the price line and the supply curve from the first to the last unit sold). After the excise tax is imposed, part of that producer surplus becomes:

tax revenue and deadweight loss

The slope of the budget line

tells us how much of good 2 an individual has to give up, giving the prices for goods 1 and 2, for another unit of good 1.

For a construction company that builds houses, which of the following costs would be a fixed cost?

the $30,000 per year salary paid to the company's bookkeeper

Suppose that the price of a hamburger doubles. If income and the price of other goods doesn't change, on a graph where the budget line is drawn with hamburgers on the horizontal axis and all other goods on the vertical axis,

the budget line becomes steeper

To an economist, "selection" in insurance markets usually refers to

the characteristics of the people who choose to buy insurance.

Demanders "bear the burden" of a tax inasmuch as they pay a higher price for the good as a result of the tax. If the demand curve is perfectly inelastic with respect to price, then demanders will bear

the entire burden of an excise tax

An "elasticity" is:

the percent change in one variable associated with a percent change in another variable

The revenue to the government from a $50 per unit excise tax is

the tax rate ($50) times the number of units sold after the tax was imposed.

When consumers' perceived quality of a product increases (holding other things constant)

the whole demand curve shifts to the right, because a greater quantity will be demanded at any given price

Profit is defined as

total revenue minus total cost