ECON 1203 EXAM 2
When comparing the accounting profit with economic profit, it must be true that the accounting profit is ___ economic profit
greater than or equal to
early in 2012, starbucks, a global coffee house company, raised the prices of some of its beverages in certain parts of the country, mostly the Northeast and the southern states. While some thought that this was not a good idea, most analysts agreed that the price increase would not adversely affect its revenues. What would have to be true for the analysts' claim (that Starbucks' revenues would not fall) to hold?
-a perception on the part of customers that few good substitutes exist for starbucks coffee - starbucks beverages will represent a relatively small fraction of people's budget share - a very limited time horizon on the part of those analysts that expected no adverse revenue effects
the price elasticity of demand for good is likely to be less elastic ___
-the lower the budget share spent on the good -the smaller the number of close substitutes for the good -the shorter the available time during which consumers can adjust
elasticity of supply will be greater
-the more inventory the firm has - the more easily the firm can hire workers -the longer the time horizon
goal of the seller: maximize profit
1. How to make the product 2. What is the cost of making the product 3. How much can the seller get for the product in the market
three measures of elasticity
1. price of elasticity 2. cross-price elasticity of demand 3. income elasticity of demand
the buyers' problem
1. what do you like? "biggest bang for our buick" 2. How much does it cost? "Prices are fixed 3. How much money do you have? "There's no saving or borrowing, only buying. We only purchase whole units
sellers in the market produce identical good
an individual seller can't influence the market price due to selling a unique product (e.g if all products are the same, a seller can't charge a higher price for his/her product since there are many other producers selling exactly the same thing?
closeness of substitutes
as the # of available substitutes grows, the price elasticity of demand increase
budget share spent on the good
as you spend more of your budget on a good, the price elasticity of demand increases
When the ATC curve is decreasing, we know that the MC curves is ___ and when the ATC curve is increasing, we know that MC is ___
below the ATC curve; above the ATC curve
in a perfectly competitive marker, a seller ___ choose to raise the price of its good since all sellers in the market produce ____, so raising the price would result in ____
cannot; identical goods; losing all its customers
variable cost
changes as the level of output changes
elasticity differences
closeness of substitutes budget share, spent on the good
if a cross price elasticity negative, then the two goods are
complements
available time to adjust
consumers in general, respond much less to price changes in the short run than in the long run
if a firm is using inputs it must be incurring ___
costs of production
___ is how quantity demanded for one good changes when the price of a substitute or complement good changes
cross-price elasticity
suppose Hershey's increases the price of its chocolate syrup by 14 percent. In response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 percent. the cross price elasticity of demand between Hershey's syrup and Breyer's vanilla ice cream is ___ implying these two goods are ___
negative; complements
no buyer or seller is big enough to influence the market price
no one can change the market price with his/her behavior (e.g if a seller wants to withhold product in an attempt to drive up market price, will be unable to do so because one seller is a small part of the market)
suppose Hershey's increases the price of its chocolate syrup by 14 percent. In response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 percent. Suppose that incomes rise by 9 percent given the price change cited above. As a result, Hershey's experiences a 5 percent increase in sales volume. Given this information, Hershey's syrup is .
normal good
ed= infinite
perfectly elastic
there is free entry and exit in the market
sellers can respond to potential profits in a market by entering or can leave markets that are no longer profitable both of which have implications on market price (e.g if many firms leave a market, the supply curve will shift "that's one of the determinants" and market price will increase)
___ is total cost= variable cost + fixed cost
short-run
ed=1
unit elastic
all firms in a perfectly competitive market are said to be
price takers
cross-price elasticity formula
% of change in quantity demand of g*x (divided by) % of change in price of goo y
fixed cost
do not change as output changes
What is the difference between accounting profit and economic profit?
economic profit subtracts both explicit and implicit costs from total revenue while accounting profit only subtracts explicit cost
ed>1
elastic
Under which of the following examples is it likely that the accounting profit is positive and the economic profit is negative?
If you open an amusement park in the middle of New York City
given that burgers and fries are complementary goods, if the price of fires decreases the demand for both goods will rise. Is this an accurate statement
It is somewhat inaccurate,as the statement claims increase the demand for burgers
Which of the following equations calculates the profits of a firm
Total revenues- Total costs
elasticity
a measure of how sensitive one variable is to changes in another
price elasticity of supply
how responsive producers are to changes in the market price
example of substitutes
iPhone would be a substitute for an IPod & both are music devices; as the prices of an ipod increases, you might just buy an iPhone instead
luxury goods
increase in income causes a bigger % increase in demand; increase more than proportionally as income rises and is a contrast to a "necessity good" E>1
ed<1
inelastic
if the income elasticity of demand for a good is negative, the good is
inferior
variable factor of production
inputs that can change in a certain period of time and that change if the level of output changes
fixed factor of production
inputs that cannot be changed in the short run and that stay the same regardless of how much outputs is produced
During an economic slump, what pricing strategy could a fast-food firm such as McDonald's have to use to maintain its sales?
lower prices to counteract an expected drop in sales since its products are normals goods
Tammi is working on a school report on the proposed merger between American Airlines and U.S. Airways. She finds that U.S. Airways' annual revenue for 2012 rose by 5.35.3 percent over the previous year, while the revenue for American Airlines recorded an increase of almost 2.62.6 percent. Based on this, she concludes that, in 2012, passenger traffic must have increased more for U.S. Airways than for American Airlines American Airlines. Is Tammi's conclusion correct? Explain your answer.
no, since total revenue is the product of price and quantity. Knowing only that revenue has increased says nothing about the reasons behind the increase
price of elasticity of demand (Ed)
percentage change in quantity demand (divided by ) percentage change in price
ed= 0
perfectly inelastic
long run
period of time where all of the firm's inputs can change (e.g you can buy another oven even build another kitchen)
short run
period of time where some of the firm's inputs cannot be changed (e.g you can't buy another oven)
for two goods that are substitutes, the cross-price elasticity of demand will be
positive
Suppose Hershey's increases the price of its chocolate syrup by 14 percent. In response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 percent. the cross-price elasticity of demand between Hershey's syrup and Nesquick's syrup is ___ implying these two goods are ___
positive; substitutes
is the most important incentives that economists study
price
total revenue
price x quantity sold
normal goods
quantity demand is directly related to income ; when income rises. consumers buy more of a E>0
inferior
quantity demand is inversely related to income; when income rises. consumers buy less of an E>0
if a cross elasticity positive, then the two goods are
substitutes
revenue
the amount of money the firm brings in from the sale of it products
shut down
the decision to stop producing in the short run occurs if price falls below AVC
producer surplus
the difference between the price the firm wold be willing to accept and the market price.
consumer surplus
the difference between what you are willing to pay and what you have to pay (the market price)
two goods are complement when
the fall in the price of one leads to a right shift in the demand curve for another
income elasticity of demand
the percentage change in quantity demanded of a good due to a percentage change in the consumer's income (formula - % of quantity demand / % change in income)
example of complement
the price of iPods fall, you want more of them but demand of headphones will increases too.
prices allows us to formally define __
the relative costs of goods
accounting profit
total revenue- total cost (explicit only)
profit
total revenue-total costs
economic profit
total revenue-total costs (explicit + implicit)
substitutes
when the rise in the price of one leads to a right shift in the demand curve for other.`
is it possible for accounting profit to be positive and economic profit to be negative?
yes, this could occur if explicit costs were modest and implicit costs were high