ECON Midterm Two

Investment cost

could represent many costs, implicit or explicit

unit-elasticity of demand

A demand relationship in which the quantity demanded changes exactly in proportion to the change in price.

Accounting profits will always be __________ economic profit. -less than -larger than -equal to

Accounting profits will always be larger than economic profit. Accounting profit excludes some implicit costs such as the opportunity cost associated with using a facility instead of renting it to someone else. Since generally accepted accounting practices do not allow the firm to expense these types of costs the firm's accounting profits will be larger than the economic profit where these costs are considered.

Constant returns

Constant returns to scale occur over the range of output where the long-run average cost is not changing. This is represented by the flat part of the long-run average cost curve.

fixed costs

Costs that do not vary with the quantity of output produced

Diseconomies of scale

Diseconomies of scale occur when long-run average cost is increasing as output increases. This is represented by the upward-sloping part of the long-run average cost curve

What term do economists use to refer to the dollar amount that business owners must earn on their time and effort they invest in a firm? -Implicit cost -Time value -Investment cost -Explicit cost

Economists refer to implicit cost as the dollar amount that business owners must earn on their time and effort they invest in a firm. It is a form of opportunity cost. Economists use the normal rate of return to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested. An investor must earn enough to compensate them for the risk of a particular investment. Different investments have different levels of risk so require different levels of return.

TRUE OR FALSE: If goods have a negative cross-price elasticity of demand then they are substitutes.

FALSE, they are compliments. When two products are complements, or goods that are consumed together, when the price of one good increases the demand for the other good will fall. Therefore any negative relationship indicates the goods are complements.

Gross domestic product is best defined as the: -total quantity of goods and services produced in a country during a period of time -total value of all goods that can be found in a country -market value of all final goods and services produced in a country during a period of time

Gross domestic product is best defined as the market value of all final goods and services produced in a country during a period of time. The purpose of the GDP is to measure economic activity in a country, typically over a one year period. The computation uses final goods to avoid the issue of double counting intermediate goods.

If the cross-price elasticity of demand between two products is -3.0, then the two products are: -complements -unrelated -substitutes

If the cross-price elasticity of demand between two products is -3.0, then the two products are complements. When two products are complements, or goods that are consumed together, when the price of one good increases the demand for the other good will fall. Therefore any negative relationship indicates the goods are complements. Substitute goods will have a direct relation between the price of one good and the demand for the other. And if the goods are not related there should be no change in the quantity demanded for one good due to a price change in the other good.

If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees? -As a part of fixed cost -As an implicit cost -As a part of variable cost

If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then the salaries and benefits paid to these employees should be considered as a part of fixed cost. Fixed costs remain the same regardless of the level of output. The cost of raw materials and components used to manufacture a product are good examples of variable costs.

If the price elasticity of supply is 0.4, then a 20% increase in price will __________ the quantity supplied by __________ %. -increase, 50.0 -increase, 8.0 -decrease, 8.0

If the price elasticity of supply is 0.4, then a 20% increase in price will increase the quantity supplied by 8.0%. The percentage change in quantity supplied is equal to the elasticity of supply multiplied by the percentage change in price. Quantity supplied will move in the same direction as price since suppliers will be willing to supply more units at higher prices, ceteris paribus. So, 0.40 x 20% = 8.0%.

In perfect competition, the marginal revenue is the same as: -Price -Price x 50% -Average cost

In perfect competition, the marginal revenue is the same as price. Marginal revenue is always the amount of revenue you receive from selling one more unit. In perfectly competitive markets: Marginal revenue = marginal benefit = price.

What does a typical average cost curve look like?

The average total cost curve is typically U-shaped because costs fall initially as production increases, then flatten out for a period of time, and then begin to rise as the law of diminishing returns kicks in and the marginal product of the variable input begins to fall.

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. The percentage change in quantity demanded for wheat will decline by 10% and farm revenues will rise. The elasticity of demand is the percentage change in quantity divided by the percentage change in price. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by .50 x 20% = 10%. Since wheat is inelastic we know that farm revenues will rise as a result.

The demand curve for an inferior good is __________ sloping while the demand curve for a normal good is __________ sloping. -downward, upward -None of these are correct, demand slope depends on elasticities. -upward, downward -downward, downward

The demand curve for both inferior goods and normal goods is downward sloping which indicates that consumers will buy more units of both as the price falls. Only in very rare cases, over short periods of time, may a demand slope upward. In general, the substitution effect of a price change will be larger than the income effect.

The downward sloping part of the long run average total cost curve is where the firm is achieving: -economies of scale -constant returns to scale -diseconomies of scale

The downward sloping part of the long-run average cost curve is where the firm is achieving economies of scale. Economies of scale happen when the long run average cost decreases as output increases. This is represented by the downward-sloping part of the long-run average cost curve.

minimum efficient scale

The lowest rate of output at which a firm takes full advantage of economies of scale

The price elasticity of supply always has a: -positive value -negative value -zero value

The price elasticity of supply always has a positive value. According to the law of supply, suppliers will always be willing and able to supply more units as prices increase. Therefore when prices increase the quantity supplied will increase. When prices decrease the quantity supplied will decrease as well.

The relationship between the inputs used by the firm and the maximum output it can produce is known as the: -manufacturing timetable -production function -output schedule

The relationship between the inputs used by the firm and the maximum output it can produce is known as the production function. The production function is directly related to the level of technology a firm uses. Firms can opt to use more labor and less technology, or vice versa. For this reason, a production function can differ from firm to firm, even if they are in the same industry.

The short run is a period of time where __________ while the long run is a period of time where __________. -at least one input is fixed, all inputs are variable -at least one input is fixed, all inputs are fixed -all inputs are variable, at least one input is fixed

The short run is a period of time where at least one input is fixed, while the long run is a period of time where all inputs are variable. Economists define the long run as the period of time sufficient to be able to adjust all inputs. This distinction is critical since economic decision-making may differ depending on the time horizon.

Considering the Law of Demand, when you compute a price elasticity of demand the answer is always: -positive -negative -greater than 1

When you compute a price elasticity of demand the answer is always negative. According to the law of demand when we increase the price of a product the quantity demanded will fall, or vice versa. As with any fraction when the numerator and denominator have opposite signs the fraction will be negative. Since we know it will always be negative we commonly refer to elasticity coefficients in absolute value terms. If the absolute value is greater than one it is elastic, or the quantity demanded is very responsive to a change in price.

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Explicit cost

actual costs paid and are also known as out-of-pocket costs.

Sunk costs

costs that represent money spent that cannot be recovered

Variable costs

costs that vary with the quantity of output produced

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price. -price elasticity of demand -unit-elasticity of demand -price elasticity of supply

price elasticity of demand