Economics Exam Review 6,7,9

Accountants use only ________ costs in their computations of cost.

explicit

(Figure: The Demand Curve) Look again at the figure The Demand Curve. Using the midpoint method the price elasticity of demand between $3 and $4 is approximately:

0.54.

8. (Table: Price Elasticity) Look at the table Price Elasticity. What is the price elasticity of demand (using the midpoint formula) between $2.50 and $2.25? (show your workings)

19

The demand for food is very inelastic, so if a tax is levied on the consumers of food, the tax incidence:

is typically on consumers more than producers.

According to the marginal decision rule, if the marginal benefit is:

less than marginal cost, an activity should be reduced.

The amount by which an additional unit of an activity increases total benefit is:

marginal benefit.

The amount by which an additional unit of an activity increases total cost is:

marginal cost.

According to the optimal output rule, if the marginal benefit is:

more than the marginal cost, an activity should be increased.

For a normal good, the income elasticity of demand will be:

positive

If the income elasticity of demand for a good is _______, the good is said to be _________.

positive; normal good

If the price elasticity of demand is found to be 6, then demand is:

price-elasticprice-elastic

Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:

price-inelastic.

Paying a tax of $10 on an income of $100, a tax of $20 on an income of $200, and a tax of $30 on an income of $300 is an example of a:

proportional tax

The price elasticity of demand measures the responsiveness of the change in the:

quantity demanded to a change in the price

When a decision maker chooses the option leading to the outcome that he or she most prefers, he or she has made a ________ decision.

rational

The government imposes a tax of $1,000 per household to fund a new public swimming pool. This tax is an example of a:

regressive tax

The implicit cost of capital is:

the opportunity cost of the capital used by a business.

Jacquelyn is a student at a major state university. Which of the following is not an example of an explicit cost of her attending college?

the salary that she could have earned working full-time

Profit is the difference between ________ and ________.

total revenues; total costs

Tax incidence analysis seeks to determine:

who actually pays the extra cost imposed by a tax

Prior to any taxes, the equilibrium price of gasoline is $3 per gallon. Then a $1 tax is levied on each gallon of gas. As a result, the price of gasoline rises to $3.75 per gallon. The incidence of the $1 tax is:

$0.75 paid by consumers, $0.25 paid by producers

(Figure: The Gasoline Market) Look at the figure The Gasoline Market. An excise tax has been levied on each gallon of gasoline supplied by producers. Based on the graph, the incidence of the tax on suppliers is:

$0.75.

Pauli's Pizza offers the following prices: one slice for $2, two slices for $3.50, three slices for $4.50, four slices for $5.00. The marginal cost of the third slice to Hui is:

$1

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the second sweatshirt is:

$11.

(Figure: The Market for Yachts) Look at the figure The Market for Yachts. If the government imposes a $60,000 tax on yachts (collected from the producers), consumers will pay ________ of the tax and producers will pay ________.

$40,000; $20,000

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred ________ in ________ costs.

$86,004; implicit

You decide to quit your $60,000 per year job as an information technology specialist and illustrate children's books. At the end of the first year of illustrating, you have earned $20,000. You also spent $5,000 for paint and paper. Your economic profit in the first year as an illustrator is: (show your workings and use the formula)

-$45,000

(Table: Market for Pizza) Look at the table Market for Pizza. In the table, when income changes from $1,000 to $1,400 per month, the income elasticity of demand for pizza at a price of $14 per pizza is:

1.5

The only producer of chocolate bunnies in the world, Choco's Bunny Company, recently expanded its production capacity from 1,000 to 2,000 bunnies per day. If the price elasticity of demand for bunnies is 3.33, by how much will the company need to reduce its price to sell the additional 1,000 bunnies (using the midpoint method)? Show your workings

20%

7. (Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. Calculate the marginal cost of the; second, third and fourth sweatshirts is: (show workings if possible)

2: 11 3: 13 4: 15

Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower price by: Use the Elasticity of Demand formula to calculate the answer ( show your workings)

50%

Bessie wants to calculate the accounting and economic profits on her cattle farm in Nebraska. She pays $30,000 per year for the cost of raising cattle, $80,000 in wages, and $20,000 in insurance. She forgoes $30,000 per year that she could make as a teacher. If her total revenue equals $140,000, that means her accounting profit is ________ and her economic profit is ________. (show your workings and use the formula)

Accounting profit: $10,000 Economic profit: $-20,000

(Figure: Demand Curves) Look again at the figure Demand Curves. Gala apples are a type of apple that has many substitutes and is not very expensive. Which graph best represents the demand schedule for Gala apples?

B

(Figure: A Market with a Tax) Look at the figure A Market with a Tax. The excise tax imposed on this good is equal to:

P1 - P3

Which of the following best describes a "how much" decision?

Should I buy a third hot dog?

What would happen in the market for canned pinto beans if individuals' incomes increased?

The income elasticity of demand would be positive if beans are a normal good

Lump-sum taxes promote economic efficiency but violate the ability-to-pay principle.

True

An "either-or" decision involves

a choice between two activities.

If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, for you, shoes are considered: Use the formula, calculate the income elasticity and then state if it is normal or inferior good. (show your workings)

a normal good. / 1.5

If the income elasticity of demand for a good is negative, the good is said to be:

an inferior good

Most economic models:

assume that people behave rationally.

The price of coffee increases by 10%, and as a result, Alex purchases fewer doughnuts. For Alex, coffee and doughnuts are:

complements

For which of the following decisions would marginal analysis be relevant?

deciding how much to spend on a summer vacation

Excise taxes that raise the most revenue and cause the least deadweight loss are likely to be those that are imposed on goods for which:

demand and supply are both inelastic.

If an excise tax is imposed on wine and collected from the consumers, the ________ curve will shift ________ by the amount of the tax.

demand; downward

According to the optimal output rule, if the marginal benefit is:

equal to the marginal cost, net benefit is maximized.

Money that must be paid for the use of factors of production such as labor and capital is an:

explicit cost.

Costs that are included in the economic concept of cost but that are not explicit costs are:

implicit costs.

Suppose the cross-price elasticity between two goods is 1.5. If the price of one good increases by 10%, then the quantity demanded of the other good will:

increase by 15%.

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of producing sweatshirts is an example of ___________ marginal costs.

increasing

Total net gain is maximized when marginal benefit ________ marginal cost.

is equal to

If the University of Michigan increases the price of football tickets, this will result in increasing revenues if demand:

is price-inelastic

Goods A and B have a positive cross-price elasticity of demand. This means goods A and B are:

substitutes

Raina consumes 100% more mechanical pencils when the price of felt-tip pens increases by 50%. For Raina, pencils and pens are ________, and the cross-price elasticity of demand is ________. (Show your workings)

substitutes; 2

Criteria that economists use in selecting a tax system include:

the ability to pay.

By law, FICA (the Federal Insurance Contributions Act), a payroll tax, is collected equally from the employers and the employees. In reality:

the employees bear almost all of the burden of the tax.

Which of the following taxes reflects the ability-to-pay principle?

the federal income tax

You own a small deli that sells sandwiches, salads, and soup to the community. Which of the following is an implicit cost of the business?

the job offer you did not accept at a local catering service