Micro Economics Exam #2
Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000?
.8
perfectly inelastic =
0
Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is:
2.5
In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be
2500
If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to
3.5
For product X, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by
3.5 percent for each 1 percent decrease in price, ceteris paribus.
The marginal cost curve intersects the minimum of which of the following cost curves?
ATC.
Hideki is the owner/operator of Hideki's Flower Shop. Last year he earned $100,000 in total revenue. His explicit costs were $60,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the course of the year he received three offers to work for other flower shops with the highest offer being $60,000 per year. Calculate Hideki's accounting and economic profit.
Accounting profit = $40,000; economic profit = negative $20,000.
If demand is elastic, then
An increase in price will reduce total revenue.
If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that
Both goods are substitute goods because the cross-price elasticity is +2.
The average fixed cost (AFC) curve
Declines as long as output increases.
Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus:
Fall by 3.5 percent
If marginal utility is rising, then total utility must be falling.
False
If the marginal utility per dollar spent for candy bars is higher than the marginal utility per dollar spent for popcorn, you should buy more popcorn and fewer candy bars in order to maximize utility.
False
If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is elastic.
False
If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase in football ticket prices would be expected to cause a 45 percent increase in quantity demanded.
False
The cross-price elasticity sign for substitute goods is negative.
False
The price elasticity of demand for a product tends to be smaller (i.e. less elastic), if the product has a large number of substitutes.
False
Price elasticity of demand refers to
How sensitive buyers are to a change in price.
The cross price elasticity between two products has been measured at 2.0. If the price of the first product is increased by 8%, demand for the second product will _____ and the two goods must be _________.
Increase by 16%; substitute goods
Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to
Lower his price to increase revenue.
The law of diminishing returns states that beyond some point, the:
Marginal physical product of a variable input diminishes as more of that input is used.
If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
New cars are a normal good, and the income elasticity is +2.0.
A good is normal if the sign on the income elasticity formula is
Positive
Utility refers to the:
Satisfaction obtained from a good or service.
Explicit costs
The actual payments a firm makes to its factors of production and other suppliers.
Marginal utility for a good is computed as:
The change in total utility divided by the change in quantity.
consumer surplus
The difference between the maximum amount a person is willing to pay for a good and its current market price.
Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because:
The marginal utility of the fourth plate would be zero or even negative.
An increase in production in the short run definitely results in an increase in
Total costs.
An individual's consumer surplus is the difference between the maximum price that she or he is willing to pay and the actual price.
True
If the marginal cost curve intersects the average variable cost curve, the averagevariable cost must be at its minimum.
True
If the price elasticity of demand is 0.4, a 5 percent increase in price will quantity demanded to fall by 2 percent.
True
If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two goods are complementary.
True
Marginal utility represents the additional satisfaction obtained from one more unit of a good or service.
True
price elasticity of demand
a measure of the sensitivity of demand to changes in price
implicit costs
are the cost of resources for which no payment is made - that is, the opportunity cost of using those resources. They can be identified only by the entrepreneur.
Variable inputs are defined as any resource that:
can be changed as output changes
If price is reduced and demand is price inelastic, then total revenue will:
decrease.
If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as:
elastic
When E>1
elastic
Economic cost=
explicit cost + implicit cost
In the short run, when a firm produces zero output, total cost equals
fixed costs
The absolute value is used
for the price elasticity of demand is taken in order to determine elastic or inelastic.
A demand curve that is completely elastic is
horizontal
There are no fixed costs
in the long run
When E<1
inelastic
A completely elastic demand curve has an elasticity coefficient of:
infinity
perfectly elastic=
infinity
Variable inputs are
inputs the manager can adjust to alter production
Fixed inputs are
inputs the manager cannot adjust in the short run
A consumer maximizes total utility from a given amount of income when the:
marginal utility per dollar spent on each good is the same.
For complementary goods, the cross-price elasticity is ______
negative
For Substitute goods, the cross-price elasticity of demand is
positive
Marginal cost
refers to additional cost of producing one more unit of output, i.e. change in total costs associated with one more unit of output.
law of diminishing marginal utility
rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased
The period in which at least one input is fixed in quantity is the
short run
Ceteris paribus, as the number of substitutes for a good increases, the
should become larger
Marginal Physical Product
the change in total output associated with one additional unit of input
Optimal consumption
the mix of consumer purchases that maximizes the utility attainable from available income
price elasticity of demand
the percentage change in quantity demanded relative to a percentage change in price
long run is defined as
the period of time in which all factors of production are variable
diseconomies of scale.
the situation in which a firm's long-run average costs rise as the firm increases output
Total utility
the total amount of satisfaction obtained from consumption of a good or service
When E=1
unitary