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Consider good J: Price elasticity (absolute value)=0.75 Cross-price elasticity with respect to good X= 0.8 Cross-price elasticity with respect to good Y= 2 Cross-price elasticity with respect to good Z= −2.5 Income elasticity= −0.5 Which would shift DJ most right? - A 50% decrease in the price of good J. - A 20% increase in the price of good X. - A 10% increase in the price of good Y. - A 10% increase in the price of good Z.
- A 10% increase in the price of good Y. Goods J and Y are substitutes since the cross-price elasticity with respect to good Y is positive. Therefore, a 10%10% increase in the price of good Y will shift the demand for good J to the right by 20%(20%(=%=% change in price of good Y ×× cross-price elasticity with respect to good Y =10%×2=10%×2).
Which of the following is true about economies of scale and increasing returns to scale? - Economies of scale and increasing returns to scale are the same thing. - Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output. - Economies of scale is a long-run concept, while increasing returns to scale is a short-run concept. - Increasing returns to scale is a long-run concept, while economies of scale is a short-run concept.
- Economies of scale is a long-run concept, while increasing returns to scale is a short-run concept. Economies of scale exist in the long run when increasing firm size results in lower average total cost. Increasing returns to scale refers to the relationship between inputs and output, meaning that output changes by more than a proportional increase in inputs.
Which of the following policies would result in an increase in the quantity supplied of a good in a market? - Providing a per-unit subsidy to sellers - Levying a per-unit tax on sellers - Imposing a binding price floor - Imposing a nonbinding price floor - Imposing a binding price ceiling
- Imposing a binding price floor Correct. A binding price floor raises the legal price, giving an incentive to sellers to produce and sell greater quantity. The binding price floor results in a surplus at the binding price.
A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded? - increase by 20% - decrease by 20% - decrease by 5% - increase by 5%
- decrease by 5% The absolute value of the price elasticity of demand is 2 and is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore the percentage change in quantity demanded will be 20% (this is calculated by multiplying the 2 by 10%). The price elasticity of demand illustrates the negative relationship between price and quantity demanded. Therefore an increase in price by 10% will result in a decrease in quantity demanded by 20% for an absolute value of a price elasticity of demand of 2.
Oren's father tells Oren he can have one dessert after dinner. He can choose from a scoop of ice cream, a slice of apple pie, a cup of chocolate pudding, or a piece of fruit. Oren prefers chocolate pudding to a piece of fruit; he prefers apple pie to chocolate pudding; and he prefers ice cream to apple pie. If Oren chooses a scoop of ice cream, what is his opportunity cost? - A slice of apple pie. - A piece of fruit, a cup of pudding and a slice of apple pie.
A slice of apple pie Opportunity cost is the next best alternative; not all alternatives.
Which of the following is an example of a scarce factor of production? - Flour - Money - Food - Airplanes
Airplanes are capital
A competitive profit-maximizing firm is currently producing at an output level at which the marginal revenue is equal to marginal cost. Which of the following changes will NOT affect the profit-maximizing quantity? - An increase in the price - An increase in variable costs - An increase in fixed costs - An increase in the firm's revenues
An increase in fixed costs - An increase fixed costs will increase the firm's total cost but not marginal cost. Marginal cost only changes with changes in variable cost. Therefore, marginal revenue will continue to be equal to marginal cost and the firm will not change its quantity to maximize its profit.
Consider the market for arugula, a normal good. Which of the following changes would result in an increase in both the equilibrium price and the equilibrium quantity of arugula? - A decrease in consumer income - An increase in the price of salad dressing, a complement - A decrease in the price of radicchio, a substitute - An increase in the price of water irrigation for arugula farms - An increase in population
An increase in population
At a firm's current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true? - Average fixed cost, average variable cost, and average total cost are all decreasing. - Average fixed cost is decreasing, and both average variable cost and average total cost are increasing. - Average fixed cost and average variable cost are both decreasing, while average total cost is increasing.
Average fixed cost is decreasing, and both average variable cost and average total cost are increasing. Marginal cost is above average variable cost and average total cost, causing both to increase. Average fixed cost always decreases.
Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility? - Yes, because he has purchased the maximum possible with his limited budget. - Yes, because he has purchased the two goods in proportion so that he can get the maximum utility from each. - No, because he can increase his total utility by purchasing fewer music downloads and more snacks. - No, because he can increase his total utility by purchasing more music downloads and fewer snacks.
No, because he can increase his total utility by purchasing more music downloads and fewer snacks. The utility-maximizing condition is not fulfilled. Utility maximization requires that the marginal utility of the last dollar spent on music downloads must equal the marginal utility of the last dollar spent on snacks. He can maximize his utility by purchasing more music downloads and fewer snacks. Purchasing more music down loads will reduce the marginal utility of music downloads, decreasing the marginal utility per dollar, and reducing the number of snacks increases the marginal utility of snacks, increasing the marginal utility per dollar; the net impact will be to increase total utility.
Kieran owns and operates his own bike shop. In the past week, he received two offers: one to work for a competitor for $50,000 per year and one to sell his bike shop for $100,000. Assume the annual interest rate is 6 percent, and Kieran is indifferent between owning his bike shop or working for the competitor. Kieran currently receives enough annual revenue to cover all explicit costs and has $60,000 left over. There are no additional implicit costs (excluding the items listed above). Under these circumstances, Kieran's economic profit is equal to which of the following? - $10,000 - $6,000 - $4,000
The correct answer is $4,000. The $4,000 equals the total revenues minus the total explicit and implicit costs. The total opportunity cost is the sum of the $50,000 salary offer plus the $6,000 interest forgone. Subtracting $56,000 from the accounting profit of $60,000 gives an economic profit of $4,000.
An increase in the price of good X causes buyers to want to buy more of good Y. Which of the following explains the resulting change in the market? - The demand curve for good X will shift to the right because the goods are substitutes. - The demand curve for good Y will shift to the right because the goods are substitutes. - The demand curve for good X will shift to the left because the goods are complements. - There will be a downward movement along the demand curve for good X because the goods are complements.
The demand curve for good Y will shift to the right because the goods are substitutes.
A change in which of the following causes a movement along a given demand curve for a normal good? - Consumer income - The demand for the good - The price of a substitute good - The price of the good - The number of buyers
The price of the good
