MICRO TRUE/FALSE

A profit-maximizing competitive firm uses just one input, x. Its production function is q = 8x1/2. The price of output is $24 and the factor price is $8. The amount of the factor that the firm demands is:

144

In a perfectly competitive industry, the demand curve for the total output of the industry may be downward sloping.

True

Oil extraction technologies open new oil fields for oil extraction. At the same time global income increases creating an increase in the demand for automobiles. Taken together, these two developments should lead to a decrease in the would equilibrium price of oil and an increase in the world equilibrium quantity of oil

Equilibrium quantity will increase, but price is unknown unless we know how big the sifts are.

Amanda, a utility maximizing consumer, consumes only two things, Ramen and Popsicles. She is currently consuming 12 packets of Ramen and 16 popsicles a week. If the price of Ramen increases (and everything else stays the same) we would expect Amanda to consume fewer Popsicles per week

FALSE. Because of the principle of rational choice she would chose to consume more popsicles because she will get more marginal utility per dollar than buying the more expensive Ramen

Putski Concrete Co. hires one additional worker. Output goes up by 10 units per day. This must have been a good (i.e. profit-maximizing) hiring decision.

FALSE. It may or may not have been. It depends on the price of each unit of output and the wage the worker receives. If the workers wage is greater than 10x the price of output, the decision will decrease profits.

José finds that anytime he eats bananas a second banana provides less satisfaction than the first banana. Therefore, if he wants to maximize his satisfaction he should not eat more than one banana at a time.

FALSE. Jose is experiencing diminishing marginal utility. But, as long as the additional utility per dollar of the second banana is greater than the additional marginal utility per dollar he might receive from other options he may still be happier by eating more than one banana at a time.

Sole proprietorships are the most common form of business in the U.S. and easy to start. Therefore, sole proprietorships must be the best way to organize a business

FALSE. Just because it is the most common and easy to start, there is a lot of risk and liability issues invokes. Partnerships and Corporations have less risk and have easier access to capital

Because a decreasing price tends to lead to an increase in quantity demanded, a producer can always expect total revenue to increase when the price of a good decreases.

FALSE. Sometime there will be an increase in revenue, but sometimes the difference in the change in quantity demanded and change in price is not significant enough

If a particular way of producing a good is technically efficient it must also be economically efficient.

FALSE. Technically efficient uses no redundant inputs, economically uses least cost. So a good could be technically efficient but not economically

The "invisible hand" is a metaphor for how societies create laws to regulate what and how things are produced in an economy.

FALSE. The "invisible hand" is a metaphore for the price mechanism. Laws are created by the legal system (which I called the "invisible boot").

You observe the price of winter scarves decrease at the beginning of spring. You also notice that the number of winter scarves purchased decreases. This seems to violate the Law of Demand.

FALSE. The ceteris paribus part of th eLaw of Demand alerts you to the fact that if something other than price changes (such as change in season) the demand curve may shift. A lower demand curve will give the impression of both a fall in price and a decrease in quanity demanded.

Economics (or market) forces are the only forces that determine how markets function in a capitalist economy.

FALSE. There are many factors that determine how capitalist economies function (ex. history, politics, social, etc)

Because monopolies charge prices above marginal cost they always enjoy positive economic profits.

FALSE. While the monopolist will price above marginal cost, profitability depends on the demand for the product. Barriers to entry may give a monopolist the ability to price anywhere on the demand curve, the monopolist cannot force people to buy his or her product at a price they are not willing to pay. The price must be greater than ATC at the quantity produced for the monopolist to make a profit.

The opportunity cost of an item or an action is always equal to the amount of money a person pays to enjoy that item or action.

FALSE. You are not just losing money in every opportunity cost. The opportunity cost is the next best thing that you give up (ex: time, energy, money, tradeoffs, etc) Nothing is ever free

A taxed imposed on electricity is likely to have a greater deadweight loss per dollar raised than an equal tax Rayovac Ultra Pro AAA batteries

FALSE. electricity is less elastic than batteries (more need) so it will not respond to price as much as batteries would

To suppliers, if the price of a good rises the opportunity cost of not producing it falls

FALSE. if price rise, the opportunity cost of not producing it will rise.

Because an effective price floor is above the equilibrium price it will not cause a misallocation of resources.

FALSE. it causes excess of goods; price ceilings cause misallocation of resources

An increase in the minimum wage if likely to create a shortage of teenage workers.

FALSE. it will create a surplus of teenage workers because more will be willing to work. Also teenagers will not be hired over adults, so there will be more looking for work.

The production possibilities frontier tells us which combination of products an economy should produce.

FALSE: The PPF gives you a description of all the efficient combinations of outputs available. You (as a society) must determine which one of them is best for you. This will require additional information.

Corporations employ more people in the U.S. than any other form of business so it must be the best way to organize a business.

FALSE: While it is true that corporations employ more people, it is not always the best way to to organize a business. The best form of business depends on the needs of the business. All have advantages and disadvantages.

A firm in a competitive industry takes account of the fact that the demand curve it confronts has a significant negative slope.

False

If the value of the marginal product of labor exceeds the wage rate, then a competitive, profit-maximizing firm would want to hire less labor.

False

Mr. O. Carr has the cost function c(y) = y^2 + 144 if his output, y; is positive and c(0) = 0. If the price of output is 30, Mr. Carr' s profit-maximizing output is zero.

False

Mr. O. Carr has the cost function c(y) = y^2 + 36 if his output, y; is positive and c(0) = 0. If the price of output is 18, Mr. Carr' s prot-maximizing output is zero.

False

Price equals marginal cost is a sufficient condition for prot maximization.

False

The change in producer's surplus when the market price changes from p1 to p2 is half of the area to the left of the marginal cost curve between p1 and p2.

False

Two firms have the same technology and must pay the same wages for labor. They have identical factories, but Firm 1 paid a higher price for its factory than did Firm 2. If they are both profit maximizers and have upward sloping marginal cost curves, then we would expect Firm 1 to have a higher output than Firm 2.

False

Because owning a patent is the equivalent of having a legal monopoly, consumer surplus would increase if there were no patents.

TRUE AND FALSE (mostly false) Patents do create monopolies. But, because competitors can reverse engineer items not protected by a patent (and avoid substantial research and development costs), the patent may be required to encourage people to invent new items in the first place. If the item is not invented, there is no consumer surplus at all. So, on balance, patents probably improve consumer surplus.

In the short run, the average total cost of producing 100 fishing lures in an hour is $5. The marginal product of labor (a variable input) is 6 fishing lures per hour. If the wage rate is $12 per hour average total cost would rise if one more unit of labor is hired.

TRUE. At $12 for 6 lures, that make the price per lure $2. MC < TC =5. The average total cost would go from 100 lures at $5 per lure to 106 lures for $7 per lure. So one more unit of labor would increase total cost.

A firm currently produces 100 units of a good per day. Its total cost of production is $21,500 per day. The marginal cost of producing the 101st unit is $220. Increasing output by one unit per day will increase the firm's average total cost.

TRUE. At Q=100, ATC = $21,500/100 = $215. If MC = $220 producing one more unit will pull up ATC

Cartels become less stable if it becomes harder for members to monitor each other's activities.

TRUE. Because each individual member has a strong incentive to produce more than it is supposed to produce (because MR will tend to be above its own MC), cartels need to monitor member behavior. The harder it is to monitor firms, the greater the incentive to cheat and the harder it is to keep the cartel together.

Bob is producing 40 bracelets per week. He is minimizing costs by producing with 2 units of capital and 20 units of labor. Both the price of labor and the price of capital increase by 10%. His current combination of labor and capital is still the economically efficient way to produce 40 bracelets.

TRUE. Both labor and capital prices increased it is still going to be the most economically efficient way to produce. MPL/W=MPk/r => MPL/W(1.1)=MPk/r(1.1)

If economic profit is positive for a firm it is almost certain that accounting profit is positive as well.

TRUE. Economic profit includes the explicit costs. The economics profit includes pay that could have been received if a person did something else instead. If economic profit is positive accounting has to be since it does not include explicit costs.

In third-party-payer markets there are likely to be non-market forces at work that restrict people consuming the quantity they demand of the good or service in the market.

TRUE. If consumers do not pay th efull price of a good or service their quantity demanded is likely to exceed the quantity supplied. This will require some means other than price to allocate the good or service.

Television advertisements for special offers often have a time limit. One of the reasons sellers do this is because economic theory suggests people's elasticity of demand changes over time.

TRUE. Less time gives you less option to search and look for other options. Time is a factor that increases elasticity

In a perfectly competitive market an increase in demand for a product may increase prices in the short run but not in the long run.

TRUE. Take the example of the market for roses as presented in class. The increase in demand will increase prices in the short run. This creates the possibility of economic profit which, in turn, attracts new firms. Since all firms are identical by assumption, the price will be driven back down to each firm's min ATC - which is where the prce was in the first place.

Barbara likes diamond rings and sapphire necklaces (in fact, they are the only things she consumes). If Barbara is perfectly rational and the price of sapphire necklaces rises we would expect Barbara to sell some of her necklaces and buy more diamond rings.

TRUE. The increase in the price of sapphire necklaces relative to the price of diamond rings will make the marginal utility of sapphire necklaces per dollar lower to the marginal utility of diamond rings per dollar (at her level of consumption before the price change). To bring her back to the point where MUS / PS = MUD / PD she will have to switch some of her consumption from sapphire necklaces (increasing MUS in the process) and increase consumption of diamond rings (decreasing MUD in the process).

If one firm promises to sell at a price below everyone else (a "low price guarantee") it is likely that the prices will actually be higher in that industry than if the industry was perfectly competitive.

TRUE. The low price guarantee signals to potential competitors not to compete based on price. Therefore, the firm issueing the guarantee does not have to offer the lowest possible price (min ATC), just a price below the other firms' prices.

In a simple two good model, if a country is using all of its resources efficiently its production possibilities frontier must be sloping downward.

TRUE. The more you make of one item, you have to make less of the other (opportunity cost)

A combination of economically efficient inputs may no longer be economically efficient if input prices change

TRUE. While technical efficiency is not a function of input prices, economic efficiency is: MPL/W = MPK/r.

A beetle infestation kills many hazelnut trees driving up the price of a key ingredient of Nutella spread. Simultaneously, the popularity of Nutella spread increases due to a widely popular advertisement campaign. These two observations together suggest that the market equilibrium price of Nutella spread should rise and the equilibrium quantity should also rise.

TRUE. the price will rise but the quantity is unsure if it will rise there are other factors to consider that will determine if the price rises

A country does not need to be able to produce more of a good than another country in order to have a comparative advantage in that good.

TRUE: Comparative advantage requires having a lower opportunity cost, not being able to produce more of a good.

No functioning market is completely devoid of government intervention.

TRUE: For any form of exchange you must at very least have some establishment and enforcement of property rights. As markets get more sophisticated the government's role as "referee" also becomes more sophisticated.

The area under the marginal cost curve measures total variable costs.

True

Wisconsin exports cheese and import alfalfa. Therefore, Wisconsin must be producing more cheese and less alfalfa than its trading partners.

This CAN be true, if WI is specializing and using trade wisely, they would want to produce more cheese if the have the comparative advantage and import alfalfa because they specialize in cheese. This is true if you assume specialization/trade. If not, then there is no definite way to remember.

A rm faces competitive markets both for its inputs and its outputs. If its long run supply curve is q = 3p; then it can not have constant returns to scale.

True

A rm produces one output, using one input, with the production function f (x)=2x^1/3 where x is the amount of input. The cost function for this rm is proportional to the price of the input times the cube of the amount of output.

True

A rm with the cost function c(y) = 20y^2 + 500 has a U-shaped cost curve.

True

A competitive rm has a continuous marginal cost curve. It finds that as output increases, its marginal cost curve first rises, then falls, then rises again. If it wants to maximize prots, the rm should never produce at a positive output where price equals marginal cost and marginal cost decreases as output increases.

True

Average fixed costs never increase with output.

True

If a profit-maximizing competitive firm has constant returns to scale, then its long-run profits must be zero.

True

The marginal product of a factor is just the derivative of the production function with respect to the amount of this factor, holding the amounts of other factor inputs constant.

True

If the short-run marginal costs of producing a good are $40 for the first 200 units and $50 for each additional unit beyond 200, then in the short run, if the market price of output is $46, a profit-maximizing firm will:

produce exactly 200 units.