Microeconomics Exam 2

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Average variable cost and average total costs get closer together as output increases because

average fixed costs decrease as outputs increases

In the short run, ______ costs exceed _____ costs.

average total; average variable

Economists usually assume that ________ is a fixed input in the _______ run.

capital; short

What statement is TRUE? Fixed costs

do NOT exist in the long run

It is essential to establish specific criteria to judge the performance of any economic system. Two such criteria

efficiency and equity

Marginal cost is _______ average variable cost when______

equal to; to average variable cost is minimized

Fixed costs are best described as:

Costs that are incurred even if the firm is currently producing nothing

Suppose a policy change will generate $10,000 of benefits for low-income families and $120,000 of costs for high-income families. This change can best be described as

inefficient

Which statement is NOT true regarding the total variable cost curve?

is a horizontal line

Long Run

is that period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter the industry and/or existing firms can exit the industry

Producer surplus

is the difference between the current market price and the cost of production for the firm

Consumer Surplus

is the difference between the maximum amount a person is willing to pay for a good and its current and market price

Short Run

is the period of time for which two conditions hold: The firm is operating under fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry

The short-run supply curve of a perfectly competitive firm is:

the portion of the marginal cost curve that lies above minimum average variable cost

To determine the optimal method of production for a good or service, a perfectly competitive firm needs to know all of the following EXCEPT

the prices charged by its rivals

Production

the process by which inputs are combined, transformed, and turned into outputs

The optimal method of production is

the production method that minimizes cost for a give level of output

Which of the following assumptions about perfect knowledge is true?

** ALL OF THE ABOVE*** 1. firms possess knowledge of all available information concerning wage rates, capital costs, and output prices 2. Households possess knowledge of the qualities and prices of everything available in the market 3. Firms and households possess all of the information they need to make market choices

A firm that is breaking even is

** ALL of THE ABOVE** - in an industry that is not attracting new firms - earning zero economic profit - earning a normal rate of return

You receive an award that pays you $300 per month for the next 5 years

- You consume MORE normal goods - You would work MORE - You would INCREASE your saving

3 Basic Decisions Every Household MUST make

1. How much of each PRODUCT to DEMAND 2. How much LABOR to SUPPLY 3. How much to spend today and how much to save for the future

The substitution effect of a price change

A fall in the price of a product might cause a household to shift its purchasing pattern away from substitutes toward that product

A profit-maximizing strategy becomes a loss minimization strategy when a firm in a perfectly competitive industry is producing where

AVC>P>ATC

If marginal cost is below the average variable cost, average variable cost will be declining.

Agree: Any time MC is below the AVC, AVC will be declining

When marginal cost (MC) is falling, which of the following must be true?

Average variable cost (AVC) is falling

A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.

Disagree: A firm suffering losses in the short run should continue to operate as long as price is greater than average variable cost

Firms that exhibit constant returns to scale have U-shaped long-run average cost curves

Disagree: Firms with constant returns to scale will have horizontal long-run average cost curves

Consumer surplus describes a situation in which there is excess quantity supplied.

FALSE

Deciding to invest in capital is a short-run decision

FALSE

For economic analysis, the short run is considered less than one year

FALSE

If Harrold runs a grocery store and is making a normal rate of return, we can infer that he is also making an economic profit

FALSE

In the short run, firms can enter an industry but not exit an industry

FALSE

When one market reaches a new equilibrium, the general equilibrium condition has been satisfied.

FALSE

EX: The yearly lease payments on its current inventory of Boeing 737 jets

FIXED COST

What can be said of a firm's short-run supply curve?

It is the marginal cost curve of the competitive firm

A resource's _________ is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus, while _______ is the average amount produced by each unit of a variable factor of production

MARGINAL PRODUCT;AVERAGE PRODUCT

Explain how the following event would affect the cost curves. A company's primary supplier of resources implements a 3 percent price increase for all of its supplies.

Marginal cost, average variable cost, and average total cost will increase. Average fixed cost will not change.

Public Good or Not a Public Good: A new roller coaster at Cedear Point Amusement park in Sandusky, Ohio.

NOT a public good

In a perfect competitive market in the long run, profits are driven to zero due to which of the following relationships?

P*=SRMC=SRAC=LRAC

If a firm's profit is $0, then it must be true that

TR equals TC

Efficiency is the condition in which the economy is producing what people want at the least possible cost.

TRUE

For economic analysis, the long run is any period in which all inputs are variable (regardless of the length of time involved)

TRUE

General equilibrium exists when all markets in an economy are simultaneously in equilibrium

TRUE

For the following business, what is the likely fixed factor of production that defines the short run? The fixed factor of production for a dentists in price practice is most likely:

The office and the dental equipment

Which of the following is most likely to be a variable cost for a firm?

The payroll taxes that are paid on employee wages

Assume firms break even in an industry. New firms ______ attracted to the industry and current ones _____ exiting it.

are not; are not

Marginal cost (MC) intersects average variable cost (AVC) and the average total cost (ATC)

at their lowest, or minimum, points

Examining the equilibrium conditions of individual markets and for households and firms separately is referred to as

partial equilibrium analysis

Average fixed costs

fall as output rises

In the short run, a firm

has at least one fixed factor of production

Firm stop producing tapes and start producing compact discs because people prefer compact discs to tapes. This will

improve effiency

Economic costs

include both a normal rate of return on investment and the opportunity cost of each factor of production

Furthermore, with external diseconomies, the long-run industry supply curve _____ with output.

increases

Diminishing marginal returns implies

increasing marginal costs

Society will benefit from less of being produced when the price of a good is

less than the marginal cost to produce that good

Suppose a competitive industry experiences external diseconomies. If so, then:

long-run average costs increase when industry output expands.

Perfect Competition

many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices

In the short run, rims earning a profit will want to _______ their profits while firms suffering losses will want to ____ their losses

maximize;minimize

A condition is Pareto optimal when

no change is possible that will make some members of society better off without making some members of society worse off.

Resources are allocated efficiently among firms in a perfectly competitive market because

of the assumption of profit maximization

In an industry characterized by perfect competition

price is higher than marginal cost AND output is less than it would be under perfect competition

Which statement is NOT true? Variable costs

remain constant as output goes up

When the marginal product is falling, the marginal cost is

rising

Suppose there is a permanent shift of consumer preferences away from pretzels and toward potato chips. The most likely result would be

short-run profits in the potato chip market increase

Marginal Utility (MU)

the additional satisfaction gained by the consumption or use of one more unit of something

An example of a positive externality is

the beauty of a home's well-kept lawn.

Marginal cost (MC) measures:

the increase in total cost that results from producing an additional unit of output

The household budget constraint reveals

the limits imposed on household choices by income, wealth, and product prices

The law of diminishing marginal utility states:

the more of any one good consumed in a given period, the LESS satisfaction (utility) gendered by consuming each additional (MARGINAL) unit of the same good

The labor supply curve shows

the quantity of labor SUPPLIED at difference WAGE RATES. Its shape depends on ho households react to changes in the WAGE RATE

Utility

the satisfaction a product yields relative to its alternatives

The choice set or opportunity set available to consumers is

the set of options that is defined and limited by a budget constraint

In the long run,

there are no fixed factors of production

Homogeneous Products

undifferentiated outputs-- products that are identical to or indistinguishable from one another

Perfectly competitive firms must make all of the following decisions EXCEPT:

what price to charge for its output

The law of diminishing returns occurs:

when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines


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