Microeconomics Exam 2
Economic Profit =
Accounting Profit - Implicit Costs OR Revenue - Explicit Costs - Implicit Costs
What is the primary difference between accounting and economic profit?
Accounting profits ignore implicit costs; economic profits consider them
Capital-Intensive Technology EX
Airplanes produced in the U.S.
The budget line shows possible production bundles
False
The money that a firm spends on rent is an example of an implicit cost
False
Your are taking a principles of economics class using Sapling Learning. As you use Sapling Learning more and more, you find both doing homework as well as learning the subject to be increasingly enjoyable
Increasing Marginal Utility
Economies of Scale
Increasing outputs results in a lower average cost
Diseconomies of Scale
Increasing outputs results in higher average costs
Constant Returns to Scale
Increasing outputs results in no change to average cost
Economies of scale
Increasing returns to scale (negative slope of line)
Charlie budgets a portion of his income for attending ball games and movies. Assuming he is utility maximizing, what would happen to his consumption of ball games if the ticket price fell, ceteris paribus
It would rise
Jeff finds some steaks for $16 for which he would have been willing to pay $20. The butcher notices the meat is near the expiration date and gives him an extra 75% off
Jeff's CONSUMER surplus: $16
Fixed Cost EXs
Lease on building Industrial equipment costs Interest on current debt Regulatory compliance costs Annual salaries of top management
Above Marginal Revenue (MR)
Losses
What happens to MC when diminishing marginal returns set in?
MC begins to increase
When increasing marginal returns are present MP is increasing. What is happening to MC when MP is increasing?
MC is decreasing
Maximizing Utility Equation
MUx/Pricex = MUy/Pricey
Which condition below indicates that a consumer is maximizing his or her utility regarding spending on two goods?
MUx/Pricex = MUy/Pricey
Assumed in Perfect Competition
Many sellers Price taking behavior
If hiring Kristen causes average product to increase, Kristen's ________ has to be above current average product
Marginal Product
The Total Effect
Increase in quantity demanded attributable to the combination of the income and substitution effect
The Income Effect
Increases in quantity demanded that are attributable to changes in purchasing power as the price of a good falls
The Substitution Effect
Increases in quantity demanded that are attributable to the good becoming cheaper relative to other goods
Joe notices that when he hires another worker, the amount of cars his company can wash increases
Marginal Product
This is the change in total output divided by the change in the number of workers
Marginal Product
Profit Maximizing Quantity
Marginal Revenue (MR) = Marginal Cost (MC)
Which economic concept is most instrumental in resolving the diamond-water paradox?
Marginal Utility
Not Assumed in Perfect Competition
Significant barriers to entry Firms selling a similar but differentiated good A small number of producers
In the long run firms will enter this industry which shifts the industry supply curve to the right
True
In the long run, firms ENTER the industry, REDUCING market price and driving economic profit to zero
True
Long run equilibrium is restored when P=LRAC=SRATC=MC
True
Marginal cost and marginal productivity are inversely related
True
Marginal cost is the change in a firm's total cost due to a one-unit change in output
True
Marginal utility is the extra satisfaction experienced by one additional unit of consumption
True
Market Failure is when market provision of a good results in an inefficient quantity
True
Market Failure occurs when either negative or positive externalities are present
True
Short run economic profits attract resources
True
The budget line depicts the combinations of two goods a consumer can buy given her income and the current prices
True
The higher price in the SR gives rise to economic profit
True
The increases in price shifts the P=MR curve up to reflect the new price in the SR
True
The principle of diminishing marginal utility states that the additional utility a CONSUMER receives from an additional unit of a good or service DECREASES as consumption of it INCREASES
True
Utility is a measure of the satisfaction people receive from their choices
True
Utility is the enjoyment a person gains from consumption
True
When demand increases, price increases in the short run (SR)
True
Imperfect Information
Undisclosed plumbing problems in a house for sale
EX of variable inputs
Upper management salaries Computers Hourly labor Shipping Beads Chairs 2 year-lease on office and retail space
Average Variable Cost
VC/Q
Total Cost =
Variable Cost + Fixed Cost
Average Variable Cost
Variable Cost/Quantity
A firm's _______ are costs that increase as quantity produced increases.
Variable costs
When is allocative efficiency met in a perfectly competitive market
When price equal marginal cost
Negative Marginal Utility
When the consumption of an additional unit of a good or service makes a person worse off
Diminishing Marginal Utility
When the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units
Individual Consumer Surplus =
Willingness to spend - price paid
MR > MC
means the additional revenue a firm gets for selling the good is higher than the additional cost; profits grow in this range of output as more units are produced
Total Surplus =
(Difference in Cost) x equilibrium number/2
Total Opportunity Cost =
(Explicit Cost + Implicit Cost) X Quantity
Economic profit can be different from the accounting profit
True
Economists assume that rational consumers seek to maximize total utility
True
Government sometimes intervenes when market failure occurs
True
Implicit costs are related to a firm's opportunity costs
True
Diseconomies of Scale
A 50% increase in inputs results in <50% increase in outputs
Economies of Scale
A 50% increase in inputs results in >50% increase in outputs
Constant Returns to Scale
A 50% increase in inputs results in a 50% increase in outputs
Not a Negative Externality EX
A donut shop emits a delicious smell into the air as a by-product of production
Negative Externality EX
A factory emits pollution into the atmosphere as a by-product of production
Imperfect information EX
A firm hiring a new employee from a list of candidates who responded to a posting on monster.com
Imperfect information EX
A firm selling car insurance
Not an example of Imperfect information
A firm that is going to promote one of 2 internal candidates for a management position
Demand curve for an individual perfectly competitive firm's product
A horizontal line
Public Goods
A lighthouse that can be see by any ship passing
Negative Externality EX
A neighbor plays loud music that annoys the surrounding community
Not an example of Imperfect information
A person buying a new Toyota Camry
Not a Negative Externality EX
A person gets a flu-shot and is therefore less likely to spread illness to others
Imperfect information EX
A person purchasing a used Hyundai Sonata
Negative Externality EX
A person smokes a cigarette and imposes secondhand smoke on others
Not a Negative Externality EX
A person who lives along buys a DVD, but finds the movie unenjoyable
Not a Negative Externality EX
A person with no allergies that gets a mosquito bite from a disease-free mosquito
Not an example of Imperfect information
A student choosing between his 2 favorite pizza spots for lunch
Total Cost =
ATC x Q
Alice is willing to spend $30 on a pair of jeans, and has a coupon for $10 off she found online. She selects and purchases a $35 pair of jeans, pre-discount
Alice's CONSUMER surplus: $5
Diseconomies of Scale
Also known as decreasing returns to scale
Economies of Scale
Also known as increasing returns to scale
Market Power
Amos owns the only ice creams shop in his town, where the average temperature is 105 degrees Fahrenheit
Externalities
An airport runway next to a neighborhood
This is total output divided by the number of workers
Average Product
When 8 weavers are employed and output is 80 baskets, _________ is equal to 10 baskets
Average Product
Average Cost =
Average Variable Cost (AVC) + Average Fixed Cost (AFC) WHICH IS THE SAME AS TC/Q = VC/Q + FC/Q
Variable Cost EXs
Cost of metal used in manufacturing Cost of wood used in manufacturing Postage and packaging costs
Marginal Cost =
Change in Total Cost/ Change in Quantity
Marginal Cost
Change in total cost divided by change in output
Claire is trying to sell her used calculus textbook online. She asks for $150 or best offer and is willing to sell for anything over $100. She is able to sell it for $125
Claire's PRODUCER surplus: $25
Market Power
Complete control of an essential input
Sheila is a coffee addict. She finds that regardless of whether she visits Starbucks three times a day or once a month, each Grande Americano that she drinks tastes awesome. She never seems to get tired of drinking coffee
Constant Marginal Utility
Brian likes running. His friend Mark challenges him to run a marathon "cold turkey," i.e without any prior training. As he begins the race, he feels exuberance and confidence as he passes by runners, thinking this is the greatest feeling ever. At mile 10, he starts slowing down and feeling tired, thinks that if he could stop, mile 10 would be the perfect distance. By mile 20, he experiences the dreaded runner's "wall." Brian is later seen screaming in agony, saying "no more" and regrets running the marathon. By the end of the marathon Brian vows to never run again
Decreasing Marginal Utility
Michelle rarely ate out as a child as her parents cooked every night. She remembers that it was a real treat to be able to go out even to get fast food. Now, Michelle has finished her first semester at college and has had McDonald's once a week for the past semester. She plans to learn to cook soon so she doesn't have to eat out any more, being sick of fast food
Decreasing Marginal Utility
Diseconomies of scale
Decreasing returns to scale (positive slope of line)
An additional worker adds less to total output than the previous worker hired
Diminishing Returns
These costs often show ________ illustrated by the increasingly steeper slope of the total cost curve
Diminishing marginal returns
Beth likes pillows since they're really comfortable to sleep on. However, she finds that if there are more than 3 pillows on her bed, they become too tall to sleep on
EX of decreasing Marginal Utility
It's 120 degrees outside and you just walk into your air conditioned apartment after getting groceries. Your are thankful for the air conditioning and wonder how you could live without it, but after cooling down, you don't notice the air conditioning any more
EX of decreasing Marginal Utility
James is at Buffet Palace and is notoriously known to be able to eat a lot. However, he puts less and less food on his plates after round 1 until he can no longer eat any more
EX of decreasing Marginal Utility
Which of the statements below is true of the Long-Run Industry Supply Curve (LRIS)
External diseconomies results in an increasing cost industry and an upward sloping LRIS curve
A deadweight loss means consumers are not making rational decisions
False
A deadweight loss means that producers are not maximizing profits
False
A deadweight loss means the economy is inside the production possibilities frontier
False
A firm's explicit costs are always larger than its implicit costs
False
AVC must be above ATC for the graph to be valid
False
Costs that are small and unimportant with little impact on profits are called marginal costs
False
Diminishing marginal utility means that consumption of an additional unit decreases utility
False
Externalities are the only example of market failure
False
Judi has $50 to spend. If movies cost $8 and books cost $5, Judi can purchase 5 movies and 3 books
False
Marginal utility is always negative
False
Marginal utility is always positive
False
Market Failure occurs when negative externalities are present, but not when positive externalities are present
False
Market Failure occurs when positive externalities are present, but not when negative externalities are present
False
Numerical utility values are relatively easy to calculate
False
Which set of conditions best describes partial equilibrium?
Firms are producing where marginal cost equals the price and households are consuming where the marginal utility per dollar spent on each good or service is equal
Total Costs =
Fixed Cost + Variable Cost
Variable Costs =
Fixed Cost - Total Cost
Average Fixed Cost =
Fixed Cost divided by Quantity
A firm's _______ are costs that are incurred even if there is not output
Fixed costs
Externality
Fritz decides to bring back fresh sauerkraut from his vacation to Germany, and the horrible stench causes many people on his return flight to become ill
Diamond-Water Paradox Explained
Goods that have a high value in use, thus higher total utility, are often priced lower than those that have a low value
Externality
Hydraulic fracturing, known as fracking, has allowed oil drillers to reach new, untapped reserves. However, it has also caused an increase in seismic activity in areas where it is done
Alsace Cellular is the first and only company to sell 3D phones, and thus can charge whatever price they like
Market Power
The possible combinations of two goods that a person can consume given her income
NEITHER total utility or marginal utility
Public Goods
National Defense
Nicole has in her possession a hockey puck from 2010 Winter Olympic Games and sells it on eBay. She will only sell the puck if the winning bid is greater than or equal to $500. After bidding closes, the last bid stands at $500
Nicole's PRODUCER surplus: $0
Average Product of Labor
Number of X produced divided by the number of workers who produced it
Which statement best summarizes the difference between partial and general equilibrium analysis?
Partial equilibrium focuses on a single market but general equilibrium considers every market simultaneously
Total Revenue =
Price X Quantity
Individual Producer Surplus =
Price received - Willingness to sell
Total Revenue =
Price x Quantity sold
The relationship between the factors of production used by a firm and the maximum output possible is called the ...
Production Function
Equation to determine quantity using budget and price
Q = Budget/Price of good EX: 240 budget/8 dollars for sushi = quantity of 30 sushi
Assume the law of diminishing marginal utility holds true for Quincy with ice cream and pretzels. He decides to eat LESS ice cream and MORE pretzels...the result is...
Quincy's marginal utility of ice cream increases, and his marginal utility of pretzels decreases
Imperfect Information
Reduced mileage on a used car's odometer
Externalities
Renovating an old house to increase its value
Accounting Profit =
Revenue - Explicit Costs (rent, equipment, and supplies)
Roy is willing to pay $2.50 for a sports drink. He notices the price is $2.79 and chooses not to purchase a sports drink
Roy's CONSUMER surplus: $0
Average (Total) Cost
TC/Q
Profit =
TR - TC
Which "law" does this illustrate?
The Law of Demand
Marginal Cost
The amount by which total cost increases when an additional unit is produced
Description of Total Utility
The amount of satisfaction that a consumer gets from consuming a bundle of goods and services
Marginal Cost is defined as...
The change in total costs from producing one more unit of output
Description of Marginal Utility
The change in utility from consuming one additional unit of a good
Marginal Utility
The extra satisfaction a person obtains from consuming one more unit of a good or service
Consumer surplus =
The maximum price a buyer is willing to pay and the market price
Market Power
The only utility company in town
If you eat a slice of pizza that gives you food poisoning, your utility will likely decrease
True
Which statement best explains the answer to the question posed above?
The ratio of the marginal utility of ball games to the price of ball games went up compared to the ratio for movies
Utility
The satisfaction experienced from consuming a good or service
Average Variable Cost
The sum of all costs that change as output changes divided by the number of units produced
Why does the total cost curve get steeper as output increase?
There are diminishing returns to labor
Average Cost (Average Total Cost)
Total Cost/Quantity
Total Cost
Total Fixed Cost + Total Variable Cost
Total Variable Cost
Total Fixed Cost - Total Cost
Average Product
Total Product divided by Number of Workers
Economic Profit =
Total Revenue (TR) - Total Cost (TC)
Profit =
Total Revenue - Total Cost
Economic Profit =
Total Revenue - Total Opportunity Cost
Average (Total) Cost
Total cost divided by quantity of output
A budget line slopes downward because to buy more of good 1, a consumer has to buy less of good 2
True
A deadweight loss means social welfare is not being maximized
True
A deadweight loss means there is a misallocation of resources
True
A deadweight loss occurs because the economy is not on the optimal point on the production possibilities frontier
True
A marginal cost curve will always intersect the average total cost curve at the minimum average total cost
True
As you move along a particular budget line, the prices faced by the consumer and the consumer's income are held constant
True
Bill's TOTAL UTILITY increases as his consumption of ice cream goes up
True
Due to satiation, Madison's MARGINAL UTILITY starts to decline as she consumes more pizza
True
Economic profit and accounting profit both make use of explicit costs
True
Producer surplus is shown graphically as the area:
above the supply curve and below the market price
What is a constant cost industry
an industry that can grow and shrink without long-run average costs being affected LRIS is a horizontal line
The law of diminishing marginal utility says that...
as a person consumes more and more of a certain good, the addition to total satisfaction decreases
while economists include
both explicit and implicit costs
Marginal Cost
change in TC/change in Q
Constant returns to scale
constant returns to scale (flat part of graphed line)
In the short run, these costs ________ as production increases
do not change
The long-run industry supply curve in a decreasing-cost industry is...
downward sloping
Market demand curve for a perfectly (or purely) competitive good
downward sloping line
Increasing-cost industries experience
external diseconomies
Decreasing-cost industries experience
external economies
Capital-intensive Technology EX
financial advice
Above ATC on a graph
firm earns a profit
Between ATC and AVC on a graph
firm incurs a loss
The point where ATC and MC intercept =
firm is making zero economic profit
Below AVC on a graph
firm shuts down
What is a Util?
it is the unit used by economists to measure RELATIVE satisfaction from the CONSUMPTION of GOODS AND SERVICES
Economic profit is typically...
lower than accounting profit
Perfect competition
many firms entry and exit is relatively easy firms sell a homogeneous product
A perfectly competitive industry is characterized by the following
many firms producing identical products with no control over the market price
This stems from the difference in how costs are calculated. Accountants will include...
only explicit costs
A perfectly-competitive firm must choose the production technology that minimizes costs. Such a production method is known as the ...
optimal method of production
Perfectly competitive firms are...
price takers, meaning that they cannot influence the market price, BUT they can sell as much as they wish at this price
When just enough firms enter the market and begin producing...
profits will be driven to zero, industry output increases, but price is the same
Labor-intensive Technology EX
shirts produced in Vietnam
The LONG RUN is best defined as a time period...
that is long enough to change all factors of production
One thing that distinguishes the short run and the long run is...
the existence of fixed costs
MC > MR
the extra cost of producing an additional unit exceeds the additional revenue; profits decline in this range as more units are produced
The marginal cost curve often decreases at first and then starts to increase. This is explained by...
the law of diminishing returns
Producer surplus is the difference between
the market price and the minimum price a seller is willing to accept
Short run supply =
the portion of MC above AVC
In the short run, perfectly (or purely) competitive firms will maximize their profit by producing...
the quantity where marginal revenue = marginal cost the quantity where price equals marginal cost
Labor-Intensive Technology EX
toys produced in China
Consumer surplus is show graphically as the area
under the demand curve and above the market price
The long-run industry supply curve in an increasing-cost industry is...
upward sloping
Shutdown price of a firm =
where AVC and MC intersect