MICROECONOMICS MIDTERM REVIEW

Assume that Destiny has $40 in income, the price of a loaf of bread is $2.00, and the price of a jar of peanut butter is $4.00. Destiny can buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

20; 10

If bagels and cereal are substitutes, then the cross-price elasticity of demand between bagels and cereal will be

greater than zero.

One implication of the shape of the demand curve facing a perfectly competitive firm is that

if the firm increases its price above the market price, it will earn zero revenue.

All else equal, the price elasticity of demand for a good tends to be lower

if the good has few close substitutes.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. (Refer to chart) When the firm uses 9 employee-hours per day, its total variable cost each day is

$126

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. (Refer to chart) The benefit John receives from his first hour cleaning windows is

$14.

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. (Refer to chart) Given the information in the table above, what is the call center's marginal cost when it goes from making 6 calls an hour to making 16 calls an hour?

$2

Refer to the accompanying figure. At a price of $2, the total expenditure on lattes each hour equals

$60.

A demand curve that is drawn as a vertical line has a price elasticity of demand equal to

0.

Refer to the accompanying table. As the firm increases the number of employees each day from 1 to 2, output increases by

33 units.

Refer to the accompanying figure. The total utility of consuming 4 pizzas a week is

90.

Which of the following statements is true for both Microsoft and a locally owned restaurant?

Both seek to maximize profits.

All else equal, the price elasticity of demand tends to be higher when

a good has many substitutes.

The short run is best defined as

a period of time sufficiently short that at least one factor of production is fixed.

If the absolute value of the price elasticity of demand for cell phone service is 3, then if the price of cell phone service increases by 1 percent, quantity demanded would

decrease by 3 percent.

As Lynn eats more pizza, we would typically expect her marginal utility from eating pizza to

decrease.

For Michael, the first cup of coffee he drinks every morning is heavenly. The second one is pretty good, but not as good as the first, and if he drinks a third cup he feels jittery and sick. For Michael, the marginal utility from drinking a cup of coffee is clearly

decreasing.

According to the law of demand, when the price of shoes ______, people will consume ______ shoes.

falls; more

If demand is ______ with respect to price, a price increase will ______ total revenue.

inelastic; increase

If the demand for salad dressing increases when the price of lettuce decreases, the cross-price elasticity of demand between salad dressing and lettuce will be ______ because these two goods are ______.

negative; complements

A seller's supply curve shows the seller's

opportunity cost of producing an additional unit of output at each quantity.

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic.

Total revenue minus both explicit and implicit costs defines a firm's

profit.

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______.

profit; $170

If the demand for electricity is inelastic, and the local utility wants to increase its total revenue, it should _______ its price.

raise

Suppose that each week Henry buys 12 peaches and 3 apples at his local farmer's market. Both kinds of fruit cost $1 each. From this we can infer that

if Henry is maximizing his utility, then his marginal utility from the 12th peach he buys must equal his marginal utility from the 3rd apple he buys.

Refer to the accompanying figure. The marginal utility of the 7th pizza is

−5.

Refer to the accompanying graph. What is the price elasticity of demand when the price of rice is $3 per pound?

0.5

If the quantity demanded of a good is Q when the price for the good is P, the price elasticity of demand for that good at that point is

(P/Q) × (1/slope).

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. (Refer to chart) Should John spend a third hour cleaning windows?

No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7.

Suppose a profit-maximizing firm in a perfectly competitive market is collecting $1,999 in total revenues. If the total cost of its fixed factors of production falls from $500 to $400, the firm will

earn greater profits or smaller losses.

The accompanying graph depicts demand. At point A, demand is

elastic.

Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should:

purchase less than 20 units of good X and more than 25 units of good Y.

Taking a limousine to a five-star restaurant in New York is a

want to both Joe Average and Richie Rich.