MicroEconomics Test 1 Study

For inferior goods, demand decreases as income ______.

rise.

A progressive tax...

rises in percentage of income as income increases.

What is a short run?

Is a period in which the number of firms does not change, but each firm can adjust the output level.

What is a long run?

Is a time long enough for existing firms to alter their capacity and for new firms to enter the industry.

What happens if the price ceiling is set below the equilibrium?

It leads to shortages.

What happens when the price floor is set above equilibrium?

It leads to surpluses.

What are the four economic resources?

Land, Labor, Capital, and Entrpreneurial abilitiy.

An excise tax on a good will shift the supply curve which way?

Left, generating a higher price.

Corporation

Legal entity owned by stockholders Whose liability is limited to the value of their stock ownership.

The main difference between marginal utility and total utility is that:

Marginal utility looks at the satisfaction of an additional unit, while total utility looks at the satisfaction from the total quantity consumed.

What does it mean for the market to be in equilibrium?

Means that the amount consumers wish to purchase at this price is matched exactly by the amount producers wish to sell.

Income elasticity of demand?

Measures the percentage change in quantity demanded divided by the percentage change in income.

What does cross elasticity of demand measures?

The responsiveness of quantity demanded to changes in the price of a related good.

What effect will higher prices for cars and lower prices for omes have on the budget line?

The slope and both intercepts will change.

Both countries can gain from a trade if the exchange occurs in accordance to which principle of advantage?

Comparative

Efficiency

Deals with how well resources are used and allocated.

Average fixed costs equation

Fixed costs / Q

Jeremy's level of satisfaction from consuming the first cookie was 25 utils. The second cookie increased the level of satisfaction by 20 utils. Jeremy's total level of satisfaction after three cookies was 60. Thus, the marginal utility for the third cookie is?

15

Sunk costs

Are costs that have already been incurred and cannot be recovered. *Rational decisions about a future course of action will ignore sunk costs.*

What expression warns against incorporating sunk costs into present and future decisions?

"Don't cry over spilt milk."

A shift in the supply curve results in?

A change in one of the determinants of supply.

Movement along the supply curve results in?

A change in the price of the good.

What will cause an increase in the quantity demanded for iPhones?

A decrease in the price of iPhones

Bayram had the opportunity to choose between investments. The first investment was describing as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, which implies Bayram is subject to?

A framing bias

What is a price ceiling?

A government-set maximum price that can be charged for a product or service.

What is a price floor?

A government-set minimum price that can be charged for a product or service.

Product market

A market in which a good or service is bought and sold.

Resource market

A market in which a resource is bought and sold.

What does the market determine?

A market will determine the price at which the quantity of a product demanded is equal to the quantity supplied.

Short run

A period over which at least one factor of production is fixed, or cannot be changed.

What is utility?

A sense of pleasure, or satisfaction that comes from consumption.

Facing budget cuts, the Pentagon announced its decision to close a local army base. The congressman from the district in which the base was located argued against closing the base, saying the $1.3 billion dollars spent to build it would be wasted if it was closed. This argument is an example of?

A sunk cost fallacy

What is market period?

A time so short that output and the number of firms are fixed.

Comparative advantage

Ability to make something at a lower opportunity cost than other producers face.

Absolute advantange

Ability to make something using fewer resources than other producers use.

Allocative efficiciency

Acheived when it produces the mix of goods of services most desired by society.

The Wonderful Widget Company is trying to increase the market price. What is one strategy it can use?

Advertise or change the product to make it more desirable.

Markets

Allow buyers and sellers to transact with one another.

Positive questions

Are questions that can be answered one way or another as long as necessary information is available. (Can be proved or disproved by reference to facts) "What is"

Production efficiency

Arises when the mix of goods and services is provided at the lowest possible opportunity cost.

Law of Diminishing marginal returns

As more of a variable resource is added to a given amount of other resources marginal product eventually declines and could become negative.

The law of demand

Asserts that consumers will buy more of a product as its price falls.

Economic profit is calculated by including:

Both explicit and implicit costs. Total revenue minus explicit and implicit costs. (We say a firm is earning an economic profit if it is generating profits in excess of zero once implicit costs are factored in.)

Butter is a substitute for margarine. If the price of margarine drops, we would expect to see:

Both the price of butter and quantity of butter traded fall.

When demand is relatively inelastic, more of the burden is shifted to the ________.

Consumer

Long run

Conversely is a period sufficient for a firm to adjust all factors of production, including plant capacity. Firms can enter or exit the industry in the long run.

If elastic of demand is less than 1, then it is:

Inelastic

Equity

Deals with questions of fairness.

Gasoline is produced from crude oil Ceteris paribus, if the supply of crude oil falls, the equillibrium price of gasoline will:

Decrease and the equilibrium quantity will increase.

Normative questions

Involve societal beliefs on what actions should be taken. (Reflects an opinion, cannot be proved or disproved by reference to the facts) "What should be"

What are the determinants of Elasticity?

Demand will be relatively more elastic when: -There are more substitutes available -The good represents a larger portion of the household budget -The good is more of a luxury rather than a necessity -Time, a longer period is being considered (demand becomes more elastic over time)

Production possibilities frontier (PPF) refers to:

Depicts the set of attainable output combinations. Production levels on teh curve can be achieved with the current level of resources.

Suppose Alan collects Yankees baseball cards. He has all but one and is willing to pay a very large sum of money for it. Alan's preferences:

Do not contradict the law of diminishing marginal utility because the law deals with consumption of exactly identical items in the given period.

Short-run, Fixed costs

Do not vary with the quantity produced.

Effects of a surplus?

Downward pressure on price.

What does an outward shift of the PPF indicates?

Economic growth

If elastic of demand is greater than 1, then it is:

Elastic

Capital refers to:

Encompassing all manufactured products used to create other goods and services.

Suppose in the market for iPhones, the following two changes take place: (1) the cost of making iPhones rises and (2) customers bein to prefer Android platform smart phones over iPhones, What happens to equilibrium price and equilibrium quantity?

Equilibrium price is indeterminate and equilibrium quantity falls.

Explicit costs

Expenses paid directly to some other economic entity. On the accounting statement.

Suppose the quantity supplied of a product equals 8 and quantity demanded equals 5. The market MOST likely is:

Experiencing a surplus of this product.

Total cost is the sum of?

Fixed and variable costs. (Therefore Total costs = Fixed costs + Variable costs)

Short-run, Variable costs

Fluctuate as quantity changes.

Complement goods

Goods that are typically consumed together.

Substitute goods

Goods used in place of one another.

Prices help consumers deciede:

How much of a product to purchase, how much of a product to substitute for another, or whether to buy a certain product

Supply

How much producers are willing and able to offer for sale per period at each price, other things constant. -Entire relationship between price and quantity supplied.

Implicit costs

Include all opportunity costs of using resources that belong to the firm. A firm's opportunity cost of using its own resources or those provided by its owners. Not on the accounting statement. Without a corresponding cash payment.

Economic costs

Include both explicit and implicit costs.

Land refers to:

Includes all natural resources.

What would cause the budget line to shift outward?

Income increased

The fundamental reason why supply curves upward is because?

Increasing costs

Inferior goods, income elasticity is _______.

Negative

If the demand for iPhones rises as incomes increase, then the iPhone is an?

Normal good.

Firms

Not for profit organizations, do not pursue profit as a goal. Charitable, educational, cultural. Not included: government agencies.

Accounting profit is calculated by including:

Only explicit costs. Total revenue minus explicit costs

The Lake Wobegon effect refers to the tendency for people to think that they are above average in some capacity relative to others. The expression comes from Garrison Keillor's assertion that all the children in the fictional town of Lake Wohegon are above average. This type of thinking is an example of?

Overconfidence

Veronica is piling up debt while she is in college so that she can have the same lifestyle as her friends. She knows that she wil have to pay off her debt in the future, but she isn't worried because the time of repayment is so far off. veronica's situation is an example of?

Overvaluing the present relative to the future

What is price elasticity of demand equal to?

Percentage change in quantity demanded Divided by the Percentage change in price.

How is price elasticity of supply measured?

Percentage change in quantity supplied DIVIDED by the percentage change in price.

Normal goods, income elasticity is _______.

Positive

Total revenue = ?

Price x Quantity

What are the determinants of Supply?

Production technology, costs of resources, prices of other commodities, future expectations, number of sellers, taxes and subsidies.

Effects of a shortage?

Puts an upward pressure on price.

Price elasticity of supply is the responsiveness to what?

Quantity supplied to changes in price.

Long-run average total costs

Represents the lowest unit cost at which any specific output can be produced in the long run, when a firm is able to adjust the size of its plant.

For normal goods, demand increases as incomes ______.

Rise

If both demand and supply decrease, but the decrease in supply greater than the decrease in demand, then the equilibrium __________ price and equilibrium output _____________.

Rises; falls

What is a perfectly elastic supply?

Shows as a horizontal line in the Constant elasticity supply curve. Any price decrease drops quantity supplied to zero. (Generic cheese sandwich)

What is a perfectly inelastic supply?

Shows as a verticale line in the Constant elasticity supply curve A price change has no effect on quantity supplied. (Picasso painting) Goods in fixed supply

Sole proprietorship

Single owner has the right to all profits. Bears unlimited liability for the firm's losses and debts.

Determinants of Demand

Tastes and preferences, Income, Prices of related goods, Number of buyers, Future expectations

The law of supply states:

That higher prices will lead producers to fofer more of their goods and services for sale during a given period.

What is marginal utility?

The additional satisfaction derived from consuming further unit of a good or service.

Marginal product

The change in output resulting from a one-unit increase in the amount of labor input. (ΔQ/ ΔL).

When supply is perfectly elastic, all of the tax burden is shifted to who?

The consumer

What are some determinants of supply?

The cost of resources, Prices of other commodities, Taxes and subsides

If bagels and doughnuts are substitute goods, then what will likely occur if the price of bagels is reduced?

The demand curve for doughnuts will shift to the left.

What is a producer surplus?

The difference between the actual price and the minimum price the firm requires in order to supply the good.

What is Consumer surplus?

The difference between the amount a consumer would be willing to pay and the actual price.

What does the downward slope of the PPF reflects?

The existence of opportunity costs.

Law of comparative advantage

The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good.

What is deadweight loss?

The inefficiency that results from markets not operating at equilibrium.

Increasing marginal returns

The marginal product of a variable resource increases as each additional unit of that resource is employed.

Carla purchased cupcakes and milk until the marginal utility per dollar was equal for both goods. If the price of the cupcakes was $3 and the price of milk was $1.50 then?

The marginal utility of cupcakes is two times the marginal utility of milk.

What is the law of diminishing marginal utility?

The more of a good consumed the smaller the increase in total utility. Marginal utility from each additional unit, declines as more is consumed.

Production

The process of turning inputs into outputs.

A relatively inelastic supply generates a higher tax burden for who?

The producers

Demand

The quantity consumers are willing and able to buy at each price during a given time period, other things constant. -Entire relationship between price and quantity demanded

What is Elasticity?

The term economists use to measure the responsiveness of one variable to change in another.

What is total utility?

The total amount of satisfaction a person receives from consuming a given quantity of goods and services.

Suppose the price of a taco is $1 and the price of a soft drink is $2. If Mehmet has $5, then he can buy:

Three tacos and one soft drink

Labor refers to:

To the mental and physical abilities of the workforce.

Average total cost equation

Total costs / Q

Average product

Total output divided by the amount of labor (Q / L )

Partnerships

Two or more owners share the profits. Bear unlimited liability for the firm's losses and debts.

If elastic of demand is equal to 1, then it is:

Unitary Elastic

Average variable cost equation

Variable Costs / Q

What must each society must answer?

What goods and services are to be produced? How are these goods and services to be produced? Who will receive these goods and services?

When does a surplus occurs?

When the price is above market equilibrium, and quantity supplied exceeds quantity demanded.

When does a shortage occurs?

When the price is below market equilibrium, and quantity demanded exceeds quantity supplied.

Mehmet and Senra went to a movie. They were both bored with the movie, and Senra wanted to leave. Mehmet didn't want to leave because they had paid so much for their tickets, which would be wasted if they left before the movie was over. What psychological factor associated with behavioral economics explains Mehmet's behavior?

a sunk cost fallacy

People contribute to disaster relief even when they do not know anyone who has been affected by the disaster. What psychological factor associated with behavioral economics explains this behavior?

altruism

Short-run costs are:

either fixed or variable

A regressive tax...

falls in percentage of income as income increases.

A flat tax...

is a constant proportion of one's income.

A lump-sum tax...

is a fixed amount of tax regardless of income.

Firms plan for the ______ run, but firms produce in the _____ run.

long , short

If television sellers expect the prices of televisions to fall in the future, we are likely to see the price:

of televisions to fall and quantity of televisions to rise.

Economics is Best defined as the study of how

people make rational decisions.

Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we would expect the:

supply of flour to be decrease.

An increase in the cost of coffee beans, which is used to make coffee will cause the _____________ for coffee to shift _______________.

supply; left

A consumer is in equilibrium when?

the addition to total utility per dollar is the same for every commodity.

Entrepreneurial ability refers to:

the skill involved in combining these other resources into products that consumers value.

Macroeconomics is concerned with issues such as:

unemployment

Tena has $50 per week to spend on lunches. Egg rolls cost $2 each and a plate of chow mein costs $7. Tena wants to buy five plates of chow mein and ten egg rolls per week.

unobtainable

Because of scarcity

we face tradeoffs in nearly every choice we make.