TAMU Econ 202 Midterm 2 Review

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships? A) -1.6 B) -0.625 C) 0.625 D) 1.6

1.6

If 50 units are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula. A) 0.17 B) 0.62 C) 1.62 D) 5

1.62

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers? A) $100 B) $124.40 C) $220 D) $240

220

The price elasticity of the supply of teenage labor services is approximately 1.36. Suppose the minimum wage rises from $7.25 per hour to $8.75. Using the midpoint formula, calculate the approximate change in the quantity supplied of teenage labor. A) 7.3 percent B) 14.4 percent C) 25.5 percent D) There is insufficient information to answer the question.

25.5%

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean? A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent decrease in orange juice consumption. B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption. C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased. D) The demand for orange juice is 6 times more than the demand for grapefruit juice.

A 1 percent decrease in the price of grapefruit juice leads to a 6 percent decrease in orange juice consumption.

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm A) added more to total costs than it added to total revenue. B) added more to total revenue than it added to total cost. C) is maximizing marginal profit. D) has minimized its losses.

Added more to total revenue than it added to total cost.

Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem, A) an equitable solution can be reached only if property rights are assigned to the victims of pollution and not the polluters. B) an equitable solution can be reached only if property rights are assigned to polluters and not to the victims of pollution. C) an efficient solution can be reached regardless of the initial assignment of property rights. D) government intervention is necessary to reach an efficient and equitable solution.

An efficient solution can be reached regardless of the initial assignment of property rights.

If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced? A) Average cost increases as more is produced. B) Average cost will fall. C) Average cost could increase or decrease depending on what happens to variable cost. D) Average cost could increase or decrease depending on what happens to fixed cost.

Average cost will fall.

The vertical difference between the total cost and the marginal cost is equal to

Average fixed costs

Which of the following goods would have the most inelastic demand? A) ski vacations B) bread C) luxury cars D) big screen TVs

Bread

If total utility increases at a decreasing rate as a consumer consumes more coffee, then marginal utility must A) remains constant. B) increase also. C) decrease. D) be negative.

Decrease

If production displays economies of scale, the long-run average cost curve is A) above the short-run average total cost curve. B) downward-sloping. C) upward sloping. D) below the long-run marginal cost curve.

Downward Sloping

Long-run cost curves are U-shaped because A) of the law of demand. B) of the law of diminishing returns. C) of economies and diseconomies of scale. D) of the law of supply.

Economies and diseconomies of scale

If at a price of $24, Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids, the demand for her orchids is A) elastic. B) inelastic. C) unit-elastic. D) perfectly elastic.

Elastic

How can you find the total fixed cost from a graph containing the Market Rate, the Market cost, Average total cost, and Average variable cost?

Find the difference between AVC and ATC then multiply it by the equilibrium point of the MR and MC

The demand curve for an individual seller's product in perfect competition is A) the same as market demand. B) downward sloping. C) vertical. D) horizontal.

Horizontal

If you exhibit the endowment effect as a decision maker, then you are A) deciding on the basis of sunk costs. B) buying something you can't really afford because you expect to save in the future. C) ignoring non-monetary opportunity costs. D) consuming based on celebrity endorsements.

Ignoring non-monetary opportunity costs.

A firm has successfully adopted a positive technological change when A) it can produce more output using the same inputs. B) it produces less pollution in its production process. C) can pay its workers less yet increase its output. D) it sees an increase in worker productivity.

It can produce more output using the same inputs.

The demand for all carbonated beverages is likely to be ________ the demand for Dr. Pepper. A) more elastic than B) perfectly elastic compared to C) less elastic than D) perfectly inelastic compared to

Less elastic than

The demand curve on which elasticity changes at every point is given by a graph that looks like a

Linear line

If Ewan is consuming his utility maximizing bundle and the price of one good falls, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Ewan do? A) MU/P has increased and Ewan should buy more of this good. B) MU/P has increased and Ewan should buy less of this good. C) MU/P has decreased and Ewan should buy more of this good. D) MU/P has decreased and Ewan should buy less of this good.

MU/P has increased and Ewan should buy more of this good.

When does deadweight loss occur?

Marginal benefit>MargCost with no transaction Inefficiency in the market Not-producing at lowest possible cost Consuming more than socially possible

If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then A) firms are breaking even. B) new firms are attracted to the industry. C) existing firms will exit the industry. D) market supply will remain constant.

New firms are attracted to the industry.

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell A) the output where marginal revenue equals marginal cost. B) any positive output the entrepreneur decides upon because all of it can be sold. C) nothing at all; the firm shuts down. D) the output where average total cost equals price.

Nothing at all; the firm shuts down

Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption? A) public goods B) private goods C) quasi-public goods D) common resources

Public Goods

Economists argue that the level of pollution should be A) reduced completely to zero because by definition, it is a negative external effect. B) ignored because it has always been present since the beginning of history. C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. D) best determined by elected officials who can speak on behalf of the public.

Reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society.

When there few close substitutes available for a good, demand tends to be A) perfectly inelastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic.

Relatively inelastic

Which of the following is an implicit cost of production? A) interest paid on a loan to a bank B) wages paid to labor plus the cost of carrying benefits for workers C) the utility bill paid to water, electricity, and natural gas companies D) rent that could have been earned on a building owned and used by the firm

Rent that could have been earned on a building owned and used by the firm

A tragedy of the commons occurs when a resource is A) rival and excludable. B) rival and nonexcludable. C) nonrival and nonexcludable. D) nonrival and excludable.

Rival and nonexcludable

Suppose the absolute value of the price elasticity of demand for meals at Fortune Buffet House is ∞. What happens to sales revenue if the restaurant increases its price by 5 percent? A) Sales revenue falls by less than 5 percent. B) Sales revenue remains unchanged. C) Sales revenue falls by 100 percent. D) It cannot be determined without information on prices.

Sales revenue falls by 100%

Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the government imposes a price floor above the free market equilibrium price in the market for milk? A) Sales revenue falls. B) Sales revenue rises. C) Sales revenue remains unchanged. D) It cannot be determined without information on prices.

Sales revenue rises.

In the long run, a perfectly competitive market will A) produce only the quantity of output that yields a long-run profit for the typical firm. B) supply whatever amount consumers will buy at a price which earns the market an economic profit. C) supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. D) generate a long-run equilibrium where the typical firm operates at a loss.

Supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

How would you find the marginal product of an extra worker from a graph?

Take the product of that extra worker and subtract it from the product of the one before it

If a firm is in an antitrust court case being accused of monopolizing a product, the firm would hire an economist to show A) the cross-price elasticity of demand between the firm's good and another is negative. B) the cross-price elasticity of demand between the firm's good and another is positive. C) the price elasticity of demand for the firm's good is highly inelastic. D) the income elasticity of the firm's good is inferior.

The cross-price elasticity of demand between the firm's good and another is positive.

If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is A) the minimum efficient scale. B) where maximum economic profit is earned by producers. C) where firm profit is large enough to finance research and development. D) one which guarantees economic profit.

The minimum efficient scale.

Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price? A) The more elastic the supply curve, the greater the price increase. B) The more elastic the supply curve, the smaller the price decrease. C) The increase in price is not affected by the elasticity of the supply curve. D) The decrease in price will always be proportional to the magnitude of the demand shift.

The more elastic the supply curve, the smaller the price decrease.

Short run output is maximized at

The point that marginal output become negative

An individual seller in perfect competition will not sell at a price lower than the market price because A) demand for the product will exceed supply. B) the seller would start a price war. C) the seller can sell any quantity she wants at the prevailing market price. D) demand is perfectly inelastic.

The seller can sell any quantity she wants at the prevailing market price.

What happens when network externalities are present? A) The usefulness of telecommunications equipment rises. B) The usefulness of networks diminishes with the number of consumers who enter them. C) The usefulness of a product increases with the number of consumers who use it. D) The usefulness of a product decreases as the number of products rises.

The usefulness of a product increases with the number of consumers who use it.

Which of the following costs will not change as output changes? A) marginal cost B) total variable cost C) average variable cost D) average fixed cost E) total fixed cost

Total fixed cost

What shape is incremental cost on a graph?

Trapaziod

If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is A) perfectly inelastic- firm is not losing and customers by raising or lowering the price, only gaining more revenue B) perfectly elastic. C) unit-elastic. D) relatively elastic.

Unit-elastic

Which of the following is an example of a long run adjustment? A) Your university offers Saturday morning classes next fall. B) Ford Motor Company lays off 2,000 assembly line workers. C) A soybean farmer turns on the irrigation system after a month long dry spell. D) Wal-Mart builds another Supercenter.

Wal-Mart builds another Supercenter.

Consider a downward-sloping demand curve. When the price of an inferior good decreases, the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions and quantity demanded increases. D) work in opposite directions and quantity demanded decreases.

Work in opposite directions and quantity demanded increases.

In a diagram that shows the marginal product of labor on the vertical axis and labor(workers) on the horizontal axis, the marginal product curve

Would intersect the horizontal axis at a point at which the curve is at a maximum