Unit 2 Microecon.
On the graph shown, consumer surplus would be the area:
below the market demand curve and above the market price.
A linear PPC would show __________, and a PPC that is curved away from the origin would show _________
constant opportunity cost, increasing opportunity cost
During an economic slump, such as the 2008 recession, if McDonald's faces an elastic demand curve, to maintain its sales it is likely to _______ the price of its product
decrease
A deadweight loss is the _______ in social surplus that results from a market _________
decrease, distortion
A fall in the price of wheat (which is a substitute for corn) will ________ corn prices by shifting the demand curve _______
decrease, leftward
Suppose there is a product that is being sold in a perfectly competitive market. If the demand for the product decreases, producer surplus will ________ since this change results in a lower price, which means there is ______ area between the supply curve and the market price for the good.
decrease, less
According to your graph, when some sellers enterenter a competitive market, the equilibrium price _______ and the equilibrium quantity _______
decreases, increases
An individual's willingness to pay measured over different quantities of the same good define the ________. If the retail price of the good increases, the _________ will decrease, all other things constant.
demand curve, quantity demanded
One reason economists in general _________ favor protectionism is because it ______ prices for consumers and ______ social surplus.
do not, raises, lowers
In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when
each plant produces where marginal revenue equals marginal cost.
If the competitive market is Pareto efficient then, government intervention cannot be justified on ______ grounds. It could however be justified on _______ grounds.
efficiency, equity
Invisible hand _____ allocates goods and services to buyers and sellers
efficiently
Terms of trade is the ____________
exchange rate of goods for goods.
Martha runs a business that makes designer jeans. Each of the seamstresses she employs uses one of the sewing machines on the factory floor. In the short run, the seamstresses are a _______ factor of production and the sewing machines are a __________ factor of production. The output of each seamstress is considered the ______ product
variable, fixed, marginal
Efficiency
when social surplus is maximized. This is a positive concept
Consumers in a competitive market are considered to be price takers because the purchases made by each consumer ________ have an effect on the market as a whole
will not
For an individual, consumer surplus is calculated as the difference between the ________ to pay and the price actually paid for a good.
willingness
The invisible hand leads to efficient production _____ an industry
within
If a good is considered to be a luxury good, does it mean that the Law of Demand does not hold?
No, it only means that its income elasticity of demand is greater than 1.0, so the Law of Demand still holds.
Compared to the market for electric drills, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for drills than in the vintage button market. Is it then correct to assume that the outcome in the drills market is Pareto efficient while in the vintage button market it is not? Explain.
No, market size has no bearing on the attainment of Pareto efficiency.
Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain your answer.
No, these industries are declining not because of coordination problems but, rather, because of falling demand.
Assume that some of the buyers in this market are now willing to pay more for a drill than they did earlier. Does this mean that the market for drills is Pareto efficient? Explain your answer.
Yes, as long as the market equilibrium still holds, the outcome is still Pareto efficient.
Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?
Yes, but only if price stayed above average variable cost.
An increase in income shifts the budget constraint ________. The shift in income causes the budget constraint to increase ________, and the slope to _________ .
outward, by the same amount, remain the same
Short Run
period of time when some of the firms inputs cannot be changed EX: you can't buy another oven. If you're baking cakes today, you're limited by the number of ovens
Producer surplus is the difference between the ______ and the ________
price consumers pay, supply curve
All firms in a competitive market are said to be ____
price takers
_______ direct the invisible hand
prices
Complete specialization occurs when each individual, firm, or country:
produces only what it has a comparative advantage in.
The _______________ tells us how much we can produce from existing resources and technology
production possibilities curve
Candle makers in Town B do not need a license. Town B, however, has passed a new minimum wage law that increases the minimum wage that candle makers in Town B pay their workers. Assume that the candle market is perfectly competitive. i. Does this higher minimum wage shift a candle maker's short-run average fixed cost curve? ii. Does this higherr minimum wage shift a candle maker's short-run average variable cost curve? iii. Does this higher minimum wage shift a candle maker's short-run profit-maximizing choice of the number of candles to produce? With the higher minimum wage, the short-run average fixed cost curve _______ and the short-run average variable cost curve _________. The higher minimum wage _________ the short-run profit-maximizing quantity of candles to produce.
remains unchanged, shifts up decreases
If marginal cost (MC) is greater than average total cost (ATC), then ATC is ______ At this point of production the average fixed cost (AFC) would be ______
rising, falling
In the next 20 years a sizeable proportion of the U.S. labor force is expected to include many people who are above the age of 65. As a result comma the U.S. production possibilities curve would _______________
shift inward.
Every candle maker in Town A must have a license. The cost of a license is the same regardless of the number of candles a business produces. Assume that the candle market is perfectly competitive. i. Does this license shift a candle maker's short-run average fixed cost curve? ii. Does this license shift a candle maker's short-run average variable cost curve? iii. Does this license shift a candle maker's short-run profit-maximizing choice of the number of candles to produce? With the license, the short-run average fixed cost curve _____ and the short-run average variable cost curve _______ The license _______ the short-run profit-maximizing quantity of candles to produce.
shifts up, remains unchanged Does not change
A production possibilities curve (PPC) ___________.
shows the relationship between the maximum production of one good for a given level of production of another good.
Why can consumer surplus reduce?
some existing consumers no longer buy the good
Absolute Advantage
the ability of an economic agent to produce more output than another agent with the same resources
If it costs a firm $3,000 to produce 400 shirts and $6,500 to produce 900 shirts, then:
the firm is experiencing economies of scale. (3000/400=7.5) (6500/900=7.22)
In a competitive market, if economic profits exist, then:
the market supply curve will shift rightward and the price will decrease
The short-run supply curve for a perfectly competitive Firm is represented by _______
the portion of the marginal cost curve above average variable cost.
In the long run, the supply curve for a perfectly competitive firm is represented by __________.
the portion of the marginal cost curve above the average cost curve
A consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because ___________.
the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off.
Deadweight Loss
the reduction in social surplus resulting from a market intervention
The production function is:
the relationship between the quantity of inputs used and the quantity of outputs produced.
Consumer Surplus is?
the value or total benefits one receives from a good in excess of the price paid for it.
There are ______ between making the economic pie as big as possible and dividing the pieces equally
trade-offs
When optimizing, the marginal benefit a buyer gained from the last dollar spent on a sweater was $1.25, and the price of a pair of jeans was $88. The marginal benefit gained from the last dollar spent on a pair of jeans is ______.
$1.25
For 15 comma 50015,500 units of production, total variable cost is $294,500. For the 15,501st unit of production, total variable cost increases to 294,521.00. The average variable cost per unit is _______ and the marginal cost for the 15,501st unit is ________
$19 (294500/15500=19) $21 (294521-294500=21)
There are many identical firms with a simple cost structure: Total cost for Q = 0 is $6 and total cost for Q = 1 is $8. Each firm is incapable of producing anything more; in other words, total cost is infinite for any Q larger than 1. In the given scenario, the fixed cost for each firm is $____ If firms are free to enter and exit this market, the long-run price will be _____
$6 (The fixed cost equals $6 since this is the cost of producing zero output.) $2 (The marginal cost of the first unit equals $2. At any price below $2, firms will shut down and produce zero output. Therefore, in the short run, the price will be $2.) $8 (In the long run, price will be driven to the minimum ATC. In this case, the minimum ATC is given as $8 at Q = 1. So, in the long run, the price will be $8.)
Suppose Total Cost is given by the equation TC = 25 + Q2, where Q is the number of units produced and sold. This implies that Marginal Cost is MC = 2Q. In this scenario, the formula for ATC is: If the market price were $8, this firm would want to supply ___ units of output In the long run, the price will be _____
(25/Q) + Q 4 (8/4)+4= 8 $10
Three years after graduating from college, you get a promotion and a 24 percent raise. Your consumption habits change accordingly. Suppose your consumption of frozen hot dogs has reduced by 16 percent. Your income elasticity of demand is ____ thus we can say frozen hot dogs are an ____ Suppose your consumption of pork chops has increased by 20 percent. Your income elasticity of demand is ____, thus we could say pork chops are a ____ Suppose your consumption of sockeye salmon has increased by 32 percent. Your income elasticity of demand is _____, thus we could say sockeye salmon is a ____
-0.667, inferior good .833, normal good 1.33, Luxury good
Acme Supply is analyzing a Production Possibilities Curve that compares production of wrenches (x-axis) to production of pliers (y-axis). If the slope of the PPC is 4, the opportunity cost of producing pliers in terms of wrenches is ________
.25
When the price of bottled water increased from $2.50 to $3.00, the quantity supplied by a firm increased from 100 to 110 bottles The price elasticity of supply is ___ In this case, the price elasticity of supply is _______
.52 relatively inelastic
Even though the price of an acre of land increased from $6,000 to $10,000, the quantity supplied did not change. The price elasticity of supply is ____ In this case, the price elasticity of supply is _____
0 perfectly inelastic
If the percentage change in quantity demanded for a good is an increase of 25%, when the price of its complement increases by 30%, the cross-price elasticity is ____
0.83 (.25/.30=0.833333)
The factors that contribute most to comparative advantage at the country level are:
1. Natural resources 2. Stocks of human-made resources 3. Technology 4. Education, work habits, and experience of the labor force 5. Relative abundance of labor and physical capital 6. Climate
3 Important Factors of Production Table
1. Specialization- marginal product increases with first workers. Workers are more efficient when they specialize in production and work together to produce a good 2. Law of Diminishing Returns- eventually, marginal product falls. At some point each additional worker contributes less output than the worker before 3. Marginal Product can be Negative. Capital is fixed in the short run. If more and more workers keep getting added, they will get in each other's way and actually cause output to fall
You are one of 5 identical firms (i.e., you all have the same costs) that sell widgets. Each day you have a fixed cost of $9 to operate. The marginal cost of your first widget is $1; second is $2; third $3; fourth $7; and for the fifth it is $8. You have a capacity constraint of 5, and you can only produce a whole number of widgets. The average variable cost (AVC) for a firm that produces 2 widgets is $_____ The market-level quantity supplied given the market price of a widget is $2.50 is _____ Suppose the market-level demand is fixed at 18. In other words, there is perfectly inelastic demand. In the short run, the equilibrium price will be ______ If firms are perfectly competitive, the equilibrium price in the long run will be_______________
1.50 (1+2)/2 10 Widgets (Each firm will supply two widgets as the marginal cost of the third widget will be greater than the market price. Since there are 5 firms, the total market-level quantity supplied is 2 × 5 = 10 widgets) $7 (For the market supply to be 18, each firm must be willing to supply either 3 or 4 widgets. At a market price of $7, firms will be willing to supply 4 widgets as the marginal cost will be equal to the price.) $5 and the equilibrium quantity will be 3 (In the long run, price will be driven to the minimum ATC. At Q = 2, ATC is $6; at Q = 4, ATC is $5.50. Therefore, in the long run, the equilibrium price will be $5.)
Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It's the last week of July, but he is yet to meet his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks into the showroom. After taking one of the cars for a test drive, Harold decides to buy it. While $11,000 was the least that Larry would have been willing to accept for that car, he quotes a price of $19,000. After some bargaining, the car is sold for $12,000. In this case the producer surplus is _____ If the cost of the car to Larry is $11,000, his profit is $___
1000 1000
Mary saw a bangle bracelet at an accessories shop that she liked and told her friend Susan that the most she would pay for it was $39.50. When she found out the price was $20.00, she immediately bought it and gained $______ in consumer surplus. If Mary was to buy another bangle bracelet, her additional consumer surplus would ______.
19.50 Decrease
Calculate the price elasticity of supply in the following examples, then determine if supply is relatively elastic or inelastic, or perfectly elastic or inelastic. When the price of a pen increased from $2.50 to $3.00, the quantity supplied by a firm increased from 100 to 150 pens. The price elasticity of supply is ____ In this case, the price elasticity of supply is____
2.20 Relatively Elastic
Imagine you are a buyer in a double oral auction with a reservation value of $17 and there is a seller asking for $12 If you accept this offer, you will gain $_____
5
Joey goes to a supermarket to buy shorts (s) and T-shirts (t). His budget constraint is given by $20 s + $5 t = $ 60. Suppose Joey purchases only T-shirts. Given his budget constraint, the price of each T-shirts is $_______, and the maximum number of T-shirts Joey can purchase is ______.
5, 12
Fixing up old houses requires plumbing and carpentry. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber, but is not particularly good at either. He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is $100,000 per year. Jack's average total cost of fixing up two old houses is $_____ George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up eight houses per year. Each earns a wage of $100,000 per year. If George and Harriet work together and fix up eight old houses each year, their average cost is $______ This problem tells us that one of the sources of economies of scale is
50,000 25,000 Specialization
John is a soda drinker that likes both Coke and Pepsi. He usually picks whichever has the best price or is most convenient. If Pepsi is on sale for $11 a liter and Coke is charging $1.501.50 for the same, John's demand curve for Coke will experience:
A Leftward Shift (inward)
How does a consumer's budget set differ from his budget constraint? A. A budget set refers to all of the possible bundles of goods and services a consumer can purchase, while a budget constraint is limited to the bundles he can purchase using all of his income. B. A budget constraint refers to all of the possible bundles of goods and services a consumer can purchase, while a budget set is limited to the bundles he can purchase using all of his income. C. A budget set is simply the collection of the many budget constraints a consumer faces at different points in time. D. There is no difference at alllong dash—the terms "set" and "constraint" are interchangeable.
A budget set refers to all of the possible bundles of goods and services a consumer can purchase, while a budget constraint is limited to the bundles he can purchase using all of his income.
An inward shift on the budget constraint graph indicates? Whereas an outward shift on the budget constraint graph indicates? (In terms of increase/decrease in income.
A decrease in income An increase in income
An inward shift on the budget constraint graph indicates? Whereas an outward shift on the budget constraint graph indicates? (In terms of price increase/ decrease)
A price increase A price decrease
Pareto Efficiency
A situation where no one can be made better off without making someone else worse off
Combinations of apples and loaves of bread that a consumer could purchase would represent a ___________ while a ____________ represents the amount of apples and bread that a consumer could choose using his or her entire budget.
Budget Set Budget Constraint
Which of the following best describes why consumers are price takers? A. Individual transactions are too small to have much impact on the market price. B. Many individuals lack the skills to negotiate prices. C. If consumers don't pay the price asked, the store will just sell the product to someone else. D. Consumers don't know what it costs to make most products.
A. Individual transactions are too small to have much impact on the market price.
All of the following are factors that contribute to a country's comparative advantage except: A. aging population. B. climate. C. technology. D. natural resources.
A. aging population.
Constant Returns to Scale
ATC does not change as output increases Ex: If inputs double, outputs double. Why? Gains from specialization are fully realized
Economies of Scale
ATC falls as output increases EX: if inputs double, output more than doubles. Why? Large set up costs, worker specialization, etc.
Diseconomies of Scale
ATC increases as output increases Ex: if inputs double, output increases by less than double- why? Top heavy, too much management
Equity
Addresses the issue of a fair distribution of resources across society. This is a normative concept.
All else being equal, the steeper the demand curve, the _________ the social surplus in a market.
larger
A firm is experiencing economies of scale when its ______ declines as more output is produced
Average Total Cost
All of the following are factors in a firm's elasticity of supply except: A. inventories. B. market price. C. labor. D. time.
B. Market Price
Compared to the market for cars, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for cars than in the vintage button market. Using the concept of Pareto efficiency, which of the following statements is likely to be true? A. The outcome in the market for vintage buttons is Pareto efficient because it is not a perfectly competitive market. B. The outcome in the market for cars is Pareto efficient because it is a perfectly competitive market. C. The outcome in the market for cars is not Pareto efficient because it is not a perfectly competitive market. D. The outcome in the market for vintage buttons is not Pareto efficient because it is a perfectly competitive market.
B. The outcome in the market for cars is Pareto efficient because it is a perfectly competitive market.
Which of the following would maximize social surplus? A Enforce trade beyond the equilibrium quantity. B. Trade at the competitive market equilibrium. C. Set price floors above the equilibrium price. D. Restrict the quantity sold in the market below the equilibrium quantity.
B. Trade at the competitive market equilibrium.
If you were to purchase a $700 Samsung smart phone from Amazon, we could conclude all of the following, except: A. you wanted a smart phone. B. you would rather have a laptop that costs $700. C. you believed that smart phone would bring satisfaction. D. you prefer that smart phone to anything else costing $700700.
B. you would rather have a laptop that costs $700.
When the ATC curve is decreasing we know the MC curve is ____, and when the ATC curve is increasing we know the MC curve is ______
Below the ATC curve, Above the ATC Curve
In a perfectly competitive market, all of the following are true except: A. Entry into the market is unrestricted. B. The products sold are basically homogeneous. C. The market supply cannot affect the retail price. D. Sellers are price-takers.
C. The market supply cannot affect the retail price.
All of the following are issues faced by central planners in a command economy, except: A. aligning the interests of the agents. B. incentive problems. C. setting quantity targets of production. D. coordination problems.
C. setting quantity targets of production.
When faced with the option of buying one pair of boots for $60 or three sets of sandals for $20 each, Janet chose the pair of boots. The opportunity cost for the boots was: A. a pair of sandals. B. $60. C. three pairs of sandals. D. $120.
C. three pairs of sandals.
All else being equal, the steeper the supply curve, the ______ the social surplus in a market
larger
The mercantilist economic doctrine was widely followed from the sixteenth to the eighteenth centuries in Europe. Mercantilists advocated the use of tariffs to restrict trade, as they believed that countries that export more than they import will increase wealth. What could be the problem with such an economic policy?
Consumers pay a price that is higher than the world price, reducing consumer surplus.
A firm is producing goods in a market where the market price is less than the firm's average total cost but greater than its average variable cost. At this point the firm should:
Continue to operate at a loss
Jonathan works at a convenience store and makes note of changes to sales after the price of liquid soap unexpectedly increases by 10 percent. He notices that the sale of shampoo increases by 5 percent and the sale of lotion decreases by 2 percent. The cross-price elasticity of demand between liquid soap and shampoo is? Based on the cross-price elasticity of demand, we can infer that liquid soap and lotion are
Cross-Price Elasticity= Percentage Change in Quantity of Demand X --------------------------------------------- Percentage Change in Price of Good Y Shampoo(-5%) / Liquid Soap (+10%)= -0.5 Complements
In a command economy, a planning agency sets prices for various inputs and final goods. In a market economy, supply and demand decide the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than planned economies? A. The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus. B. The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change. C. The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents. D. All of the above.
D. All of the above
What could explain why South Korea's gross domestic product (GDP) per capita increased so much faster since the 1970s than North Korea's GDP per capita? A. South Korea has a market economy, while North Korea is a command economy. B. South Korea has been better able to solve the coordination and incentive problems. C. Resource allocation in South Korea is done much more efficiently than in North Korea. D.All of the above.
D. All of the above
Why is the equilibrium price in this market $40,000? A. At this price, three consumers are willing to buy an electric car and three firms are willing to sell an electric car. B. At this price, the quantity demanded (three cars) equals the quantity supplied (three cars). C. At $4040,000, three consumers have reservation values equal to or above $4040,000 and three firms have reservation values equal to or below $4040,000. D. All of the above.
D. All of the above
How do economic profits and losses allocate resources in an economy? A. When an industry's goods (or services) become more highly valued by society, positive economic profits emerge for firms in the industry, attracting new firms and their resources to that industry. B. Businesses always seek to improve their profits and in so doing, they move resources into the production of goods and services that society values the highest. C. When an industry's goods (or services) become less highly valued by society, firms in the industry suffer losses and thus become motivated to put their resources to more profitable uses elsewhere. D. All of the above.
D. All the above
Consider a good that you do not like at all, perhaps turnips. Given the market price for turnips, what would be your consumer surplus? A. Zero, unless someone actually pays you to eat them. B. Zero, since not liking turnips at all implies an unwillingness to pay anything. C. Some positive, but it will be a very small number. D. Both A and B are possible.
D. Both A and B are possible.
If you are the only buyer, and you know that the lowest ask price is $2, should you accept this offer? A. Yes, accepting an offer from any other seller will reduce your surplus. B. No, as the only buyer you can extract a lower ask price. C.Yes, since you will gain $15. D. Both A and C are correct.
D. Both A and C are correct.
Which of the following is not one of the common arguments against free trade? A. Countries with lax environmental policies allow for more pollution than those with strong environmental policies. B. A company is too weak to withstand competition from other firms and requires government protection to survive. C. Allowing countries to specialize in the production of only one good may result in the creation of banana republics. D. Firms always win at the expense of consumers. E. Fear of the effects of globalization on a nation's culture.
D. Firms always win at the expense of consumers.
All of the following are reasons for elasticity differences, except: A. available time to adjust. B. budget share spent on the good. C. closeness of substitutes. D. market demand.
D. Market Demand
Which of the following is not a source of a country's comparative advantage? A. Stocks of man-made resources B. Relative abundance of labor and capital C. Natural resourcesNatural resources. D. Quotas
D. Quotas
In which of the following scenarios would a country export a good? A. The world demand for the good is lower than the domestic demand. B. The world price for the good is below the domestic price. C. The domestic demand for the good is lower than the domestic supply. D. The domestic price for the good is below the world price.
D. The domestic price for the good is below the world price.
All of the following shift the Production Possibilities Curve outward except: A. increases in worker education. B. increases in natural resources. C. changes in productivity growth due to population growth. D. new competitors in the marketplace.
D. new competitors in the marketplace.
For an exporter under free trade, consumer surplus will ____________ compared to that in the absence of free trade.
Decrease
If your professor decided to give all students the highest grade in the class, your classmates' incentives to study would ______
Decrease
Anna Jones estimated the price elasticity of demand for new vehicles to be 0.88. If the price of cars increased by 20%, one would expect the quantity of new cars demanded to _____, by _____
Decrease, 17.6% (.88 x .2= .176)
When the price increased, imports ________ Consumer surplus _________
Decreased, Decreased
A decreasing production pattern where successive increases in inputs lead to a decrease in marginal product is called the Law of:
Diminishing Returns
A market where sellers orally state asks and buyers orally state offers is known as a:
Double oral auction
Suppose a country has 100 westerners and 100 easterners. A westerner can produce either 6 units of food or 2 units of national defense; an easterner can produce either 2 units of food or 1 unit of national defense. According to the data, __________ have a comparative advantage in the production of defense. Suppose this country has decided it wants to produce 60 units of defense. In this case, the country will have more food to consume if the __________ produced these 60 units of defense. You should have anticipated this answer because ____________. Now suppose this country institutes a draft and chooses people for the military randomly. Suppose further that it drafts 20 westerners and 20 easterners (who together will produce 60 units of defense). If the country chooses to have a military draft, it will produce _______ units of food Compare the cost in terms of foregone food production under a draft to the cost under a volunteer army where the country pays the easterners enough to persuade them to become soldiers. The cost of defense measured in terms of foregone food production is ____________ with a draft than with a volunteer army
Easterners Easterners the easterners have a comparative advantage in the production of defense. 640........ If the country uses 20 westerners and 20 easterners to produce defense, then 80 westerners and 80 easterners will be available to produce food. In this case, food production will be left 640(80×6)+(80×2)=640 units of food. Higher
What is the difference between accounting profit and economic profit?
Economic profit subtracts both explicit and implicit costs from total revenue, while accounting profit only subtracts explicit costs.
How do price elasticities of demand relate to total revenues?
Elastic (Ed>1)- Increasing price-->Decreasing Revenues; Decreasing Price--> Increasing Revenues Unitary Elastic (Ed=1)- Increasing Price--> No Change; Decreasing Price--> No Change Inelastic (Ed<1)- Increasing Price--> Increasing Revenues; Decreasing Price--> Decreasing Revenues
Nalalya consumes two goods, food and clothing. The price of food is $8, the price of clothing is $11, and her income is $ 5000$. NalalyaNalalya always spends 30 percent of her income on food regardless of the price of food, the price of clothing, or her income. What is her price elasticity of demand for food? What is her cross-price elasticity of demand for food with respect to the price of clothing? What is her income elasticity of demand for food?
Exactly 1 Exactly 0 Exactly 1
If a country had exports of $160 billion and imports of $110 billion, they would be considered a net _____
Exporter
For a consumer with a given level of income, the combinations of goods for the budget setset will be _______ than for the budget constraintconstraint.
Higher
Fixed Factor of Production
Input that cannot be changed in the short-run and that stays the same regardless if how much output is produced
How has the pattern of trade changed in the United States since 1960?
Imports have grown faster than exports, and the United States has become a net importer.
For an exporter under free trade, producer surplus will __________ compared to that in the absence of free trade.
Increase
Given that burgersburgers and fries are complementary goods, if the price of fries decreases the demand for both goods will rise. Is this an accurate statement?
It is somewhat inaccurate. The decrease in the price of friesfries will increase the quantity demanded (not the demand) for fries. It will, however, as the statement claims, increase the demand for burgers.
Salmon fishing in Alaska is a seasonal business; May through September is the best time to bait salmon and halibut. Toland Fisheries, a small commercial fishery, recorded its highest ever catch last year. They started this year's fishing season with the same number of workers and equipment. With the new season also starting well, Toland has increased hiring substantially. However, the fishery did not make any additional investment in trawlers and other fishing equipment. Other things remaining unchanged, what is likely to happen to the marginal product of each new worker in the short run? In the long run, if Toland Fisheries would like to increase the productivity of its workers, it will need to _______
It will be increasing at a decreasing rate, meaning each additional worker will have a lower marginal product of labor than the previous one hired. increase its amount of capital and equipment.
Hardware stores charge higher prices for snow shovels after a big snow storm. What role do prices play in the snow shovel market?
It would incentivize distributors to ship more snow shovels into the area to meet the increased demand
How would the introduction of legal or technical barriers to entry affect the long-run equilibrium in a perfectly competitive market?
It would reduce any downward pressure on prices from entry and allow economic profits in the long run.
How to Interpret the income elasticity of demand
Less than 0= Inferior Good Less than 1 and greater than 0= Normal Good Greater than 1= Luxury Good
What are the types of goods that are causing the shift in the balance of imports and exports in the United States?
Manufactured goods have played an important role in the shift, even though the number of manufactured goods has increased.
Which of the following describes the long-run competitive market if demand were to increase? A. Market price increases, economic profits increase, short-run market supply decreases, long-run supply settles at minimum AVC B. Market price decreases, economic profits decrease, short-run market supply increases, long-run supply settles at minimum ATC C. Market price increases, economic profits increase, short-run market supply increases, long-run supply settles at minimum ATC D. Market price decreases, economic profits decrease, short-run market supply decreases, long-run supply settles at minimum AVC
Market price increases, economic profits increase, short-run market supply increases, long-run supply settles at minimum ATC
A perfectly competitive firm will choose to shut down when the _______ intersects the marginal cost curve below the ________
Price (marginal revenue), average variable cost curve
How To Interpret the cross-price elasticity
Negative=Complement Zero=Independent Positive=Substitute
Suppose one firm accounts for 55 percent of the global market share for a product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and sellers, is this market likely to be competitive?
No, even though there are many firms in the market, there is one firm large enough to influence the market price.
In the market for sneakerssneakers, suppose Green's price elasticity of demand is 0.5, Smith's price elasticity is 1.5, and the price elasticity of all the other consumers is greater than 0.5 but less than 1.5. Could the market price elasticity be less than 0.5 or greater than 1.5?
No, it must lie between 0.5 and 1.5.
Do all consumers in a competitive market enjoy the same amount of consumer surplus?
No, since considerable variation exists among consumers in terms of tastes and incomes.
You are planning to build an apartment building. Your market research department estimates that your revenues will be $800,000. Your engineering department estimates the cost will be $600,000. You started construction and spent $200,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to $399,950. Should you complete the apartment building?
No, the remaining cost to build is $400,000 and you only expect to earn $399,950; you will ignore the $200,000 spent since it is a sunk cost.
Perfectly Elastic
Parallel Line
Long Run
Period of time when all of the firm's inputs can be changed EX: you can buy another oven, or build another kitchen
The demand curve graphs a consumers responsiveness to a change in ______. The points on the curve can be verified through ______.
Price, Marginal Analysis
Which of the following is true about how a firm in a competitive market decides what level of output to produce in order to maximize its profit? A. Produce until marginal cost is furthest above average total cost. B. Produce up to the point where price equals average total cost. C. Produce at the point where price is equal to marginal cost. D. All of the above.
Produce at the point where price is equal to marginal cost.
Is producer surplus always equal to profit?
Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve.
The goal of a business in a perfectly competitive market is to maximize:
Profits
Solutions:
Profits= Total Revenues - Total Costs Total Revenue= Profits X Quantity Total Cost= Average Total Cost X Quantity Profit= (Profit X Quantity) - (Average Total Cost X Quantity) = (Profits - Average Total Costs) X Quantity
Which of the following shows the arc elasticity method of calculating the price elasticity of demand?
Q2−Q1 __________ Q2+Q1/2 _________________ P2−P1 ________ P2+P1/2
Production Possibilities Curve
Shows the relationship between the maximum production of one good for a given level of production of another good.
Why does a demand curve with a constant slope not have a constant elasticity?
Slope is based on absolute change and elasticity is based on percentage change.
Dominic is willing to pay $12 for a single pizza; Stephany is willing to pay $7; and Tyler is willing to pay $5. There are no other potential consumers for pizza. Cheezbuzz, the supplier of pizza, has a cost of $1 for the first pizza, $2 for the second pizza, $3 for the third, $4 for the fourth, and so on. In a closed market equilibrium, the social surplus will be $____ If the world price is $10.50, a total of _____ pizzas will be exported. If the world price is $2.50, the social surplus will be $_____
Social surplus is the sum of consumer surplus and producer surplus. In this case, the social surplus will be ($12 - $1) + ($7 - $2) + ($5 - $3) = $11 + $5 + $2 = $18. If the world price is $10.50, domestic demand will be equal to 1 pizza and domestic quantity supplied will be equal to 10 pizzas. Therefore, a total of 10 - 1 = 9 pizzas will be exported. Social surplus is the sum of consumer surplus and producer surplus. In this case, if the world price is $2.50, the social surplus will be equal to ($12 - $1) + ($7 - $2) + ($5 - $2.50) = $11 + $5 + $2.50 = $18.50. An increase in social surplus occurs because a single lower cost pizza ($2.50 instead of $3.00) will now be imported instead of being produced domestically.
Why is free trade controversial?
Some individuals may lose
What is the problem with the argument that infant industries need to be protected from foreign competition?
Starting a company in isolation may deprive it of "technological spillovers" that its competitors, all located near one another, may enjoy.
If a cross-price elasticity is positive, then the two goods are ____. If the price of coffee goes up, and as such, the demand for Coffee Mate decreases, this would indicate a ______ cross-price elasticity and that the two goods are _______.
Substitutes, negative, complements.
There are winners and losers within trading states and countries. The winners from trade gain more _____ than the losers lose.
Surplus
Walmart and Target are both discount retailers. However, during the Great Recession of 2009, Target's same-store sales fell while sales at Walmart actually increased. What could potentially explain this outcome?
Target positions itself in the market as a low-cost retailer of home accessories and clothing. Walmart stocks more goods like food and health items than Target
Comparative Advantage
The ability of one economic agent to produce at a lower opportunity cost than another agent
What is the goal of the seller, and what three problems must a seller solve?
The goal of the seller is to maximize profit. In order to achieve this goal, sellers must solve 3 problems: 1. How to make the product 2. What is the cost of making the product 3. How much can the seller get foe the product in the market
Based on your understanding of how the invisible hand works, which of the following decisions is likely to correct the problem of shortages of cabs in Beijing?
The government should lift the price control imposed on the base fare of cabs.
The market for economics textbooks is in equilibrium. The government decides to imposeimpose export restrictions on paper, leading to aa decreasedecrease in the demand for paper. How does social surplus in the market for textbooks change? Why?
The social surplus increases. Producer surplus may increase or decrease Consumer surplus increases
Social Surplus
The sum of consumer and producer surplus =$___ CS + $___PS = $___ Social Surplus
According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation: They find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Government-determined gasoline prices have also increased. But the government, worried about rising prices for cab rides, has left the cabs' base fare unchanged. Which of the following statements is true of the market for cabs in Beijing?
There has been a rightward shift of the demand curve, while the supply curve has remained unchanged.
Are all efficient outcomes also equitable? Explain.
There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgments are made.
The aggregate difference between the average total cost (ATC) and average variable cost (AVC) for all units of production is the:
Total Fixed Cost
Perfectly Inelastic
Vertical Line
In a perfectly competitive market, an increase in market price shifts the marginal revenue (MR) curve _______, ________ the quantity supplied
Up, Increasing
A company pays each of its workers on a per diem basis. If another worker is hired, ________ costs will increase while ________ costs will remain the same.
Variable, Fixed
If there are no "losers" in free trade, does it matter if wages and employment fall when a country engages in free trade?
Yes, the government might not be able to effectively carry out such wealth transfers.
The price elasticity of demand shows the percentage change in the quantitypercentage change in the quantity demanded of a good due to nbspdemanded of a good due to ________ change in a good's price.
a percentage,
The International Space Station (ISS) is a habitable satellite that was launched by NASA and space agencies of other countries. In 2009, NASA was considering shutting down the ISS within the next 5 to 6 years. Among those who were opposed to this idea of de-orbiting the ISS was Senator Bill Nelson, who was quoted as saying "If we've spent a hundred billion dollars, I don't think we want to shut it down in 2015." The "hundred billion dollars" that Senator Nelson is referring to is known as __________ Given this information, the senator's comment is ______ since these types of costs ______ affect current and future decisions.
a sunk cost flawed, shouldn't
The long-run supply curve is the portion of the MC curve:
above the ATC curve.
A firm with positive _____ profits might still choose to exit an industry, while a firm with positive ______ profits would not
accounting, economic
the invisible hand efficiently allocates resources ______ industries
across
When economies open up to free trade, trading partners _________ benefit
always
A negative income elasticity would indicate ___. If your income increased 1010% and your demand for diamond jewelry increased 1515%, diamond jewelry would be considered ______.
an inferior good, a luxury good.
All of the following could cause an increase in producer surplus except: A. a shift in the market demand curve. B. a higher equilibrium price. C. a downward shift in the marginal cost curve. D. an upward shift in the marginal cost curve.
an upward shift in the marginal cost curve.
Bilateral negotiations often lead to prices that:
approach the theoretical equilibrium price.
On the Production Possibilities Curve, possible production levels are represented:
at any point on or below the curve.
Is it true that a country needs to have an absolute advantage in the production of a good in order to benefit from trade in that good? Countries that do not have an absolute advantage in the production of a good _______ benefit from a trade
can
When a country engages in free trade, the "winners" __________ compensate the losers
can
In a perfectly competitive market, a seller _____ choose to raise the price of its good since all sellers in the market produce _____, so raising the price would result in ______.
cannot, identical goods, losing all of its customers
In a ________ economy, a central authority determines the goods and services produced while a ________ economy is based on price signals and strong economic incentives.
command, market
The basis for trade is _________
comparative advantage
Specialization is based on __________, not ___________ advantage
comparative, absolute
Many service-sector jobs in the United States have moved to other countries where these jobs are done at a fraction of the cost. The outsourcing of jobs overseas is heavily debated by politicians, policymakers, and economists in the United States. In the domestic economy when outsourcing exists, prices ____________, social surplus ______________, and labor market welfare _________________ The economy as a whole benefits from outsourcing if the gain in social surplus is ___________ the losses in labor welfare.
fall, increases, decreases greater than
Suppose a market for cheap sunglasses is in a long-run competitive equilibrium and that the price is $10. Every producer of sunglasses sells 5,000 pairs. A cloudy summer decreases the demand for sunglasses, which causes the market price to change. As a consequence, in the short run, each firm sell _____ 5,000 pairs of sunglasses, and in the long run each firm will sell ______ 5,000 pairs of sunglasses
fewer than, exactly
You read a story in the newspaper about a car company that has recently been fined five billion dollars by government regulators. The fine is for past infractions that are no longer relevant to how the firm will produce cars going forward. The story contains the statement "clearly, the company will now need to raise prices in order to recover this loss." If it is impossible for the company to pay its obligations, the company should __________
file for bankruptcy
Which of the following criteria would most likely influence an optimizing buyer's purchasing decisions? A. lowest price B. lowest opportunity cost C. highest marginal benefit per dollar spent D. highest marginal benefit
highest marginal benefit per dollar spent
If the domestic price for a good is lower than the world price when a country opens itself to trade, domestic suppliers will ________ the price of the good, which in turn will ______ the domestic demand of the good
increase, decrease
A flood that destroys a great deal of the corn crop will _______ corn prices by shifting the supply curve for corn ________
increase, leftward
A change in consumer taste away from hot dogs towards corn dogs will ______ corn prices by shifting the demand curve ________
increase, rightward
An increase in the number of demanders in the corn market will ______ corn prices by shifting the demand curve for corn ______
increase, rightward
If the income elasticity of demand for a good is negativenegative, the good is
inferior
Variable Factor of Production
input that can be changed in a certain period of time and that changes in the level of output changes
In a perfectly competitive market, when firms enter and exit competitive markets:
it is a sign the market is working well
According to the principle of comparative advantage, both parties will engage in a trade if the trading price:
lies between their opportunity costs.
When a country opens itself to trade and becomes an importer of goods and services, sellers _____ and buyers ______
lose, win
National security concerns might cause a nation to:
maintain a variety of agricultural industries.
One reason a country might seek to implement protectionist policies could be to:
maintain its culture's uniqueness.
What isn't a true statement about marginal revenue in a perfectly competitive market
marginal revenue is equal to price times quantity
Equity vs Efficiency Trade-Off
markets are efficient, but don't always result in fair outcomes. In some cases, concern for equity may outweigh efficiency The government often attempts to address efficient outcomes that we many not consider to be equitable
The invisible hand directs consumers and producers to _______
maximize their surplus And leads to the highest level of social welfare
Minimum efficient scale is the lowest level of output where long-run average total cost is _______
minimized
By producing to where marginal revenue equals marginal cost, the seller is:
minimizing an existing loss
Absolute advantage is the ability of an individual, firm, or country to produce:
more of a certain good than other competing producers, given the same number of resources.
During peak demand, service-based companies using a surge-pricing model often charge more than during less busy times in order to
move the market to equilibrium
For two goods that are complementscomplements, the cross-price elasticity of demand will be
negative
An outcome is Pareto efficient if
no individual can be made better off without making someone else worse off.
Terms of trade are determined _____________
on the basis of opportunity costs.
Suppose you had to organize a double oral auction for a good that has perfectly elastic demand. Do you expect prices to approach the competitive equilibrium?
Yes, there is no reason why price in a double oral auction for a good with perfectly elastic demand would not be expected to approach the equilibrium price.
Is it possible for accounting profit to be positive and economic profit to be negative?
Yes, this could occur if explicit costs were modest and implicit costs were high. EX: If you use a diamond mine as a tourist attraction instead of using it for mining
Are there real-world markets that resemble double oral auctions?
Yes, trading on the New York Stock Exchange is very similar to a double oral auction.
The market for electric drills in a certain country is characterized by a large number of buyers. The market for drills is in equilibrium. Does this also mean that it is Pareto efficient? Explain your answer.
Yes, with the market in equilibrium, no one participant can be made better off without someone else being harmed.
