CD Microeconomics Exam 2

I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can openers was

$2.43

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

3.0

The most common pattern for marginal utility is ____________________. A. diminishing marginal utility B. a budget constraint model C. a long-term perspective theoretical model D. substitute consumption

A. diminishing marginal utility

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit. A. diminishing marginal utility B. marginal utility pattern C. marginal income utility D. decreasing marginal utility

A. diminishing marginal utility

When economists attempt to predict the spending patterns of U.S. households, they will typically view the _____________________ as a primary determining factor that influences the individual consumption choices that each will make. A. income level of each household B. national average spending level C. national average savings level D. nation's perennial political debate

A. income level of each household

The government distributes food stamps that can only be used to acquire food to low-income families. The budget line graph will show food on the horizontal axis and everything else on the vertical axis. After receiving food stamps, Ted's family is able to consume the same amount of food. The new consumption point for Ted's family will be: A. on the new budget line, directly above the old consumption point. B. on the new budget line, above and to the right of the old consumption point. C. on the new budget line, directly to the right of the old consumption point. D. remain precisely the same as the old consumption point.

A. on the new budget line, directly above the old consumption point.

Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found? A. the marginal utility per dollar is the same for both goods B. the marginal utility per dollar is controlled by trade-offs C. the quantities demanded change so total utility rises D. the demand curves are flatter reducing quantity

A. the marginal utility per dollar is the same for both goods

The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises, A. total utility rises, but marginal utility falls. B. marginal utility increases. C. total utility decreases, but marginal utility rises. D. total utility decreases.

A. total utility rises, but marginal utility falls.

The marginal utility of two goods changes ______________. A. with the quantities consumed B. for the better, if taxes are imposed C. if they are intertemporal choices D. if the mother controls the household budget

A. with the quantities consumed

Jed's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Jed knows that 2 pizzas and 4 burgers will give him a utility of 8. At his utility-maximizing point, Jed's utility is: A. 4 B. 8 C. 6 D. 10

B. 8

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost: A. $50 B. $25 C. $100 D. $150

A. $50

Rick eats only french fries and burgers at his office cafeteria. His weekly lunch budget is $48. Each burger costs $6 and each order of fries costs $3. When deciding how much of each good to buy, Rick knows that 2 burgers and 4 orders of french fries will give him a utility of 8. At his utility-maximizing point, Rick's utility is: A. 32 B. 48 C. 40 D. 24

A. 32

The government wants to make medicare benefits available to more people, but to achieve this goal, it needs to make cuts in the existing medicare budget. The two areas where they are considering cuts are non-essential elective surgery and 6-12 month mental health care programs. Applying the concept of diminishing marginal utility, the budget cuts should be made for spending on: A. mental health therapy due to its higher marginal return rate. B. elective surgery due to its lower marginal return rate. C. both programs, which have the same marginal return rate. D. neither can be compared by measuring marginal utility.

B. elective surgery due to its lower marginal return rate.

Even with wage increases, the supply curve of labor is most often inelastic for which of the following? A. part-time workers B. full-time workers C. lawyers D. massage therapists

B. full-time workers

Saving money is a(n) ____________________, because it involves less consumption in the present, but the ability to consume more in the future. A. budget constraint B. intertemporal choice C. risk premium D. opportunity cost

B. intertemporal choice

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she: A. is decreasing utility. B. is maximizing utility. C. likely has negative savings. D. must reduce the quantity.

B. is maximizing utility.

The term _________________ refers to the additional utility provided by one additional unit of consumption. A. utility B. marginal utility C. added utility D. Giffen utility

B. marginal utility

The step-by-step process of finding the choice with highest total utility involves a comparison of the: A. budget constraint and low-income housing expenses. B. marginal utility gained and lost from different choices along the budget constraint. C. household consumption choice budget and the labor-leisure budget using an utilimometer. D. various categories of economic proverbial wisdom.

B. marginal utility gained and lost from different choices along the budget constraint.

A decrease in consumer preference for a product, other things being equal, will cause: A. a decrease in supply. B. market demand to shift to the left. C. market demand to shift to the right. D. quantity demanded is not a price function.

B. market demand to shift to the left.

Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses? A. one-fourth B. one-third C. one-quarter D. two-thirds

B. one-third

As a general rule, utility-maximizing choices between consumption goods occur where the: A. rise in income has created the greatest utility. B. price ratio and marginal utilities ratio of two goods is equal. C. higher-income households have the greatest satisfaction. D. constraints on budget expenditures has fallen substantially.

B. price ratio and marginal utilities ratio of two goods is equal.

The ________________ arises when a price changes because consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price. A. income effect B. substitution effect C. backward-bending supply curve D. preferences effect

B. substitution effect

The theoretical model of the intertemporal budget constraint for the U.S. economy as a whole suggests that the most common pattern seems to be that: A. the quantity of savings automatically adjusts to changes in the rate of return. B. the quantity of savings doesn't adjust much to changes in the rate of return. C. the result of a higher rate of return is a higher quantity of saving. D. the result of a lower rate of return is a lower quantity of saving.

B. the quantity of savings doesn't adjust much to changes in the rate of return.

In microeconomic terms, the ability of a good or a service to satisfy wants is called: A. opportunity cost. B. utility. C. utility maximization. D. profit potential.

B. utility.

For lunch, Maria eats only salads or vegetarian burgers. Her weekly food budget is $36. Each salad costs $6 and each vegetarian burger costs $3. When deciding how much of each good to buy, Maria knows that 2 salads and 4 vegetarian burgers will give her a utility of 8. Maria's utility-maximizing point is: A. 6 salads, 1 vegetarian burger B. 4 salads, 6 vegetarian burgers C. 3 salads, 6 vegetarian burgers D. 2 salads, 8 vegetarian burgers

C. 3 salads, 6 vegetarian burgers

How does the U.S. Bureau of Labor Statistics gather information with regard to the typical consumption choices of Americans? A. Consumer Spending Survey B. Consumer Income Budget Survey C. Consumer Expenditure Survey D. Consumer Income Survey

C. Consumer Expenditure Survey

Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes. A. one budget constraint theory; unrealistic possibilities B. a systematic way of thinking; misguided conclusions C. two budget constraint theories; misguided possibilities D. systematic consumption choices; unrealistic conclusions

B. a systematic way of thinking; misguided conclusions

In the U.S., the amount in savings contributed to IRAs rose from $239 billion in 1992 to $3,667 billion by 2005, while overall savings actually dropped from low to lower. Evidence suggests that, in the economy as a whole, increased savings in these retirement accounts: A. are the negative result of a change in wage levels and a higher work effort. B. the result of personal preferences and intertemporal budget constraints. C. are being offset by negative savings or less savings in other kinds of accounts. D. the result of a higher interest rates and preferences about present consumption.

C. are being offset by negative savings or less savings in other kinds of accounts.

Marginal utility can: A. be positive or negative, but not zero B. decrease, but not become negative C. be positive, negative, or zero D. increase positively, but not negatively

C. be positive, negative, or zero

An inferior good is a product: A. for which demand increases as income increases. B. for which there is no demand. C. for which demand decreases as income increases. D. that has an upward sloping demand curve.

C. for which demand decreases as income increases.

The term _____________ describes a situation where a ________________ causes a reduction in the buying power of income, even though actual income has not changed. A. substitution effect; lower price B. intertemporal budget; higher price C. income effect; higher price D. intertemporal budget; lower price

C. income effect; higher price

The key assumption that accompanies the use of numbers for measuring utility is that: A. utility cannot be measured by an outside party. B. utility can be perfectly measured. C. individuals choose based on their preferences. D. people make consumption decisions.

C. individuals choose based on their preferences.

The _________________ budget constraint shows the tradeoff between present and future consumption. A. inflation B. utility-maximizing C. intertemporal choice D. time-value of money

C. intertemporal choice

In terms of microeconomic analysis, what is the function of "utils"? A. a form of budget constraint B. applies to changes in income C. a measurement of utility D. relates to a consumers original choice

C. a measurement of utility

For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48. Each salad costs $6 and each smoothie costs $3. When deciding how much of each good to buy, Wendy knows that 2 salads and 4 smoothies will give her a utility of 8. What is Wendy's utility-maximizing point? A. 1 salad, 14 smoothies B. 6 salads, 4 smoothies C. 5 salads, 6 smoothies D. 4 salads, 8 smoothies

D. 4 salads, 8 smoothies

Todd is a cattle rancher. In June and July he spent his clothing budget on jeans and cowboy hats. Each pair of jeans cost $50 and each hat cost $100. At Todd's optimal choice, his marginal utility from the last pair of jeans purchased is 200. This means that his marginal utility from the last cowboy hat purchased is: A. 550 B. 500 C. 450 D. 400

D. 400

Substitution and income effects of a change in price of a good may be used to explain the: A. direct relationship between price and quantity purchased. B. inverse relationship between price and quantity demanded. C. direct relationship between price and quantity supplied. D. direct relationship between income and demand.

D. direct relationship between income and demand.

Which of the following is most likely to cause variation in American household spending patterns? A. differing levels of family income B. geographical location of households C. each household's personal preferences D. each of the above will cause a variation

D. each of the above will cause a variation

Approximately what portion of annual consumption is typically spent by American households on shelter? A. one-fourth B. one-half C. one-quarter D. one-third

D. one-third

During a severe recession, the government issued food stamps that could only be used to acquire food to a greater number of families. The budget line graph shows food on the horizontal axis and everything else on the vertical axis. The government expects that issuing the food stamps will cause each family's budget constraint line to: A. pivot out along the horizontal axis. B. pivot out along the vertical axis. C. shift to the left. D. shift to the right.

D. shift to the right.

Which of the following occurs simultaneously with an income effect? A. backward-bending supply curve B. Giffen good effect C. preferences effect D. substitution effect

D. substitution effect

Economists are able to determine total utility by: A. multiplying the marginal utility of the first unit consumed by the number of units consumed. B. multiplying the marginal utility of the last unit consumed by the number of units consumed. C. multiplying the marginal utility of the last unit consumed by the unit price. D. summing up the marginal utilities of each unit consumed.

D. summing up the marginal utilities of each unit consumed.

____________________________ occur when the marginal gain in output diminishes as each additional unit of input is added.

Diminishing marginal returns

__________ is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price).

Elasticity

______________ include all of the costs of production that increase with the quantity produced.

Variable costs

In economics, a firm that faces no competitors is referred to as _________________.

a monopoly

A situation known as _____________________ occurs when all production inputs are allowed to expand, but that expansion does not result in much of a change in the average cost of production.

constant returns to scale

When demand is inelastic:

consumers are not very responsive to changes in price.

The ______________ of all firms can be broken down into some common underlying patterns.

cost structure

Which of the following falls outside of the classification of business expenses that fall into the category of fixed costs?

costs incurred in the act of producing

Which of the following falls outside of the classification of business expenditures that fall into the category of variable costs?

costs of research and development

In order to determine ____________, the firm's total costs must be divided by the quantity of its output.

average cost

The _____________________ curve will always lie below the curve for average cost because average cost includes _____________ in the numerator of the calculation.

average variable cost; fixed costs

In order to reduce the harmful affects of recession and carbon emissions, the government provided tax incentives for manufacturing firm's to ___________________ that provide alternative, more efficient methods of combining inputs to produce output.

acquire energy efficient production technologies

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises.

decreasing returns to scale

In microeconomics, the term ___________________ is synonymous with decreasing returns of scale.

diseconomies of scale

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

According to the definition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will

do so regardless of what type of competition exists in a market.

The term __________________ describes a situation where the quantity of output rises, but the average cost of production falls.

economies of scale

In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity.

either total cost or variable cost

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

elastic

Supply is said to be ____________ when the quantity supplied is very responsive to changes in price.

elastic

When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as ____________.

elastic

Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.

elastic

If the supply curve for a product is horizontal, then the elasticity of supply is:

equal to infinity.

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:

fall and the equilibrium quantity to stay the same.

A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production.

fixed costs; do not change,

Economies of scale may arise from all but one of the following. Which one is it?

government economic subsidies protect firms from competition to avoid losses

A perfectly elastic supply curve is:

horizontal.

The longer the time period considered, the more the elasticity of supply tends to:

increase

If the demand curve is perfectly elastic, then an increase in supply will:

increase the quantity exchanged but result in no change in the price.

In microeconomics, the term _____________________ is synonymous with economies of scale.

increasing returns to scale

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:

increasing the price of game tickets because demand is inelastic.

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.

inelastic

The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be __________.

inelastic

When economists are sketching examples of demand and supply, it is common to sketch a demand or supply curve that is close to vertical, and then to refer to that curve as _________.

inelastic

Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.

inelastic; elastic

A demand or supply curve with ______________ would be horizontal in appearance.

infinite elasticity

The economies-of-scale curve is a long-run average cost curve, because

it allows all factors of production to change.

If the firm produces 5 units (quantity) that it sells at a price of $20.00 each, what will its profits or losses equal?

losses equal $55

The term _____________ is used to describe the additional cost of producing one more unit.

marginal cost

If cola and iced tea are good substitutes for consumers, then it is likely that:

their cross price elasticities are greater than zero.

Fixed costs are important because, at least in the ___________, the firm _______________.

short run; cannot alter them

Whatever the firm's quantity of production, _____________ must exceed total costs if it is to earn a profit.

total revenue

_____________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.

total revenue

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:

stay the same and the equilibrium quantity to fall.

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:

total revenue will decrease.

Which of the following should typically be ignored because spending has already been made and cannot be changed?

sunk costs

Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.

unit elastic

If a paper mill shuts down its operations for three months so that it produces nothing, its __________________ will be reduced to zero?

variable costs

The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______ change in price.

percentage; percentage

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

physical space for the gallery

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

price

Why would labor be treated as a variable cost?

producing larger quantities of a good or service generally requires more workers

The price elasticity of demand measures the:

responsiveness of quantity demanded to a change in price.

Price elasticity of demand is defined as:

the percentage change in quantity demanded divided by the percentage change in price.

In order to determine the average variable cost, the firm's variable costs are divided by _______________________.

the quantity of output

________________________ arises where many firms are competing in a market to sell similar but differentiated products.

Monopolistic competition

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

Total costs

Josh's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Josh knows that 2 pizzas and 4 burgers will give him a utility of 8. What is Josh's utility-maximizing point? A. 0 pizzas, 8 burgers B. 3 pizzas, 2 burgers C. 2 pizzas, 4 burgers D. 4 pizzas, 1 burger

C. 2 pizzas, 4 burgers

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

rise and the equilibrium quantity to stay the same.