Econ 2030 exam 2

Suppose Michelle's Mitten Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing mittens is $17, average total cost is $19, and marginal revenue is $18. In the short run, Michelle should

maintain her current level of production since she is minimizing her losses.

Suppose green grocer Artie ran a 20 percent-off sale on artichokes last week and his revenues from selling artichokes increased from the previous week. It can be concluded with certainty that the demand for Artie's artichokes is _____, everything else held constant.

price elastic

supply is perfectly inelastic

sellers bear burden of tax

Who bears burden of tax

side of the market that is less sensitive (smaller elasticity)

demand is perfectly elastic

supplier bears burden of tax

Ed=1 Cause = Effect

unit elastic

Suppose Charles spends $150 each and every month on paint, no matter what the price of paint is in a particular month. From this it can be concluded with certainty that Charles' price elasticity of demand for paint is

unit elastic

Buyers will bear none of the burden of an excise tax if supply is perfectly _____.

inelastic

Ed<1 Cause > effect

inelastic

Suppose rational decision-maker Gena purchased a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $150 and Gena's reservation price for the ticket was $200. Gena's consumer surplus from this purchase was

$50

Suppose Andrea, a rational artist, recently sold her painting, City #1, for $325. Suppose further that her reservation price for selling the painting was $250. Andrea's producer surplus from this sale was

$75

Suppose Mimi's Magic Marker Company operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing magic markers is $0.20, average variable cost is $0.15, and marginal revenue is $0.25. At her current level of production, what is... a) the price of a magic marker? b) Mimi's marginal cost of producing magic markers? c) Mimi's profit from selling magic markers? Over time, what will happen to... a) the number of firms selling magic markers? b) the price of magic markers? c) the quantity of magic markers transacted in the market? d) profits of firms operating in the magic marker market?

.25 .25 .05*Q increase decrease increase decrease

Suppose, at a given point in time, Sally's Smoothie Shack operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing a smoothie is $2.90, average total cost is $4.00, and marginal cost is $3.60. At her current level of production, what is... a) Sally's average fixed cost of producing a smoothie? b) Sally's marginal revenue from selling a smoothie? c) the price of a smoothie? d) Sally's profit from selling smoothies? In the short run, will Sally's Smoothie Shack remain open or shut down?

1.10 3.60 3.60 -.40*Q stay open bc price is > AVC

Suppose Al owns a donut shop. He pays his employees $80,000 per year and his inventory costs him $20,000 per year. Prior to running the donut shop, Al worked on a television show and earned $50,000 per year. (Assume these are the only costs he faces.) The total revenue of the store per year is $180,000. What is Al's... a) explicit cost? b) implicit cost? c) accounting profit? d) economic profit?

100k 50k 80k 30k

Suppose Marcy's Medical Machines is a monopolist and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost is $2500, average fixed cost is $900, and marginal revenue is $2500. At her current level of production, what is... a) Marcy's average variable cost of producing a medical machine? b) Marcy's marginal cost of producing a medical machine? c) the price of a medical machine? d) Marcy's profit from selling medical machines? Will Marcy continue to produce medical machines in the long run?

1600 2500 >2500 >= 0 continue to produce

Suppose Danielle is considering opening her own beauty salon. She anticipates the following costs per year: Furniture: $20,000Equipment: $30,000Rent: $36,000Coloring products: $40,000Styling products: $43,000 Danielle is withdrawing $50,000 from her savings account that pays 2 percent interest per year to purchase furniture and equipment and is quitting her current job that pays $40,000. She expects that the total revenues from the new business in the first year will be $200,000. What is Danielle's... a) explicit cost? b) implicit cost? c) accounting profit? d) economic profit?

169k 41k 31k -10k

Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 1.5 and the price elasticity of supply for it is 3.5. What percentage of the tax will be borne by the buyers? What percentage of the tax will be borne by the sellers? The price buyers pay for the good after the tax is levied will be _____ than the price they paid prior to the tax. The price sellers receive for the good after the tax is levied will be _____ than the price they received prior to the tax.

70% 30% $7 higher $3 less

demand is perfectly inelastic

=0 buyers bears burden

Producer Surplus

Actual Price - Reservation Price of Sellers

Suppose pens and pencils are substitutes in consumption. Suppose further that the price of pens decreases. Everything else held constant... How will consumer surplus change in the pencil market? Producer surplus? Economic surplus?

CS - ambiguous PS - bad ES - bad

Suppose that worker productivity increases in the steel industry. Everything else held constant... How will consumer surplus change in the steel market? Producer surplus? Economic surplus?

CS - good PS- ambiguous ES- good

Which of the following is a characteristic of a perfectly competitive market?

Firms face no barriers to entering the market

For a profit-maximizing firm, the goals of an advertising campaign are to _____ demand for the company's product and make it more price _____.

Increase; inelastic

profit maximizing level of output

MR = MC

In perfect competition P =

Marginal Revenue at all levels of output

profit maximizing level of output for monopolies

P>MR=MC

Total Revenue

Price * Quantity Demanded

Economic Surplus

Reservation Price Buyers - Reservation Price Sellers

Consumer Surplus

Reservation price of buyers - Actual Price

Suppose a profit-maximizing firm is earning positive accounting profits at its current level of output. Everything else held constant, the firm's economic profits are

ambiguous

supply is perfectly elastic

buyer bears burden of tax

Suppose, at a moment in time, the price at which a monopolist is selling its output is $10 and the marginal revenue from the last unit sold is $6. Suppose further that the marginal cost of producing the last unit of output sold is $8. Everything else held constant, which of the following actions should the non-price discriminating, profit-maximizing monopolist take? Increase output and increase price. Increase output and decrease price. Decrease output and increase price. Decrease output and decrease price

decrease output and increase price

Suppose Petra's Plantain Plantation sells plantains in a perfectly competitive market. Suppose further that at her current level of production, Petra's marginal cost is $2.00 per kilo. If the market price of plantains is $1.75 per kilo, it can be concluded with certainty that Petra's economic profits are

decreasing

If there are few substitutes for gasoline, then the _____ gasoline would tend to be price _____, everything else held constant.

demand for; inelastic

Ed>1 cause < effect

elastic

Sellers will bear the entire burden of an excise tax if demand is perfectly _____

elastic

Last month Gene increased the price on all the jeans he sells at his local boutique by 15 percent. If the number of pairs of jeans that he sold decreased by 20 percent, it can be concluded with certainty that the demand for Gene's jeans is price _____ and his revenues for the month _____, everything else held constant

elastic; decreased

Answer true or false to the following statement. If a non-price discriminating monopolist is maximizing its profits, we know that it has equated its marginal cost with the market price.

false

The _____ the proportion of a consumer's budget a good makes up, everything else held constant, the more price elastic demand will be for the good.

greater

If the price a firm charges for a good is greater than its average total cost of producing it, then the firm is earning an economic profit _____ zero.

greater than

In a monopoly, price ___ marginal revenue

greater than

It can be concluded with certainty that a monopolist's economic profits will be _____ zero in the long run.

greater than or equal to

Suppose rational decision-maker Gena was considering purchasing a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $150 and Gena's reservation price for the ticket was $200. Instead of buying the Springsteen ticket, however, Gena chose to go to a free Beth Patterson concert. Everything else held constant, it can be concluded with certainty that Gena's consumer surplus from seeing Beth Patterson was

greater than or equal to $50

If a 9 percent decrease in price results in a 12 percent _____ in quantity demanded, it can be concluded with certainty that demand is _____.

increase; elastic

If a 6 percent increase in price results in a 4 percent _____ in quantity supplied, it can be concluded with certainty that supply is _____.

increase; inelastic

Suppose Petra's Plantain Plantation sells plantains in a perfectly competitive market. Suppose further that at her current level of production, Petra's marginal cost is $2.00 per kilo. If the market price of plantains is $2.25 per kilo, it can be concluded with certainty that Petra's profits are

increasing

When marginal cost is greater than the average total cost at a particular level of output, average total cost must be

increasing