Econ Exam 2
Which of the following is the most likely to be a variable factor of production at a university?
The number of librarians
KAHOOT: Suppose that total expenditures for coffee reach a max at a price of $5/pound. At this price, the demand for coffee is
Unit Elastic
To produce 150 units of output, a firm must use 3 employee-hours. To produce 300 units of output, the firm must use 8 employee-hours. Apparently, the firm is:
experiencing diminishing returns
Individual supply curves generally slope ______ because ______.
upward; of increasing opportunity costs
Variable Costs
vary with how they're produced; ex. ingredients, labor (hourly wage)
Fixed Costs
the type of cost that is unrelated to how much you produce; independent
Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this year, Casey did not plant any vegetables and went to work at a bank instead. If Casey's decision to change careers did not affect the price of vegetables at the farmers market, then this suggests that:
the market for vegetables is perfectly competitive
In general, when the price of a variable factor of production increases:
the profit-maximizing level of output falls
One reason that variable factors of production tend to show diminishing returns in the short run is that:
there is only so much that can be produced using additional variable inputs when some factors of production are fixed
Refer to the figure below. If the price of a latte increases from $2.00 to $2.50: (image in camera roll; HW 4 Question 15).
total expenditure would decrease
Individual supply curves generally slope ______ because ______.
upward; of increasing opportunity costs.
Income Elasticity of Demand Rules
-Between 0 and 1 is a necessity. -Anything greater than 1 is a luxury.
Cross-Price Elasticity of Demand Rules
-If positive, then the two goods are substitutes. -If negative, then the two goods are complements.
Competitive Market characteristics:
-In a competitive market, there are so many producers; one single producer is insignificant in terms of the whole market. -Their MR is identical to the market price, because they don't need to lower their prices in order to sell more. - Producers in a competitive market are producing and selling identical products.
What determines the price elasticity of supply?
-time -suppliers -ability to apply inputs
Price Elasticity of Supply Rules
0-1: Inelastic Supply (steep curve). 1-∞: Elastic Supply (flat curve) 1: Unit Elastic 0: Perfectly Inelastic Supply (vertical)
When the price of hot dogs is $1.50 each, 500 hot dogs are sold every day. After the price falls to $1.35 each, 510 hot dogs are sold every day. At the original price, what is the price elasticity of demand for hot dogs?
0.2
If the absolute value of slope of the demand curve is 2.5, price is $6 per unit, and the quantity demanded is 8 units, then the price elasticity of demand is:
0.3
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: (image in camera roll; HW 4 Question 25). How many hours a day should John spend cleaning windows?
2
HW 5 Question 1 continued; What is the profit-maximizing quantity of bats? b. What would be the profit-maximizing number of bats if the firm's fixed cost were not $60 per day but only $30?
20 bats; b. 20 bats
HW 5 Question 2 Continued: What is the profit-maximizing quantity of bats? b. What would be the profit-maximizing number of bats if the firm's fixed cost were not $60 per day but only $30?
25 bats; b. 25 bats
If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to:
3
The figure below shows a single consumer's demand for ice cream at the student union. (image in camera roll; HW 4 Question 1) During a regular semester, there are 500 students on campus. Each student's weekly demand for ice cream is shown above. When the price of ice cream is $2.00 per scoop, those 500 students purchase a total of _____ scoops per week from the student union.
3,000
The percentage change in quantity demanded that results from a 1 percent change in price is known as the:
price elasticity of demand
Inferior Goods
products whose income elasticity of demand is negative
Normal Goods
products whose income elasticity of demand is positive
Total revenue minus both explicit and implicit costs defines a firm's:
profit
Price Elasticity of Demand rules
0: perfectly inelastic 0-1: inelastic 1: unit elastic >1: elastic
Refer to the figure below. If Mallory and Rick are the only two consumers in this market, then the market demand for soda will be 90 cans per month when the price of a can of soda is: (image in camera roll; HW 4 Question 3).
$0.50
The figure below shows a single consumer's demand for ice cream at the student union. (image in camera roll; HW 4 Question 2). The student union sells a total of 7,200 scoops of ice cream each week at a price of $2.00 per scoop. If every student who buys ice cream has the demand curve shown above, then there must be ______ students purchasing ice cream each week.
1,200
In which of the following markets do firms sell the same standardized product?
2% milk
HW 5 Question 3 Continued: What is the profit-maximizing quantity of bats? b. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $10 per day on the company? (Hint: Think of this tax as equivalent to a $10 increase in fixed cost.): c. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $2 per bat instead of the $10 tax of part b)? (Hint: Think of this tax as a $2 per bat increase in the firm's marginal cost.):
20 bats; b. 20 bats; c. 15 bats
Suppose that at a price of 25 cents per orange, 500 consumers each demand 4 oranges, and at a price of 20 cents per orange, 750 consumers each demand 5 oranges. Therefore, the market demand for oranges is ______ at a price of 25 cents per orange and ______ at a price of 20 cents per orange.
2000; 3750
Refer to the figure below. If Laura and Chris are the only two consumers in this market then at a price of $2.50 per pound, the market demand for hamburger is: (image in camera roll; HW 3 Question 6)
4.5 pounds per week
KAHOOT: Which of the following is not a demand elasticity?
Inferior elasticity of demand
Why is price elasticity of demand important?
It is important because you want to tie elasticity with revenue. If you are a seller, how do you get revenue up?
Which of the following is NOT true of a perfectly competitive firm?
It seeks to maximize revenue
Refer to the figure below. At P = 4, how does the price elasticity of demand for D1 compare to that for D2? (image in camera roll; HW 4 Question 12).
It will be lower for D1 than D2
How would each of the following affect the U.S. market supply curve for corn? a. The government taxes sodas sweetened with high-fructose corn syrup. b. The opportunity cost of farmer's time increases. c. Scientists discover that corn consumption improves performance on standardized tests.
a. The market supply curve would not shift. b. The market supply curve would shift to the left. c. The market supply curve would not shift.
Refer to the figure below. If Mallory and Rick are the only two consumers in this market and the price of soda increases from $0.75 to $1.00 per can, the quantity of soda demanded in the market will ______ by ______ cans per month. (image in camera roll; HW 4 Question 4)
decrease; 40
Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. The lemonade market in Jenny's neighborhood is more likely to be perfectly competitive if:
each lemonade stand sells the same kind of lemonade
Suppose a profit-maximizing firm in a perfectly competitive market is earning an economic profit of $1,345. If the firm's fixed cost increases from $200 to $300, the firm will:
earn a smaller profit
If the absolute value of the slope of the demand curve is 0.25, price is $8 per unit, and quantity demanded is 12 units, then demand for this good is:
elastic
Suppose the market for shoes consists of three consumers. The table below shows the quantity demanded at various prices for each consumer: (table in camera roll; HW 3 Question 5). The data suggests that Leigh:
has a greater demand for shoes than either Pat or Chris do.
Pepsi One is a close substitute for Diet Coke. When Pepsi introduced Pepsi One, the price elasticity of demand for Diet Coke ______ and Coke's ability to raise revenues through price increases ______.
increased; was reduced
If demand is ______ with respect to price, a price increase will ______ total revenue.
inelastic; increase
KAHOOT: If demand is ________ with respect to price, a price increase will _______ total revenue
inelastic; increase
Suppose you learn that in 1900, households spent about 40 percent of their budget on food, and today, they spend about 10 percent of their budget of food. All else equal, this suggests that the price elasticity of demand for food:
is probably lower now than it was in 1900.
A firm that produces a good with many substitutes will most likely find that:
lowering its price will increase total revenue
If the demand for a good is highly elastic, that good is likely to have:
many close substitutes
A profit-maximizing perfectly competitive firm must decide:
only how much to produce, taking price as fixed
When calculating price elasticity of demand, if the percentage change in price is negative, then the percentage change in quantity demanded is typically:
positive
In surveying their alumni, State U's economics department discovered that ramen noodle consumption declined once students graduated and found jobs. One conclusion the survey team might draw from this result is that:
ramen noodles are an inferior good
KAHOOT: The law of demand indicates that as the cost of an activity:
rises, less of the activity will occur
Marginal Revenue
the additional income from selling one more unit of a good; sometimes equal to price
The price elasticity of demand is a measure of:
the change in quantity demanded of a good that results from a change in its price.
Marginal Cost
the cost of producing one more unit of a good
In general, when the price of a fixed factor of production increases:
the profit-maximizing level of output does not change
total cost equation
total cost = fixed cost + variable cost
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: (image in camera roll; HW 4 Question 23). John's benefit from his first hour cleaning windows is:
$14
The following graph depicts demand. (image in camera roll; HW 4 Question 10). The slope of the demand curve (ignoring the negative sign) is:
0.5
For a given seller, the figure below shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. What is this seller's reservation price for the 250th unit? (image in camera roll; HW 4 Question 27).
$4
Refer to the figure below. At a price of $2, the total expenditure on lattes each hour equals: (image in camera roll; HW 4 Question 14).
$60
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: What is John's opportunity cost of cleaning windows for an hour? (image in camera roll; HW 4 Question 22).
$7
Refer to the table below. To increase output from 33 to 66 units requires ______ extra employee-hour(s); to increase output from 66 to 99 units requires ______ extra employee-hour(s). (image in camera roll; HW 5 Question 27).
1; 2
Another formula for Price Elasticity of Demand (How to calculate price elasticity of demand at a certain point)
E= 1/slope(P/Q)
KAHOOT: If consumers can easily switch to a substitute when the price of a good increases, demand for that good is likely to be
Elastic
Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. Suppose that the first week of summer, Jenny charged 25 cents for an 8-ounce cup of lemonade, her next-door neighbor Sam charged 50 cents for an 8-ounce cup of lemonade, and Alex across the street charged 15 cents for an 8-ounce cup of lemonade. Assuming the market for lemonade is perfectly competitive, what is most likely to happen?
Eventually prices will equalize across all three lemonade stands
Condition for Profit Maximization in a Perfectly Competitive Industry
MR = MC
KAHOOT: Which of the following is likely to have the highest price elasticity of demand?
Nike Zoom Fly 3 running shoes
If consumers cannot readily switch to a close substitute when the price of a good increases, the demand for that good is likely to be:
inelastic
As the market price of a service increases, more potential sellers will decide to perform that service because:
more potential sellers will find that the market price exceeds their reservation price
KAHOOT: The cross-price elasticity of demand between lettuce and salad dressing is most likely
negative
KAHOOT: If the income elasticity of demand for economy-class airline tickets is 0.3, then these tickets are
normal and necessities
During recessions, when some workers lose their jobs and have lower incomes, sales of durable goods (goods with a life expectancy of 3 years or more) decline. Apparently, durable goods are:
normal goods
KAHOOT: If the price of plane tickets increased, more people would travel by train. If this happened, you would know that
the cross-price elasticity between plane and train tickets is positive
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: (image in camera roll; HW 4 Question 24). A second hour cleaning windows will yield additional earnings of _______.
$8
Income Elasticity of Demand Formula
%ΔQd/%ΔI (percent change in quantity demanded/ percent change in income)
Cross-Price Elasticity of Demand Formula
%ΔQdx/%ΔPy (percent change in quantity demanded of good x/ percentage change in price of good y)
Price Elasticity of Supply Formula
%ΔQs/%ΔP (percent change in the quantity supplied/ percent change in the price of the product)
Price Elasticity of Demand Formula
%ΔQx/%ΔPx (percent change in the quantity of good x/ percentage change in the price of good x)
What shifts the supply curve?
- # of suppliers - cost of production (ex. better technology, higher labor wages, price of supplies)
Perfectly Competitive Industry characteristics:
- There is an infinite number of sellers in the industry, and an infinite number of buyers in the industry as well. - sellers are price takers, they don't have an influence on price/ don't dictate a price. - sellers and producers in a competitive industry produce IDENTICAL products. - all sellers/producers, and buyers, have same access to information; no one has advantage.
Demand Sensitivities
- demand sensitivity with respect to price. - demand sensitivity with respect to change in income. - demand sensitivity with respect to the price of related goods.
KAHOOT: If the slope of the demand curve is 2, price is $12 per unit, and the quantity demanded is 6 units, price elasticity is
-1
Condition for Profit Maximization in a Perfectly Competitive Market
P = MC
Refer to the table below. To increase output from 99 to 132 units requires ______ extra employee-hours; to increase output from 132 to 165 units requires ______ extra employee-hours. (image in camera roll; HW 5 Question 28).
3; 4
If the price elasticity of demand for cigarettes is 0.55, and the price of cigarettes increases by 10 percent, then the quantity of cigarettes demanded will fall by:
5.5 percent
The following graph depicts demand. (image in camera roll; HW 4 Question 11). The price elasticity of demand at point A is:
5/2
Refer to the table below. The law of diminishing marginal returns becomes evident after ______ units of output are produced. (image in camera roll; HW 5 Question 29).
66
Fran runs a doughnut shop in a tiny 3-person town. The table below shows the quantity demand by the three townspeople at various prices. (table in camera roll; HW 3 Question 4). When the price of a doughnut is 50 cents, what is the market demand for doughnuts?
9 doughnuts
Which of the following is a defining characteristic of all perfectly competitive markets?
All firms sell the same standardized product
KAHOOT: According to the graph (graph in camera roll)
At P= $2, market demand is 6
KAHOOT: According to the graph (graph in camera roll)
Chris has a more elastic demand
KAHOOT: %ΔQdx/%ΔPy
Cross-price elasticity of demand
KAHOOT: If %ΔQx/%ΔI < 0
Good X is an inferior good
Demand Curve for a perfectly competitive firm
HORIZONTAL
How do we change the individual demand curve to the market demand curve?
Horizontal Summation of the Individual Demand Curve
How do we get the individual supply curve to the market supply curve?
Horizontal Summation of the Individual Supply Curve
Marginal Revenue and Marginal Cost Rules
If MR > MC- increase production. If MR < MC- decrease production. UNTIL MR = MC
KAHOOT: According to the graph (graph in camera roll)
If price increases, Laura will spend more money on hamburgers
Which of the following is likely to have the highest price elasticity of demand?
Nike running shoes
Ann lives in Princeton, New Jersey, and commutes by train each day to her job in New York City (20 round trips per month). When the price of a round trip goes up from $10 to $20, she responds by consuming exactly the same number of trips as before, while spending $200 per month less on restaurant meals. Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer?
No
Profit Equation
Profit = Total Revenue - Total Cost
When is profit maximized?
Profit is maximized when MARGINAL revenue = MARGINAL cost (equilibrium)
KAHOOT: If %ΔQdx/%ΔPx= -3, and the price of X increases by 9%, then
Quantity demanded for X will decrease by 27%
KAHOOT: If a 10% increase in price leads to no change in quantity demanded, then
The demand curve is vertical
Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good. Which of the following statements is always true?
The firm should shutdown if its total revenue is less than its variable cost
Which of the following is the most likely to be a fixed factor of production at a farm?
The land on which the farm is located
The short run is best defined as:
a period of time sufficiently short that at least one factor of production is fixed
When the price of NBA tickets is $25 each, 30,000 tickets are sold. After the price rises to $30 each, 20,000 tickets are sold. At the original price, the demand for NBA ticket is:
elastic
Suppose the price P on a given demand curve results in a price elasticity of demand equal to 1. Any price higher than P will lie on the ______ part of the demand curve, and any price lower than P will lie on the ______ part of the demand curve.
elastic; inelastic
To increase total revenue, firms with ______ demand should lower price, and firms with ______ demand should increase price.
elastic; inelastic
An imperfectly competitive firm is one that:
has at least some influence over the market price
A price-taker faces a demand curve that is:
horizontal at the market price
One implication of the shape of the demand curve facing a perfectly competitive firm is that:
if the firm increases its price above the market price, it will earn zero revenue
The buyers' side of the market for amusement park tickets consists of two consumers whose demand curves are shown in the diagram below. Graph the market demand curve for this market. Instructions: Use the tool provided to plot the market demand curve for prices: $36, $24 and $0 (three points total).
image in camera roll (HW 3 Question 1)
Suppose, while rummaging through your uncle's closet, you found the original painting of Dogs Playing Poker, a valuable piece of art. You decide to set up a display in your uncle's garage. The demand curve to see this valuable piece of art is as shown in the diagram below. Instructions: On the graph below, double click the ??? prompts and use the drop-down menu to indicate whether demand is elastic, inelastic or unit elastic at each point. What price should you charge if your goal is to maximize your revenues from tickets sold?
image in camera roll (HW 3 Question 3); $6 per visit
For a given seller, the figure below shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. As the market price of this good increases, the quantity produced by this seller will ______. (image in camera roll; HW 4 Question 28).
increase
Refer to the figure below. If Laura and Chris are the only two consumers in this market, then when the price of hamburger decreases from $2.50 to $2.00 per pound, the quantity demanded in the market will ______ by ______ pound(s) per week. (image in camera roll; HW 3 Question 7)
increase; 1.5
If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:
inelastic
A variable factor of production:
is variable in both the short run and the long run
Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:
keeps the price of her lemonade the same and increases the output
Jeans in general have fewer close substitutes than a specific brand of jeans. Therefore, the demand for jeans in general will be _______ than the demand for a specific brand of jeans.
less elastic
The primary objective of most private firms is to:
maximize profit
The table below shows a pizzeria's fixed cost and variable cost at different levels of output. Pizza's sell for $20 each. (table in camera roll; HW 5 Question 33). When the pizzeria makes 100 pizzas per day, it earns an economic ________ of ________.
profit, $650
If a firm's total revenue is less than its variable cost when the firm produces the level of output at which price equals marginal cost, then the firm should:
shut down
The cross-price elasticity of demand between bread and potatoes is estimated to be 0.5. This implies bread and potatoes are:
substitutes
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: (image in camera roll; HW 4 Question 26). If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services.
supply
HW 5 Question 1: Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats per day it produces depends on the number of employee-hours per day, as shown in the table below. a. Suppose the wage of lathe operators is $15 per hour, and Paducah's daily fixed cost for the lathe and building is $60. Instructions: Complete the table below. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Enter your responses as whole numbers.
table in camera roll; HW 5 Question 1
HW 5 Question 2: Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $16 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats per day it produces depends on the number of employee-hours per day, as shown in the table below. a. Suppose the wage is $18 per hour and Paducah's daily fixed cost for the lathe and building is $60. Instructions: Complete the table below. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Enter your responses as whole numbers.
table in camera roll; HW 5 Question 2
HW 5 Question 3: Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats per day it produces depends on the number of employee-hours per day, as shown in the table below. a. Suppose the wage of lathe operators is $15 per hour, and Paducah's daily fixed cost for the lathe and building is $60. Instructions: Complete the table below. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Enter your responses as whole numbers.
table in camera roll; HW 5 Question 3
KAHOOT: When Taylor raised the price of earrings at her Boutique, her total revenue increased. This suggests that
the demand for Taylor's earrings at the original price was inelastic
When Taylor raised the price of earrings at Taylor's Boutique, her total revenue from selling earrings increased. This suggests that:
the demand for Taylor's earrings at the original price was inelastic
The owner of a pizza shop observes that when she raises the price of a large pizza, her total revenue decreases, and when she lowers the price of a large pizza, her total revenue increases. This suggests that:
the demand for her large pizzas is elastic with respect to price
If the slope of a demand curve is infinite, then the price elasticity of demand is:
zero
