Econ Midterm
If a 16 percent increase in the price of Cheerios causes a 15 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for Cheerios is
-.94 The demand for cheerios is inelastic
Assume world oil supply is 78 million barrels per day at a price of $47 per barrel. Suppose that if the price per barrel of oil increases to $59 per day, then 86 million barrels of oil will be supplied. Using the midpoint formula, what is the price elasticity of supply for oil?
.45 In this price range, the world supply of oil is ---inelastic---
Indicate which of the following could cause a movement from point A to C. (Check all that apply.)
A rise in buyer incomes. AND A decline in vegetarianism.
Suppose the figure to the right represents a local cattle market. What would be the effect on this market of the local government regulating a price ceiling of $1.00 per pound?
The market would have a ---shortage--- of ---20---thousand pounds.
A country will always be an exporter of a good where it has
a ---comparative advantage--- in production.
A price ceiling
does not increase the amount of the product that consumers buy because it creates a shortage.
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is
false: decreases in price affect the quantity demanded, not demand.
If a consumer buys a good we know that her willingness to pay:
is either greater than or equal to its price.
Comparative advantage
is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Absolute advantage
is the ability of an individual, a firm, or a country to produce more of a good or service than competitors when using the same amount of resources.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the product's price
Compare the demand for water with the demand for wine. The demand for wine is likely
relatively more elastic because wine is a luxury.
KFC lowers the price of a bucket of fried chicken
shift the demand for McDonald's big mac hamburgers to the left
The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
Marginal benefit is
the additional benefit from consuming one more unit.
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
Producer surplus is
the difference between the lowest price a firm would be willing to accept and the price it actually receives.
How does it differ from the consumer surplus in the markets you have studied up to this point? Unlike in most other examples, in this case,
the highest price a consumer is willing to pay is infinite.
Suppose instead that the demand curve shifts to the right. Then, relative to the initial market equilibrium,
the new equilibrium price would be higher and the new equilibrium quantity would be higher.
What is the formula for the price elasticity of demand? The formula for the price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price
Over the past 30 years, the price of oil has been relatively unstable, fluctuating between $11.00 and well over $100 per barrel. Which of the following potentially contributes to oil-price instability? Oil prices are relatively unstable because
the supply of oil is inelastic.
Which of the following would cause a shift in the demand curve from point A to point B?
A decrease in income (inferior good). B. An increase in income (normal good). C. An increase in the price of a substitute good. D. ALL THE ABOVE-- this one
The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, led the media to conclude that the price of corn in country A would soon be as high as $10/bushel. If the new equilibrium price turns out to be below $10/bushel, which of the following inferences can be drawn?
A. The demand curve for corn must be flatter in country A than in country B.
Identify whether each of the following statements describes a change in supply or a change in the quantity supplied.
A. To take advantage of high prices for snow shovels during a very snowy winter, Alexander Shovels, Inc., decides to increase output. --- A change in quantity supplied-- B. In the six months following Hurricane Katrina, production of oil in the Gulf of Mexico declined by 25 percent. ---A change in supply---
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
ATC= TC/Q; MC= ChangeTC/ ChangeQ
Suppose France and Spain produce only cloth and wine. Assume that each country uses only labor to produce each good, and that the cloth and wine made in France and Spain are exactly alike. The table below shows how much each country can produce of each good with one hour of labor. Output per Hour of Labor FranceFrance 24 cloth 14 wine SpainSpain 3 cloth 9 Wine
According to the table, the opportunity cost to France of producing one more unit of cloth is ---.58---units of wine and the opportunity cost to Spain of producing one more unit of cloth is 3 units of wine. Thus, we can conclude that: France has a comparative advantage in producing cloth and Spain has a comparative advantage in producing wine.
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus ---decreases---, and as the price of a good falls, consumer surplus ---increases---
How does producer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, producer surplus ---increases--- and as the price of a good falls, producer surplus ---decreases---
In 1916, the Ford Motor Company sold 500,000 Model T Fords at a price of $440. Henry Ford believed that he could increase sales of the Model T by 1,000 cars for every dollar he cut the price. Use this information to calculate the price elasticity of demand LOADING... for Model T Fords. Use the midpoint formula in your calculation.
Assuming the price decreases by $1 and the quantity increases by 1000 cars, the price elasticity of demand for Model T Fords is −.88
Consider the markets for BP supreme-grade gasoline, all BP grades of gasoline, and all gasoline. For which of these three markets will demand be most elastic? Demand will be most elastic for
BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline.
Telesca Inc., a manufacturer of telescopes, currently produces10,000 units per week. The firm's average cost of production has been declining so far. Labor is the only variable input used in production. The operations research team at this firm reports that the marginal cost of producing 10,000 telescopes is lower than both the average total cost and the average variable cost of production. The team believes that average cost will decrease further if production is increased beyond 10,000 units. When the firm manufactures a total of 12,000 telescopes each week, its average cost equals its marginal cost of production. Which of the following conclusions can most reasonably be drawn from this information?
Both the average variable cost and the average total cost would increase if the firm increases production beyond 12,000 telescopes.
The figure to the right illustrates the market for a breast cancer-fighting drug, without which breast cancer patients cannot survive. What is the consumer surplus in this market?
Consumer surplus is equal to ---infinity---
From the list below, select the variable that will cause the demand curve to shift:
Consumer Income
Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31
If so, then beer and wine are ---substitutes--- .
When lettuce prices doubled, from about $1.45 per head to about $2.90, the reaction of one consumer was quoted in a newspaper article: "I will not buy [lettuce] when it's $2.902.90 a head," she said, adding that other green vegetables can fill in for lettuce. "If bread were $5 a loaf we'd still have to buy it. But lettuce is not that important in our family."
For this consumer's household, which product has the higher price elasticity of demand bread or lettuce? lettuce For this consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative: positive
Tim mows neighborhood lawns for extra money. Suppose that he would be willing to mow one lawn for $1010, a second lawn for $17, and a third lawn for $23. Also suppose that three neighbors are interested in having their lawns mowed. Mrs. Jones would be willing to pay $30 to have her lawn mowed, Mr. Wilson would be willing to pay $30, and Ms. Smith would be willing to pay $23.
If Tim offers to mow lawns for $2323 each, what will be his producer surplus? $19. Considering Mrs. Jones, Mr. Wilson, and Ms. Smith together, what will be their consumer surplus? $14.
Briefly explain whether you agree with the following argument: "Unfortunately, Bolivia does not have a comparative advantage LOADING... with respect to the United States in the production of any good or service."
If the U.S. trades at all with Bolivia, then the argument above is false. There would be no trade unless both countries were made better off, and this would imply Bolivia has the comparative advantage in the production of at least one good or service.
Gao and colleagues have estimated that the cross-price elasticity of demand between beer and spirits is 0.15.
If the price of spiritsspirits increases by 10 percent, then the quantity of beer demanded will increase by 1.5percent. In addition, Gao and colleagues have estimated the income elasticity of demand for beer to be minus−0.09. If so, then beer is ---an inferior good---
Next, suppose the demand for a mystery novel by John GrishamJohn Grisham is infinitely elastic. In this example, assume the initial price of the novel is $27.00 and the quantity demanded is 51 thousand copies per year.
If the price of the mystery novel increases by $1.00, then the quantity demanded will be 0 copies per year.
Suppose the demand for a Czech novel translated into English is perfectly inelastic. Assume the initial price of the translated novel is 26.00 and the quantity demanded is 645 copies per year.
If the price of the translated novel increases by $2.00, then the quantity demanded will be 645 copies per year.
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as ---comparative advantage--- Referring to your answer above, what makes it such a powerful insight?
It explains why if individuals, firms, and countries specialize and trade they will be better off.
Why is the demand curve referred to as a marginal benefit curve?
It shows the maximum consumers are willing to pay for each unit of a product, which is a measure of their benefit from that unit.
A price ceiling is a legally determined ______ price that sellers may charge
Maximum
A price floor is a legally determined ______ price that sellers may receive.
Minimum
If the price of hot dogs falls hot dogs falls while the demand for hot dog buns rises hot dog buns rises, is the cross-price elasticity of demand between the pair of products likely to be positive or negative?
Negative, Therefore, the cross-price elasticity of demand between "substitutes" is most likely ---positive--- and the cross-price elasticities of demand between "complements" is most likely ---negative---
A company that provides home-care for the elderly is able to provide monthly services for 5 patients at a total cost of $2,500 and monthly services for 6 patients at a cost of $2,800. What is the marginal cost of providing monthly services for a 6th patient?
The marginal cost is $300
Why isn't elasticity just measured by the slope of the demand curve?
The measurement of slope is sensitive to the units chosen for quantity and price
Using the numbers in the table, determine which country has a comparative advantage in producing each product. Output per Hour of Work Smartwatches Fitness Bracelets Switzerland 8 Smart watches 14 Fitness Bracelets Canada 5 Smart Watches 7 Fitness Bracelets Which of the following statements is true?
The opportunity cost for CanadaCanada to produce one Smartwatch is 1.40 Fitness Bracelet. ---Canada---should produce Smartwatches and ---Switzerland--- should produce Fitness Bracelets.
The following table shows the hourly output per worker measured as quarts of olive oil and pounds of pasta in Greece and Italy: Output per Hour of Work Olive Oil Pasta Greece Olive Oil 22 Pasta 11 Italy Olive Oil 33 Pasta 66
The opportunity cost of producing one more quart of olive oil in Greece is . 5 pounds of pasta. The opportunity cost of producing one more quart of olive oil in Italy is 2 pounds of pasta. The opportunity cost of producing one more pound of pasta in Greece is 2 quarts of olive oil. The opportunity cost of producing one more pound of pasta in Italy is .5 quarts of olive oil.
Consider the market for a new DVD movie, where the price is initially $2222 and 1616 copies are sold per day at a superstore, as indicated in the figure to the right. The superstore is considering lowering the price to $1818. What is the price elasticity of demand between these two prices (use the Midpoint Formula)?
The price elasticity of demand is negative −2
Consider the market for a breakfast cereal. The cereal's price is initially $3.50 and 65 thousand boxes are demanded per week. The company that produces the cereal is considering raising the price to $4.00. At that price, consumers would demand 60 thousand boxes of cereal per week. What is the price elasticity of demand between these prices using the midpoint formula?
The price elasticity of demand using the midpoint formula is −0.60
When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current $6 per unit to $7 per unit. Timothy Walters, the marketing head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current 1,200 units to 900 units. His colleague and the head of the sales department, Jake Mayers, feels that the quantity demanded would only decline by 250 units. According to Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share. Which of the following, if true, would imply that the firm is operating in the inelastic portion of the demand curve?
The quantity demanded declines by 10 percent in response to the $1 price increase.
Briefly explain whether you agree with the following statement: "If consumer surplus in a market increases, producer surplus must decrease."
The statement is incorrect. Consumer surplus (and producer surplus) could increase by decreasing deadweight loss.
Briefly explain whether you agree with the following statement: "If at the current quantity marginal benefit is greater than marginal cost, there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."
The statement is incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweight loss.
A student makes the following argument: "When a market is in equilibrium, there is no consumer surplus LOADING... . We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.
The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.
Consider the market for a natural resource, where the price is initially $12,000 per ton and 6,000 thousand tons are supplied. Suppose the price of the resource falls to $10,000 per ton, at which price the market supplies 4,000 thousand tons. What is the price elasticity of supply between these prices?
Using the midpoint formula, the price elasticity of supply is 2.20 As such, supply is ---elastic---
Suppose Nationwide increases the insurance premium they charge for their auto policies by 16 percent. In response, the demand for State Farm auto policies in a small town increases from 3,000 to 3,750. What is the cross-price elasticity of demand for State Farm auto policies in this town?
Using the midpoint formula, the cross-price elasticity of demand for State Farm auto policies is 1.389 In this instance, auto insurance from Nationwide and auto insurance from State Farm are ---substitutes---
Suppose SusanSusan is currently producing 100,000 pizzas per month at a total cost of $20,000.00.
What is her average total cost of production? .20 Now suppose SusanSusan increases production to 100,001 pizzas, and the total cost of production increases to $20,000.08. What is her marginal cost of producing the 100,001 pizza? $.08 Since the marginal cost of production is less than the average total cost of production, the average total cost of production must be ---falling---
Suppose the total cost of producing 5,000 tennis balls is $50,000, and the fixed cost is $20,000.
What is the variable cost? $30,000 When output is 5,000, what is the average variable cost? $6.00. When output is 5,000, what is the average fixed cost? $4.00 Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs ---decreases--- as output increases.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
Imagine that the curves shown in the accompanying figure represent two demand curves for traditional wings (basket of six) at Buffalo Wild Wings. The movement from point A to B on D1 is caused by
a decreasea decrease in the price of baskets of traditional wings
McDonald's distributes $1.00 off coupons. This will cause
a movement along the demand curve for McDonald's Big Mac hamburgers.
What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget. Which determinant is the most important? The availability of close substitutes is the most important determinant.
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost?
decreases because average fixed cost decreases as output increases.
The price of Burger King's Whopper hamburger increases. This will cause
demand for McDonald's Big mac hamburgers to increase
The U.S. economy enters a period of decline in incomes. This will cause
demand for McDonald's Big Mac hamburgers to shift to the right if they are inferior goods.
The publisher of a magazine gives his staff the information in the table below. He tells them "Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue LOADING... being exactly equal to our cost." Current price $2.00 per issue Current sales 150,000 copies per month Current total costs $450,000 per month In order for the publisher's analysis to be correct,
demand is perfectly inelastic.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
Suppose the price of a substitutesubstitute to LCD televisions risesrises. What effect will this have on the market equilibrium for LCD TVs? The equilibrium price of LCD TVs will
increase and the equilibrium quantity will increase.
The wrist watch industry in a country is not very competitive. There are limited brands available and the existing firms use their market power to keep prices high. Envy, one of the leading brands in the market, is planning to increase the price from $1,000 to $1,100 per watch. The firm is expecting the quantity demanded to fall by only 7 percent. However, after the price is increased to $1,100, quantity demanded actually declined by 12 percent. Sonia, a student of economics, knows that the average income level in this country has increased over the last year. When actual sales of Envy watches turn out to be lower than anticipated, she concludes that the income elasticity of demand for Envy watches is negative. Her conclusion is flawed because
she is confusing between price elasticity of demand and income elasticity of demand
