ECONOMICS 1810 MIDTERM
Match each of the following as greater than or less than 0: The cross-price elasticity of demand for a pair of substitutes.
Greater than 0
Match each of the following as greater than or less than 0: The income elasticity of a normal good.
Greater than 0
Match each of the following as greater than or less than 0: The price elasticity of supply.
Greater than 0
Identify the type of merger: A merger between two TV manufacturers.
Horizontal merger
If a perfectly competitive firm is producing an output level that generates marginal cost greater than the market price, then profit __________ as the firm ___________ production.
Inccreases, Decreases
Suppose that for a monopoly average total cost is $35, marginal cost is $30, and marginal revenue is $35 with a selling price of $40. To maximize profits, the monopoly should
Increase output but decrease price
Fill in the blanks: If the price elasticity of demand is equal to -0.5, then a 10 percent decrease in price will cause the quantity demanded to _________ by _________ percent
Increase, 5
Identify whether each of the following is labor, capital, or a natural resource: Your economics professor
Labor
Match each of the following as greater than or less than 0: The cross-price elasticity of demand for a pair of complements.
Less than 0
Assuming two factors of production, labor (L) and capital (K), a firm will minimize the cost of producing a given level of output when which of the following is true?
MP(labor)/P(labor) = MP(capital)/P(capital)
Identify examples of microeconomics and macroeconomics: How the government responded to the recent recession
Macroeconomics
Identify examples of microeconomics and macroeconomics: Last month's U.S. inflation rate
Macroeconomics
A firm's supply curve slopes upward as its
Marginal cost curve slopes upward
A monopoly maximizes profits by producing the output level at which
Marginal revenue equals marginal cost
An economy with free exchange of goods and services
Market economy
For a firm in a perfectly competitive market, marginal revenue is always equal to
Market price
Identify examples of microeconomics and macroeconomics: Sales volumes of Walmart stores
Microeconomics
Identify examples of microeconomics and macroeconomics: The rising prices of textbooks
Microeconomics
A market economy in which government also plays a role in allocating resources
Mixed economy
Indicate the type of market for each of the following: A large number of buyers, but one seller
Monopoly
Indicate the type of market for each of the following: Economic profit exists in the long run.
Monopoly
Indicate the type of market for each of the following: Price is greater than marginal cost
Monopoly
Identify whether each of the following is labor, capital, or a natural resource: A beach in Florida
Natural Resource
Identify whether each of the following is labor, capital, or a natural resource: Untapped oil deposits in Texas
Natural Resource
A market in which a single producer can produce large quantities efficiently because of its extensive economies of scale is called a
Natural monopoly
Identify normative or positive statements: "Everyone in the country should be covered by national health insurance."
Normative
Identify normative or positive statements: "The current rate of unemployment of 5 percent is too high."
Normative
Stephanie buys one coffee each morning, regardless of the price. we can conclude that Stephanie's demand for coffee is
PERFECTLY INELASTIC = vertical demand curve
Indicate the type of market for each of the following: Price equals marginal cost
Perfect competition
For a horizontal demand curve, demand is
Perfectly elastic
Identify normative or positive statements: "A high rate of economic growth creates more jobs."
Positive
Identify normative or positive statements: "Smokers are more likely to be extraverts than nonsmokers."
Positive
In the long run, if price is greater than average total cost in an industry, then
Some new firms enter the industry
Which curve passes through the minimum point of the average total cost curve?
The marginal cost curve
Along a linear demand curve, total revenue is greatest where demand is
Unit elastic
Indicate each of the following inputs as variable cost and/or fixed cost: Exist in the short run
Variable and Fixed costs
Determine whether each of the following examples are fixed costs or variable costs: Fuel cost to operate a truck
Variable cost
Determine whether each of the following examples are fixed costs or variable costs: Wages for factory workers
Variable cost
Indicate each of the following inputs as variable cost and/or fixed cost: Labor
Variable cost
Identify the type of merger: A merger between a smartphone manufacturer and a smartphone app developer.
Vertical merger
Identify the type of merger: An online retailer purchases a truck delivery company.
Vertical merger
Price elasticity of demand measures
a buyer's responsiveness to a change in price.
A price ceiling is
a government price control that sets the maximum allowable price and tends to cause a shortage.
Suppose that the demand for good X is price inelastic, then a 10 percent increase in the price of good X will result in
a less than 10 percent decrease in the quantity demanded.
Economies of scale occur when an increase in inputs causes
a more-than-proportionate increase in output.
In economics, the term supply refers to
a set of combinations of price per unit and quantity supplied per period, all other things equal.
Economic profit equals
accounting profit - implicit cost.
If an external benefit occurs in a perfectly competitive market, firms produced an
amount less than the efficient quantity.
When the expansion of an industry leads to higher input prices, that industry is characterized by
an upward sloping long-run supply curve.
Average Total Cost=
average fixed cost + average variable cost
Average total cost is equal to marginal cost when
average total cost is at its minimum.
In a market capitalist economy, the what, how, and for whom problems are determined by
both consumers and firms
All other things equal, if the demand curve shifts to the right
both the equilibrium price and the equilibrium quantity will rise.
Economic models are
built using relevant observations, assumptions, and abstractions.
Arc price elasticity of demand is
calculating percentage changes relative to the average value of each variable between two points.
As a firm increases its use of capital relative to labor, it becomes more
capital intensive
The three types of factors of production are
capital, labor, and natural resources.
Marginal cost=
change in total cost / change in quantity
A firm has market power when it can
change its price without losing all its market share.
In a competitive industry, a firm's demand curve is
horizontal
Formula for : Income elasticity of demand
% change in quantity demanded / % change in income
Formula for: Price elasticity of demand
% change in quantity demanded / % change in price
Match each of the following price elasticity of demand with its numerical value: Perfectly Inelastic
0
If the quantity supplied increases by 2 percent when price increases by 10 percent, then the price elasticity of supply is
0.2
Determine whether each of the following examples are fixed costs or variable costs: Price paid for a piece of land
Fixed cost
Determine whether each of the following examples are fixed costs or variable costs: Rent for an office
Fixed cost
Indicate each of the following inputs as variable cost and/or fixed cost: Capital in the short run
Fixed cost
Indicate each of the following inputs as variable cost and/or fixed cost: Do not change with production
Fixed cost
A persistent shortage will likely occur in a market if the government
imposes a price ceiling
Fixed costs exist
in the short run but not in the long run.
If a large storm in Florida destroyed a lot of orange crops, we would expect the equilibrium price of oranges to
increase and the quantity of oranges sold to decrease.
A market price floor for cotton
increases the cotton price paid by consumers.
Microeconomics deals with
individual units in the economy.
Fill in the blanks: Suppose that a 5 percent increase in the price of good X causes a 2.5 percent decrease in the quantity demanded of good X and 10 percent increase in quantity supplied of good X. For good X, demand is _________, and supply is _________.
inelastic, elastic
Match each of the following price elasticity of demand with its numerical value: Perfectly Elastic
infinity
Steven has two hours to complete an assignment in economics or to watch a movie. For Steven, the opportunity cost of spending the two hours watching a movie
is a lower score in the economics assignment
A public park
is subject to the free-rider problem.
Water is considered a scarce good rather than a free good because
it has alternative uses
If a firm adopts a technology that can increase production without increasing labor or other resource inputs, then
it will reach a point that was previously unattainable.
A competitive firm's supply curve is
its marginal cost curve
Fill in the blanks: Compared to the demand curve of a competitive firm, a monopoly's demand curve is ___________ elastic because its demand is __________ the market demand.
less, the same as
The economic way of thinking deals with
making choices by comparing marginal costs and marginal benefits.
The sum of producer surplus and consumer surplus is maximized when
marginal benefit and marginal cost are equal.
A cost-benefit analysis of a public policy involves evaluating the
marginal cost and marginal benefit of the policy.
If a firm is experiencing diminishing returns to labor,
marginal cost must be increasing
The difference between the full marginal cost and the marginal external cost is
marginal private cost
Diminishing returns occur when the
marginal product of an input is falling.
A firm maximizes its profits when
marginal revenue equals marginal cost
All other things equal, when firms enter a perfectly competitive market,
market supply increases and market price decreases.
A simplified representation of a particular problem is a
model
Gains from trade occurs as a result of
more goods and services can be obtained at lower opportunity costs.
Trade can be beneficial to an economy because
more goods and services can be obtained at lower opportunity costs.
Statements that make value judgments are
normative
A production function relates
output to inputs
A production function relates
output to variable inputs
A free-rider problem occurs when
people who do not pay for a good benefit from the good.
Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is positive, demand is _____________
price elastic
A given change in gasoline supply will result in a larger change in the equilibrium price of gasoline if the
price elasticity of demand for gasoline is lower.
An economy has a comparative advantage in the production of a good if it can
produce the good at a lower opportunity cost than another economy.
A product with an inelastic supply means that
producers are relatively insensitive to a change in the price of the product.
To maximize profits, a monopoly
produces less output than a competitive firm
In economics, firms are assumed to maximize
profits
Deadweight loss is
the loss of producer and consumer surplus at an inefficient production level.
Christy has a comparative advantage over Joel in making pizzas relative to making hotdogs. This means that
the opportunity cost of making pizzas is lower for Christy than for Joel.
Suppose demand is unit elastic,
the percentage change in quantity demanded is equal to the percentage change in price.
The price elasticity of supply is a measure of how sensitive producers are to a change in
the price of a good or service
The term quantity demanded refers to
the quantity buyers are willing and able to buy at a particular price during a particular period.
Market equilibrium occurs when
the quantity supplied equals the quantity demanded
A surplus occurs when
the quantity supplied exceeds the quantity demanded at the current price level.
All other things equal, if the price of apples increases
the quantity supplied of apples will increase.
Factors of production are
the resources the economy has available to produce goods and services.
When a competitive market is at equilibrium,
the sum of consumer surplus and producer surplus is maximized.
If an economy produces only smartphones and laptops, then the opportunity cost of producing more smartphones is
the value of forgone laptop production
Profits are
total revenue minus total costs.
Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is 0, Demand is ______________.
unit price elastic
Fill in the blanks: Economists assume that consumers seek to maximize __________ and firms seek to maximize ____________.
utility, profits
The opportunity cost of a choice is the
value of the next best alternative not chosen
The fundamental economic questions every economic system must answer are
what, how, and for whom
Macroeconomics deals with
the analysis of the aggregate values in the economy.
Scarcity is a situation in which
the available resources are not enough to satisfy the wants of the people.
Marginal cost equals
the change in total cost given a one-unit change in output.
For a given shift in supply, the less elastic demand is, then
the greater the change in price.
Match each of the following price elasticity of demand with its numerical value: Inelastic
<1
Match each of the following price elasticity of demand with its numerical value: Elastic
>1
Which of the following is a characteristic of a natural monopoly? (Check all correct answers) A. Average total cost declines over the entire range of production B. Relatively high marginal cost C. Relatively high sunk costs D. Diseconomies of scale
A and C
Which of the following is true for a perfectly competitive firm in the long run? (Check all correct answers) A. Price equals minimum average total cost. B. Profits are maximized. C. Price equals marginal cost. D. Economic profits are positive.
A and C
Match each of the following changes with its results: A decrease in demand
A decrease in both equilibrium price and equilibrium quantity
Match each of the following changes with its results: An increase in supply.
A decrease in equilibrium price but an increase in equilibrium quantity
The U.S. Justice Department is likely to challenge a merger in an industry with
A high degree of concentration
The key elements of a market capitalist economy include (Check all correct answers) A. free exchanges of goods and services. B. private ownership of resources. C. freely determined prices. D. government support of market supply.
A,B,C
Which of the following leads to a rightward shift of the demand curve? A. An expectation of an increase in the good's price in the future B. A decrease in the number of consumers C. An increase in the good's own price D. A decrease in the price of a substitute
A. An expectation of an increase in the good's price in the future
Good A has a high price elasticity of demand; it is most likely that A. good A has many substitutes. B. good A is not related to any other goods. C. good A has many producers. D. good A has many complements.
A. good A has many substitutes.
Indicate whether each of the following is an assumption of perfect competition (T/F): Large barriers to enter the market
False
A competitive market is efficient under the following conditions EXCEPT A. income is distributed inequitably across households. B. property rights are transferable. C. the sum of producer surplus and consumer surplus is maximized. D. the marginal benefit of the last item consumed is equal to the marginal cost for the last item produced.
A. income is distributed inequitably across households.
Which of the following is true of a monopoly? (Check all correct answers.) A. There are no close substitutes for its product. B. High barriers to entry exist. C. The firm is a price taker. D. The firm has market power.
ABD
Which of the following is (are) correct about firms? (Check all correct answers) A. Firms seek to minimize costs given its factors of production. B. Firms seek to maximize the prices of goods and services they produce. C. Firms are organizations that produce goods and services. D. Firms seek to maximize profits.
ACD
Which of the following is a source of monopoly power? (Check all correct answers) A. Sunk costs B. Diseconomies of scale in production C. Restricted ownership of production inputs D. Barriers to entry
ACD
Which of the following is an element of a competitive equilibrium model? (Check all correct answers) A. Firms maximize profits B. Government controls market prices C. The "invisible hand" coordinates the market D. Consumers maximize utility
ACD
Which of the following is an example of a positive statement? A. the rate of unemployment is 4 percent. B. a high rate of economic growth is good for the country. C. baseball players should not be paid higher salaries than the president of the United States. D. everyone in the country needs to be covered by national health insurance.
ANSWER: A. the rate of unemployment is 4 percent.
Ceteris paribus means
All other things unchanged
Match each of the following changes with its results: An increase in demand.
An increase in both equilibrium price and equilibrium quantity
Match each of the following changes with its results: An increase in both demand and supply.
An increase in equilibrium quantity
A government action that is designed to promote competition among firms is called
Antitrust policy
When marginal cost is greater than average cost,
Average cost is rising
Which of the following is at its minimum point when a perfectly competitive market is at the long-run equilibrium?
Average total cost
Select which one(s) of these is subject to the free rider problem: A. Public school lunches B. National defense C. Over-the-air radio broadcasts D. Postal services
B and C
Which of the following is NOT held constant when constructing a supply curve for good A? A. Number of firms producing good A B. Price of good A C. Technology for producing good A D. Price of inputs for producing good A
B. Price of good A
Indicate the type of market for each of the following: Firm produces where marginal revenue equals marginal cost
Both perfect competition and monopoly
Identify whether each of the following is labor, capital, or a natural resource: A department store
Capital
A system in which resources are owned by private individuals who have the power to make decisions about their use
Capitalism
An economy in which the government has most broad power to allocate the use of factors of production
Command economy
Identify the following characteristics of property rights: Resources for which no property rights have been defined
Common property
Which of the following causes a rightward shift of the supply curve? A. A decrease in the number of producers B. An increase in the price of the good being sold C. A government tax on production D. A decrease in the cost of production
D. A decrease in the cost of production
Fill in the blanks: Assume a monopoly firm produces where P = MC. The firm's profit increases when it __________ the output level and __________ its price. The firm's profit decreases when it __________ the output level and _____________ its price.
Decreases, increases Increases, decreases
Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: All firms earn zero economic profits
Does not shift
Which of the following will most likely to be produced by a natural monopoly?
Electricity
Identify the following characteristics of property rights: Allows its owners to prevent others from using a resource
Exclusive
Identify the outcomes of the presence of an external cost or external benefit: Efficient output level > Equilibrium output level
External benefit
Identify the outcomes of the presence of an external cost or external benefit: Marginal private benefit < Full marginal benefit
External benefit
Indicate whether each of the following examples involves an external cost or external benefit: A flower bed in your house's front yard
External benefit
Indicate whether each of the following examples involves an external cost or external benefit: Flu shots
External benefit
Identify the outcomes of the presence of an external cost or external benefit: Efficient output level < Equilibrium output level
External cost
Identify the outcomes of the presence of an external cost or external benefit: Marginal private cost < Full marginal cost
External cost
Indicate whether each of the following examples involves an external cost or external benefit: A coal-fired power plant
External cost
Indicate whether each of the following examples involves an external cost or external benefit: Cigarette smoking
External cost
Indicate whether each of the following is an assumption of perfect competition (T/F): Each firm faces a downward-sloping demand curve
False
Identify the characteristics of price controls: A reduction in the quality of goods and services.
Price Ceiling
Identify the characteristics of price controls: A shortage will likely occur in the market.
Price Ceiling
A minimum price set above the equilibrium price is a
Price Floor
Identify the characteristics of price controls: A surplus will likely occur in the market.
Price Floor
Identify the characteristics of price controls: The government regulated price is higher than the market equilibrium price
Price Floor
Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is negative, demand is ___________
Price inelastic
Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: Some firms incur economic losses.
Shifts to the left
Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: Some firms earn positive economic profits
Shifts to the right
Today most firms in the United States are
Sole proprietorship's
Identify the following characteristics of property rights: Can be sold or leased to someone else
Transferable
Indicate whether each of the following is an assumption of perfect competition (T/F): A large number of buyers
True
Indicate whether each of the following is an assumption of perfect competition (T/F): A large number of firms
True
Indicate whether each of the following is an assumption of perfect competition (T/F): Buyers and sellers have complete information about prices
True
Evaluating the costs and benefits of a policy is called
cost-benefit analysis
When hiring one additional worker raises output by less than the last worker hired, the firm experiences
decreasing returns
The short-run average total cost curve gets its U-shape as a result of
diminishing marginal returns
In a competitive market, if firms earn economic profits in the short run, then economic profits in the long run will
disappear because the market supply curve will shift to the right.
Market failure occurs when private decisions
do not result in an efficient allocation of scare resources.
In the absence of market failures, market competition results in
efficiency.
A perfectly competitive firm reaches its long-run equilibrium when market price
equals the minimum of ATC
A market price support policy aims at assisting the farm industry by
establishing price floors in farm output markets.
Suppose you observe that the sun rises every morning at the six o'clock business report. If you conclude that the six o'clock business report makes the sun rise, you are committing the fallacy of
false cause
Average fixed cost =
fixed cost/quantity
If an economy is producing a combination of goods that places it on the production possibilities curve, then it has
full employment
An individual seller in a perfectly competitive market
has control over the quantity it sells but no control over the price.
Average product of labor=
quantity produced / labor input
The concept of comparative advantage is based upon
relative opportunity costs
The law of increasing opportunity costs is a result of the fact that
resources are not equally productive in all output categories.
The problem of determining what goods and services society should produce exists because
resources are scarce
Price controls
result in inefficient outcomes.
Total revenue will decrease if price
rises and demand is elastic.
If long-run industry supply has a positive slope, firms will likely experience
rising production costs as the industry expands.
Fill in the blanks: Fixed cost occurs in the _____________. As output increases, fixed costs are _________ and average fixed cost ___________.
short run, constant, declines
An industry in which production costs decrease as output rises (a decreasing-cost industry) causes the long-run supply curve to
slope downward
Economics is a
social science that deals with making choices among alternatives.
Property rights are defined as a set of rules that
specify the ways in which an owner can use a resource.
When an external cost exists in the production of a good, the appropriate policy is to
tax production of that good in an amount equal to the external cost.
