Intermediate Micro Exam 3, Exam 2, Econ S321 Exam 1

Suppose MC is constant, this implies that TC _____________________________.

"increase at a constant rate" TC is an upward sloping straight line.

5. Which of the following statements about price elasticity of demand is false? A. If there is an increase in a tax on the sellers of a product, the quantity demanded will not change if price elasticity of demand is 1. B. The longer the time period considered, the higher the price elasticity of demand. C. Based on the availability of substitutes, the price elasticity of demand for soda is likely to be smaller than the price elasticity demand for a particular brand of soda. D. Goods that comprise a very small percentage of a household's total expenditures tend to have a relatively low price elasticity of demand.

*A. If there is an increase in a tax on the sellers of a product, the quantity demanded will not change if price elasticity of demand is 1.

4. If a person spends $50 each week on cigarettes (regardless of the price of cigarettes), one can conclude that this person's demand for cigarettes has an A. elasticity of demand = 0. B. elasticity of demand = 1. C. elasticity of demand which is infinite. D. none of the above answers is correct.

*B. elasticity of demand = 1.

If marginal physical product is declining but positive, then A. average physical product is declining. B. total physical product is declining. C. total physical product is increasing at a decreasing rate. D. average physical product is greater than marginal physical product.

*C. total physical product is increasing at a decreasing rate.

For a Giffen good, which of the following must be true? A. The good must be inferior and the income effect must be larger than the substitution effect. B. The good must be inferior and the substitution effect must be larger than the income effect. C. Both the income and substitution effects must lead price and quantity in the same direction. D. The substitution effect must lead quantity and price in the same direction and the substitution effect must be larger than the income effect.

A. The good must be inferior and the income effect must be larger than the substitution effect.

3. In 2008 car manufacturers were buying 20 million tons of imported steel per month at $1,000 per ton. In 2009 they were buying 25 million tons per month at $1100 per ton. Given this information, one could conclude that between 1998 and 1999 there was A. an increase in the demand for imported steel. B. a decrease in the demand for imported steel. C. a movement upward along the demand curve for imported steel. D. a movement downward along the demand curve for imported steel.

A.* an increase in the demand for imported steel.

Convexity of indifference curves over two goods A and B depends on an assumption of A. diminishing MRS of good B for Good A. B. an elastic demand for at least one of the goods. C. that at least one good is a normal good. D. All of the above are TRUE.

A.* diminishing MRS of good B for Good A.

What is an isocost line? Draw it using TC=$1000, PL=$20, and PK =$100.

All combinations of expenditures on L and K that yield the same TC.

As discussed in class, what are the three axioms that lay the foundation for the theory of the consumer?

Completeness, Non-satiation, Transitivity - these axioms are discussed in detail in the text and in class notes.

Which of the following is a true statement? A. Decreasing returns to scale and diminishing marginal product are two ways of stating the same thing. B. Increasing returns to scale is a short-run concept, and diminishing returns to production is a long-run concept. C. SR costs exceed LR cost because they include fixed costs and LR cost do not include fixed costs. D. All the above are true. E. None of the above is true.

E.* None of the above is true.

The theory of P.C. assumes that A. MR=Average Revenue =market price. B. all firms produce identical products. C. firms may make negative SR profits. D. firms can enter and exit the industry in the LR. E. all of the above.

E.* all of the above.

If a person is risk neutral, does this imply they are indifferent between taking a risk and not taking a risk?

No, risk neutrality ⇒ the expected utility of a taking a risk is equal to the utility that would be gained from a change in wealth equal to the expected value of the risk (gamble)

What role does the "law of diminishing returns" play in the short run? In the long run?

SR → "law" eventually leads to ↓ MPi LR → no role

What distinguishes "short run" from "long run"?

SR → contractual agreements ⇒ fixed inputs LR → situation where all inputs are variables

What is the Hicksian decomposition?

The method of decomposing the effects of a price change in good "B" into a substitution effect (holding utility constant) and an income effect (which results from a change in buying power as the price of B changes.

10. In what sense is the "ceteris paribus" assumption essential to the standard textbook definition for defining substitutes and complements?

The price change initiated for the definition to apply must be external to the consumer (holding all else constant for the consumer).

How does one distinguish between the concepts of risk neutrality (RN), risk aversion (RA), and risk loving (RL) behavior?

This goes back to the consumer's evaluation of EU from a gamble (a risky choice) vs the total utility of a change in wealth based on the EV of the gamble. RN ⇒ EU = Utility of the EV RA ⇒ EU < Utility of the EV RL ⇒ EU > Utility of the EV Be sure you know how to identify these cases graphically, as shown in class.

7. Explain the relevance of the "sign" of dTE/dP = Q (1-Ed) to understanding how changes in supply (which change market price) impact consumer spending (total expenditures).

dTE/dP represents the mathematical relationship between changes in market price, total consumer spending, and the Ed, moving along a given demand curve. If dTE/dP >0 this means that if price increases then TE decreases (that is, the price and TE move in the same direction. As the equation above shows, dTE>0 only if Ed<1. The opposite is true if dTE/dP <0. If dTE/dP=0, then a change in price does not affect total expenditures.

2. Unemployment created by an increase in a binding price floor will be _________ in the long term as both the Ed and the Es become __________________.

greater...... greater

4. An excise tax would increase government revenues to the largest extent when demand is highly _________ and supply is highly ___________.

inelastic .... inelastic

6. In the event of an increase in subsidies to purchase health insurance and a decrease in the liability of insurers, the market demand will increase due to an increase in (MWP) ________________ by potential buyers of insurance and a decrease in (MWA) ________________ by potential suppliers of insurance. The impact of such policies will have the greatest effect on the number of those covered by insurance when demand and supply are highly ____________________.

maximum willingness to pay ..... minimum willingness to accept ........ elastic

A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit and capital $5 per unit. For the quantities of inputs employed, MPL = 7 and MPK = 5. In this situation, the firm A. is producing the maximum output possible given the prices and relative productivities of the inputs. B. could increase its output at no extra cost by using more capital and less labor. C. could lower its production costs by using more labor and less capital. D. should use more of both inputs in equal proportions.

*B. could increase its output at no extra cost by using more capital and less labor.

Which of the following statements about marginal cost is FALSE? A. An upward sloping SR marginal cost curve implies the existence of declining marginal product of the variable input. B. When marginal cost equals average cost, average cost is at its minimum. C. In the short-run, the marginal cost curve is vertical if the marginal product of the variable input is constant. D. When marginal cost is falling, total variable costs are rising at a decreasing rate.

*C. In the short-run, the marginal cost curve is vertical if the marginal product of the variable input is

Which of the following statements about marginal cost is FALSE? A. An upward sloping SR marginal cost curve implies the existence of declining marginal product of the variable input. B. When marginal cost equals average cost, average cost is at its minimum. C. In the short-run, the marginal cost curve is vertical if the marginal product of the variable input is constant. D. When marginal cost is falling, total variable costs are rising at a decreasing rate.

*C. In the short-run, the marginal cost curve is vertical if the marginal product of the variable input is constant.

8. Ceteris paribus, government revenues from an excise tax will A. be greater if demand is highly inelastic. B. be greater if supply is highly inelastic. C. both of the above are true. D. neither of the above are true.

*C. both of the above are true.

The substitution effect is the change in consumption due to A. a change in relative prices. B. a change in income. C. a change in utility. D. a change in preferences.

A. a change in relative prices.

For an increase in price, isolation of the substitution effect would require A. positive income compensation. B. negative income compensation. C. no change in income. D. more information is needed.

A. positive income compensation.

If a good is inferior and the income effect is larger than the substitution effect A. the good is a Giffin good. B. the good is a Hicksian good. C. the demand for the good is elastic. D. the demand for the good is horizontal.

A. the good is a Giffin good.

7. Suppose that buyers' incomes decline in the market for package noodle meals, an inferior good. At the same time there is an increase in costs to produce noodles. What does the supply and demand model predict would happen in this market? A. The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous (could increase, or decrease, or remain the same). B. Both equilibrium price and equilibrium quantity would decrease. C. Both equilibrium price and equilibrium quantity would increase. D. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous (could increase, or decrease, or remain the same). E. The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous (could increase, or decrease, or remain the same).

A.* The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous (could increase, or decrease, or remain the same).

As discussed in class, a monopolist does not have a supply curve. The reason for this is A. at the optimal output, the price charged by the monopolist will vary with the elasticity of demand for the good produced. B. at the optimal output, the price charged by the monopolist will vary with the MC for producing the good. C. at the optimal output, the price charged by the monopolist will vary depending whether the situation is short run or long run. D. at the optimal output, the price charged by the monopolist will vary depending on whether the monopolist is making economic profits.

A.* at the optimal output, the price charged by the monopolist will vary with the elasticity of demand for the good produced.

Which of the following statements is false? A. expected utility is the same as utility of the expected value. B. risk aversion implies a declining marginal utility of wealth. C. risk neutrality implies constant marginal utility of wealth. D. All of the above statements are False.

A.* expected utility is the same as utility of the expected value.

12. Suppose the government wants to decrease consumption of several goods by implementing a per-unit excise tax on the sell of those goods. In which of the following demand and supply curve combinations would the government's goal be most successful? A. highly elastic supply and demand B. highly inelastic supply and demand C. highly elastic demand and highly inelastic supply D. highly inelastic demand and highly elastic supply

A.* highly elastic supply and demand

2. Suppose the price elasticity of demand for auto insurance has been estimated to be 1.45. This implies, acting as a group insurance companies could increase their revenues by A. lowering rates on insurance policies. B. imposing price floors on the policies they sell. C. decreasing the supply of insurance policies. D. all of the above are true.

A.* lowering rates on insurance policies.

8. When the opportunity costs of sellers increase, their A. reservations prices increase and the equilibrium price increases. B. reservations prices decrease and the equilibrium price increases. C. reservations prices increase and the equilibrium price decreases. D. reservations prices decrease and the equilibrium price decreases.

A.* reservations prices increase and the equilibrium price increases.

If a decision maker is risk loving, it implies A. the utility from the expected value of a lottery is less than the expected utility from the lottery. B. the decision makers reservation price for the lottery is less than the expected value. C. the decision maker's total utility is decreasing as wealth increases beyond a particular threshold of risk. D. All of the above are true for a risk loving decision maker.

A.* the utility from the expected value of a lottery is less than the expected utility from the lottery.

How is the marginal rate of substitution of good B for good A related to the slope of the indifference curve?

As shown in class, the MRS of good B for good A can be shown to equal the "negative of the slope of the indifference curve" and equal to the MU of good B divided by the MU of good A.

11. Assume a binding wage floor is increased for "unskilled" labor. Given a longer time period for adjustment, one would expect: A. the resulting unemployment to decrease. B. the resulting unemployment to increase. C. the demand for unskilled workers to decrease. D. the demand for unskilled workers to increase.

B.* the resulting unemployment to increase.

Moving along an indifference curve over two goods, A and B, A. expenditures are held constant. B. total utility is held constant. C. marginal utility is held constant. D. All of the above are TRUE.

B. total utility is held constant.

6. For the inverse demand P = $10 - Q, the elasticity of demand is equal to one when P = ____ and Q = ____. A. $1, 10 B. $5, 5 C. $10, 5 D. $5, 10 E. None of the above are correct.

B.* $5, 5

9. Suppose housing insurance is a perfectly competitive market. Now suppose, new legislation significantly INCREASES government aid to homeowners in the case of flooding and also REDUCES the liability (the amount they have to pay out if there is a flood) insurance companies have in the case of flooding. What would be expected affect on the market for home owner flood insurance? A. Increase Pe, indeterminate affect on Qe B. Decrease Pe, indeterminate affect on Qe C. Increase Qe, indeterminate affect on Pe D. Decrease Qe, indeterminate affect on Pe

B.* Decrease Pe, indeterminate affect on Qe

If a person is risk averse A. MWP > EV B. MWP < EV C. Both A and B could be true. D. Neither A or B is true.

B.* MWP < EV

Present value of a future payment (Z), 10 years from now (with interest rate "r") equals A. Z/(1+r) B. Z/(1+r)10 C. Z*(1+r) D. Z*(1+r)10

B.* Z/(1+r)10

Based on the model of preferences and discounting, if an individual is said to have a low "discount factor" they A. act as if they care less about the future. B. act as if care more about the future. C. are likely to be risk averse. D. are less likely to be risk averse.

B.* act as if care more about the future.

10. The interest rate paid by borrowers and received by sellers is the price of that loan. Ceteris paribus, revised expectations that future interest rates will increase will change the supply and demand for current loans, leading to A. an increase in current equilibrium interest rates and an increase in the current equilibrium quantity of loans. B. an increase in current equilibrium interest rates and an indeterminate effect on the current equilibrium quantity of loans. C. a decrease in current equilibrium interest rates and an increase in the current equilibrium quantity of loans. D. a decrease in current equilibrium interest rates and a decrease in the current equilibrium quantity of loans. E. an indeterminate effect on current interest rates.

B.* an increase in current equilibrium interest rates and an indeterminate effect on the current equilibrium quantity of loans.

6. Assume economists can either teach economics, work for private firms, or work for the government. Holding all other factors constant, an increase in salaries for economists in the private sector due to an increase in demand would be expected to A. reduce the demand for economics teachers. B. decrease the supply of economics teachers. C. decrease the demand for economists in the private sector. D. increase the supply of economists in the private sector.

B.* decrease the supply of economics teachers.

5. Assume farmers in Indiana can grow either corn or soy beans. Ceteris paribus, a decrease in the profitability of growing corn would be expected to A. cause an downward movement along the market supply curve for corn. B. increase the market supply of soy beans - lowering farmers' reservation prices for supplying soy beans. C. decrease both the market demand and market supply for corn. D. increase the demand for soy beans, leading to an upward movement along the supply market curve for soy beans.

B.* increase the market supply of soy beans - lowering farmers' reservation prices for supplying soy beans.

Assume a is profit maximizing (or loss minimizing), it currently has TR=$20,000 per week and TFC = $5,000 per week. If this firm has TVC=$18,000 and an O.C. of $10,000 per week A. should shut down B. is making economic losses but accounting profits. C. is making both economic losses and accounting losses. D. is making economic profits and accounting profits.

B.* is making economic losses but accounting profits.

As discussed in class, ceteris paribus, a monopolist has greater monopoly power when A. it faces a demand curve that is relatively more elastic. B. it faces a demand curve that is relatively more inelastic. C. it faces economies of scale in production. D. it faces MC that are less than MR at all levels of output.

B.* it faces a demand curve that is relatively more inelastic.

Without being subsidized, a single price profit maximizing monopolist will never operate in the inelastic segment of its demand curve because A. average revenues are negative. B. marginal revenues are negative. C. total revenue is negative. D. none of the above are true.

B.* marginal revenues are negative.

Based on the rule for maximizing utility, if the price of good A is twice that of good B then A. the TU from A must be twice the TU from B. B. the MU of the last unit of A must be twice the MU of the last unit of B. C. the consumer must buy twice as many units of B in comparison to A. D. None of the above are correct.

B.* the MU of the last unit of A must be twice the MU of the last unit of B.

7. The imposition of a binding quota on imported sugar would have the smallest impact on sugar prices if A. the demand for sugar is highly inelastic. B. the demand for sugar is highly elastic. C. the supply of sugar with no quota is highly elastic. D. the supply of sugar with no quota is highly inelastic.

B.* the demand for sugar is highly elastic.

Using only an isocost line, one can identify A. the least costly combination of inputs needed to produce a given level of output. B. the relative prices of inputs. C. the technological relationships among inputs. D. the rate at which one input can be substituted for another in the production process to hold output constant.

B.* the relative prices of inputs.

A perfectly competitive firm is producing 1,000 units of output per week in a market where the market price is $50 per unit. At this output level, TC = $40,000 and TVC = $30,000. The firm is currently producing a level of output where MC is increasing and equal to $70. This output level maximizes the difference between market price and MC. Assuming this firm wants to maximize total profits, we can conclude that A. this firm should increase output. B. this firm should decrease output. C. this firm should shut down. D. this firm is producing the output level that maximizes profits.

B.* this firm should decrease output.

Which of the following statements about the relationship between marginal cost (MC) and average cost (AC) is correct? A. AC is falling only when MC is falling. B. AC equals MC at MC's lowest point. C. When MC exceeds AC, AC must be rising. D. When AC exceeds MC, MC must be rising.

C. * When MC exceeds AC, AC must be rising

Which of the following statements about the relationship between marginal cost (MC) and average cost (AC) is correct? A. AC is falling only when MC is falling. B. AC equals MC at MC's lowest point. C. When MC exceeds AC, AC must be rising. D. When AC exceeds MC, MC must be rising.

C. * When MC exceeds AC, AC must be rising.

Which of the following statements is TRUE? A. An increase in income will always cause an increase in demand. B. The equal marginal principle implies for maximization of utility, the MU of the last unit of good A will equal the Marginal Utility of Good B. C. After a price increase for good A, the substitution effect will lead to reduced consumption of good A, while the income effect may lead to increased or decreased consumption of good A. D. The marginal rate of substitution of good B for good A will increase as the consumer compares bundles of goods with smaller amounts of good A and larger amounts of good B.

C. After a price increase for good A, the substitution effect will lead to reduced consumption of good A, while the income effect may lead to increased or decreased consumption of good A.

If demand is perfectly inelastic A. the substitution effect is zero. B. the income effect is zero. C. the sum of the substitution and income effects is zero. D. None of the above are true.

C. the sum of the substitution and income effects is zero.

When the price-consumption curve is A. upward-sloping, total expenditures on the good are increasing as the price falls. B. downward-sloping, total expenditures on other goods are increasing as the price falls. C. upward-sloping, total expenditures on the good are decreasing as the price falls. D. upward-sloping, total expenditures on other goods are decreasing as the price falls.

C. upward-sloping, total expenditures on the good are decreasing as the price falls.

If marginal product of the variable input is declining then we can infer A. MC is declining and AC are increasing. B. MC is increasing and AVC are decreasing. C. TVC are increasing at an increasing rate. D. Total product is decreasing at an increasing rate.

C.* TVC are increasing at an increasing rate.

4. Many economics texts define goods A and B as complements if the demand for A decreases when the price of B increases. This definition assumes A. A and B must be purchased as a set. B. The price increase in B was caused by a change in demand. C. The price increase in B was caused by a change in market price not related to a change in demand. D. None of the above are true.

C.* The price increase in B was caused by a change in market price not related to a change in demand.

2. If good Y is a complement to good X, an increase in the price of Y, resulting from an increase in the cost of producing Y, results in A. a decrease in demand for Y and X. B. a decrease in the demand for Y and a movement downward along the demand curve for X. C. a movement upward along the demand curve for Y and a decrease in the demand for X. D. a decrease in the demand for Y and an increase in the demand for X.

C.* a movement upward along the demand curve for Y and a decrease in the demand for X.

9. The price increase following the increase of a per unit tax on the sell of cigarettes is referred to as the burden of the tax on buyers. The increase in price would be A. greatest in the long term. B. greatest if demand and supply are highly inelastic. C.* greatest if demand is highly inelastic and supply is highly elastic. D. greatest if demand is highly elastic and supply is highly inelastic.

C.* greatest if demand is highly inelastic and supply is highly elastic.

For a given short-run cost function, A. technology is assumed to change as capital stock changes. B. technology is assumed to change as the labor input changes. C. technology is considered to be constant. D. technology is assumed to change positively until diminishing returns set in and then it increases.

C.* technology is considered to be constant.

In the short run, the individual firm's supply curve includes A. that portion of the average total cost curve above minimum marginal cost. B. that portion of the marginal cost curve above minimum average total cost. C. that portion of the marginal cost curve above minimum average variable cost. D. that portion of the marginal cost curve above minimum marginal cost.

C.* that portion of the marginal cost curve above minimum average variable cost.

The expected utility of a two outcome gamble is defined as A. the utility one places on winning a gamble. B. the weighted probability of the dollar value of each outcome of the gamble. C. the weighted probability of the utilities of both outcomes of the gamble. D. the utility one gains from the best outcome of the gamble minus the utility one gains (or loses) from the worst outcome of the gamble.

C.* the weighted probability of the utilities of both outcomes of the gamble.

The process of movement to LR equilibrium in a perfectly competitive industry is based on A. entry of new firms when economic profits are being made by existing firms. B. adjustment of output by existing firms based on LR costs. C. exit of firms when economic profits are negative. D. All of the above are true.

D.* All of the above are true.

How is convexity of indifference curves related to the marginal rate of substitution?

Convexity implies the slope declines as good B is substituted for Good A. This implies convexity depends on a declining MRS of good B for Good A.

Assume that peanut butter is an inferior good. Which of the following best describes the income and substitution effects as the price of peanut butter rises? A. The substitution effect leads the consumer to buy more peanut butter while the income effect would cause the consumer to purchase less. B. Both the income and substitution effects would cause the consumer to purchase less peanut butter, although the substitution effect is larger. C. Both the substitution and income effects would cause the consumer to purchase more peanut butter. D. The substitution effect causes the consumer to buy less peanut butter while the income effect causes the consumer to purchase more.

D. The substitution effect causes the consumer to buy less peanut butter while the income effect causes the consumer to purchase more.

If the demand curve for a good is downward sloping, then the good must be A. normal. B. inferior. C. Giffen. D. either normal or inferior but not Giffin E. either inferior or Giffin.

D. either normal or inferior but not Giffin

1. Which of the following statements is false? A. Demand is a set of limit prices (MWP), ranked from highest to lowest. B. Demand is a relationship between possible prices and the maximum quantity that consumers are willing to purchase at each possible price. C. Qd changes as surpluses or shortages are reduced. D. A movement along the demand curve for X is caused by a change in preferences.

D.* A movement along the demand curve for X is caused by a change in preferences.

Suppose at an output of 50, ATC=Average Revenue. At all other levels of output, ATC exceeds average revenue. At Q=50, the firm A. is making zero economic profits. B. is making positive IRS profits. C. is maximizing profits. D. All of the above are TRUE.

D.* All of the above are TRUE.

A perfectly price discriminating monopolist will A. have a demand curve and a MR curve that are equivalent. B. produce greater output than a single price monopolist. C. operate such that consumer surplus is reduced to zero and producer surplus is maximized. D. All of the above are correct.

D.* All of the above are correct.

If the expansion path is linear and the firm faces increasing returns to scale A. average costs will decline. B. doubling inputs will more than double output. C. marginal cost must be less than average cost. D. All of the above are true.

D.* All of the above are true.

Suppose a firm's expansion path is known to be non-linear. In that case we can infer A. If the firm faces decreasing returns to scale it may also face economies of scale. B. If the firm faces decreasing returns to scale it may also face diseconomies of scale. C. If the firm faces constant returns to scale it will face economies of scale. D. All of the above are true.

D.* All of the above are true.

10. If the market demand curve for a good is P = 800 - 4Q, which of the following statements is true? A. Price elasticity of demand interval from P = $550 to P = $540 is greater than price elasticity over the demand interval from P = $500 to P = $510. B. Price elasticity at P = $400 is equal to one. C. Buyers' total expenditures are maximized when P = 400 and Q = 100. D.* All of the above statements are true.

D.* All of the above statements are true.

Together, the axioms of transitivity and non-satiation imply that A. indifference curves do not intersect. B. indifference curves are downward sloping. C. indifference curves show bundles of goods that yield the same level of utility. D. Both A and B are correct E. All of the above are implied by the axiom of transitivity.

D.* Both A and B are correct

3. Which of the following cases illustrates a situation where demand is most price inelastic? A. Wage rates for clerical workers increase by 20% and the number of workers hired decreases by 40%. B. Prices for theater tickets fall by 10% and the number of tickets sold increases by 15%. C. Gasoline prices fall from $2.25 per gallon to $2.00 per gallon and total sales revenue increases from $10,000 per month to $19,000 per month. D. Gasoline prices rise from $2.00 per gallon to $2.25 per gallon and total sales revenue increases from $5,000/month to $6,000/month.

D.* Gasoline prices rise from $2.00 per gallon to $2.25 per gallon and total sales revenue increases from $5,000/month to $6,000/month.

The theory of P.C. implies that supply will increase if A. the MC schedule of firms shifts downward. B. input prices decrease. C. opportunity costs decrease. D. all of the above.

D.* all of the above.

Assume at the level of output where MC=MR, a firm experiences TR = $40,000 per week, TFC = $100,000 per week, and TVC = $38,000. The TVC include opportunity costs equal to $13,000 per week. This firm A. should shut down. B. is making a zero economic profit, but accounting profits. C. is making economic losses, but may be making accounting profits. D. is making both economic losses and accounting losses, but should operate in the SR.

D.* is making both economic losses and accounting losses, but should operate in the SR.

1. Suppose that an increase in the supply of blank CDs causes an 8% decrease in the price of blank CDs, and a 2% increase in the quantity of blank CDs purchased. It follows that A. the elasticity of supply of blank CDs is 4.00. B. the elasticity of supply of blank CDs is 0.25. C. the elasticity of demand of blank CDs is 4.00. D. the elasticity of demand of blank CDs is 0.25.

D.* the elasticity of demand of blank CDs is 0.25.

A tangency point between an isoquant and an isocost line identifies A. the least costly combination of inputs required to yield a particular level of spending. B. the various levels of output that can be produced using a given level of inputs. C. alternative combinations of inputs that can be used to produce a given level of output. D. is the least costly combination of inputs required to produce a given level of output.

D.* the least costly combination of inputs required to produce a given level of output.

A tangency point between an isoquant and an isocost line identifies A. the least costly combination of inputs required to yield a particular level of spending. B. the various levels of output that can be produced using a given level of inputs. C. alternative combinations of inputs that can be used to produce a given level of output. D. the least costly combination of inputs required to produce a given level of output.

D.* the least costly combination of inputs required to produce a given level of output.

Discounted utility of a future event refers to _____________________________________ ____________________________________________________________________. An example of discounted utility is ___________________________________________ _____________________________________________________________________

Discounted Utility) refers to discounting the value one expects to receive from a future event. The rate one discounts the value of a future event changes one's current choices. For example, ceteris paribus, someone who places a high value on getting scholarships to go to college will study more when they are in high school compared to someone who is not concerned about scholarships.

The second order condition for profit maximization implies that A. economic profits must equal zero. B. marginal product must be increasing. C. marginal cost must equal marginal revenue. D. the expansion path must be linear. E. None of the above are correct answers.

E. * None of the above are correct answers.

If the marginal product of labor is declining A. the average product of labor must be declining. B. total output must be declining. C. returns to scale must be decreasing. D. All of the above are true. E. None of the above are true.

E.* None of the above are true.

How is MC related to AVC? How is MC related to TVC?

If MC > AVC → AVC ↑ If MC < AVC then AVC ↓ If MC ↓ → TVC ↑ at a ↓ rate

For a given level of output, the cost minimizing level of inputs implies MPL/ PL= MPK/ PK? In words, explain why this equation also makes "sense" from the perspective of maximizing output for a given cost.

If MPL/PL ≠ MPK/PK then the firm could increase output (with the same TC) by choosing more of the input that has the higher marginal product per dollar spent.

What is the difference between expected value of a gamble and the expected utility of a gamble? If you were risk averse, how would evaluate a gamble in terms of these two concepts?

EV = math concept. EV = p($A1) + (1 - p)($A2) where A1 and A2 are two possible outcomes. EU = measurement of "satisfaction" over the two outcomes weighted by their probabilities. EU = p(TUA1) + (1 - p)( TUA2)

What is the equal marginal principle? How is this principle derived from the constrained optimization problem?

Equal Marginal Principle: MUa/Pa = MUb/Pb. Note that a better description of the principle would be the "equal marginal per dollar spent principle." As shown in class, this principle follows from the observation that the optimal bundle for consumption is a point of tangency between the indifference curve and the budget line. It thenf ollows that this point of tangency is where the MRS of good B for good A equals the negative of the slope of the budget line, which is equal to the Pb/Pa.

9. True or False - explain - The supply of new Toyota Camrys increases when demand increases.

False - First, supply is not the appropriate model for examining the offering of new Toyota Camrys(although with internet competition between distributors, this may be evolving toward a perfectly competitive market situation). Second, an increase in demand does not change supply (at least in a short run model).

8. True or False - explain - A decrease in consumer wealth must decrease demand for all goods.

False - a decrease in wealth will decrease demand for normal goods, but increase demand for inferior goods.

7. True or False - explain - The market price is equivalent to the equilibrium price.

False - if markets are not in equilibrium, the market price will differ from the equilibrium price.

5. True or False - explain - If supply increases, demand will increase.

False, demand is not changed by a change in supply. Quantity demanded changes as a result of the price change caused by the supply change.

4. True or False - explain - If both supply and demand increase, market price must increase.

False, on in the special case of which the shifts exactly offset each other.

Why does the case of a "Giffin Good" violate the so called law of demand?

Giffen Good ⇒ PX ↑ QDx ↑ or PX ↓ QDx ↓

Use the Hicksian Decomposition method to show income and substitutions effects for the three cases below.

If Px changes:a) X is a normal good, b) X is an inferior good but not a Giffin good, c) X is an inferior good and a Giffin good (See class notes for these graphs)

8. Based on your response to question 7, what are the implications for the effect of an increase in minimum wage on total earnings by workers who have jobs paying the minimum wage?

If the increase in minimum wage is above the market equilibrium wage (an effective or binding minimum wage), then whether a minimum wage increases overall spending on minimum wage workers depends on whether the Ed for these workers is greater than or less than zero. Importantly, we expect the demand for workers to be relatively more elastic in the long term. Therefore we expect the long term effects will be larger than the short term effects.

How can the model of expected utility relate back to maximum willingness to pay for insurance against losses that might occur with a known probability? How does the MWP by an individual vary depending on whether the person is risk averse, risk loving, or risk neutral?

In this example, the starting wealth value is $100,000. The amount "F" is the loss (think of it as a loss due to a fire). In the example above, F is $80,000, with a probability of a fire of 10%. That is, if there is a fire, the homeowner's property is worth only $20,000 and the fire occurs with a 10% probability. The expected value (EV) is equal to .1(20,000) + .9 (100,000) = $92,000. The dollar amount of $65,000 (an example since we don't know exactly what this amount will be other than it is between $20,000 and EV=$92,000) is an amount of money that would give the individual the same total utility as the expected utility of the gamble. So, if the person can buy insurance for less than $35,000, they end up being assured of having a higher level of utility than that associated with the expected utility if they did not buy insurance (EU(G)). In this example, the number $65,000 is somewhat arbitrary (it depends on the shape of the TU function)... what if the TU was less "bowed"... that would mean the person was closer to being risk neutral and they would be willing to pay less for insurance. If the individual were risk loving, MVP would be less than the difference between W and EV. Risk neutrality implies a MWP equal to the difference between W and EV in the graph above. Convince yourself this is true with appropriately drawn graphs.

In regard to a Total Product curve, at what point does MPL reach its maximum? Can MPL be negative? If so, what would that imply about the TP curve?

L* ⇒ MAX MPL → inflection point MPL could be negative which would imply TP ↓.

What is the expansion path, define and draw it?

Line showing the combination of inputs that maximize output at alternative levels of spending (TC)

If MPL is constant at 10 units and the Price of Labor = $20 per unit, what do we know about MC of output?

MC = ΔTVC/ΔQ = $20/10 = $2 per unit.

Derive the relationship between MPL and MC algebraically. Why is this relationship critical to showing how the law of diminishing returns affects our expectations regarding SR costs?

MPi = ∆Q ∆i MC = ∆TVC ∆Q = Pi∆i ∆Q = Pi 1 MPi So, if MPi ↑, MC ↓ & MPi ↓, MC ↑

Why must a Giffin Good be an inferior good in which the income effect dominates the substitution effect?

Substitution effect is negative: PX ↑ QDx ↓ or PX ↓ QDx ↑ Income effect would have to be in the opposite direction and larger.

5. Following a supply increase, the market price is expected to decrease as a result of a ________ at the former equilibrium price. This fall in price is expected to increase ________________ and decrease ____ _________ along the new supply curve.

Surplus ......quantity demanded ....quantity supplied

What is the PCC? How does the slope of a PCC relate to the total expenditure function and the elasticity of demand?

The PCC (price consumption curve) is the set of optimal consumption bundles derived by changing the price of one good while holding income and the price of the other good constant. With good B on the horizontal axis, a negative slope of the PCC ⇒ an elastic demand for B and a positive slope implies an inelastic demand. This relationship is shown by showing howexpenditures on B increase or decrease as the price of B changes.

If goods A&B have strictly positive marginal value to the individual, can indifference curves be upward sloping? Horizontal? Vertical?

The answer to all three questions is "NO". In each case, the axiom of non-satiation would be violated .....

6. True or False - explain - The inverse demand function is useful for depicting a particular definition of demand.

True - the definition that links quantity demand to limit prices.

Define a compensated demand curve as a demand curve in which utility is held constant. How is utility held constant? Why would economic theory predict this demand curve to be downward sloping?

Utility is held constant by adjusting income so that the consumer faces the "new" relative price but is on their original indifference curve. If utility is held constant, only the substitution effect is realized.

If the price good B falls and expenditures on good B increase, what do we know about the elasticity of demand for good B? In a two good world, in this scenario, what must happen to the quantity of good A purchased and expenditures on good A?

We know from our earlier discussions that if Pb falls and total expenditures on good B increase, then the elasticity of demand for Good B is greater than one for that price change. It also follows that, ceteris paribus, if a price change leads to greater total expenditures on good B, then expenditures on good A must fall. One would simply have less income to spend on Good A, if expenditures on good B increase.

Using indifference curves and budget lines for a two good scenario, show why an increase in income must imply at least one good is a normal good.

Your graph would show an indifference curve mapping, with several budgets lines that shift outward as income increases. The optimal bundle would change as income increases. if income is increasing, expenditures must increase for at least one of the goods.

3. If demand is linear, the Ed _________ as one move downward along the demand curve, and equals one at the ____________ of the demand curve.

decreases ...... midpoint