micro ch 5-13

If Firm A is in a cartel and cuts its price from $450 to $300, based on the kinked demand curve, what will other firms in the market do?

The other firms will also cut their price to $300, as can be seen on the steep portion of the kinked demand curve. As seen on the steep portion of the kinked demand curve, if one competitor lowers its price, all firms will lower price to stay competitive. If they don't they will lose all sales to Firm A.

___________ occurs when the price of a good changes and consumers have an incentive to consume less of the good with a higher price and more of the good with a lower price.

The substitution effect The substitution effect occurs when the price of one goods increases and consumers substitute away towards other cheaper alternatives. That is, when the price of a good increase, it becomes relatively more expensive and so consumers will decrease their quantity demanded for that good and increase their demand for other substitute goods. If the price of a good decreases, it becomes relatively more cheaper and so consumers will increase their quantity demanded for that good and decrease their demand for other substitute goods.

Which of the following is considered to be one of the shortcomings of command-and-control regulations?

They often have politically motivated loopholes. Although command-and-control regulations have helped to protect the environment, they have three shortcomings: they provide no incentive for going beyond the limits they set; they offer limited flexibility on where and how to reduce pollution; and they often have politically-motivated loopholes. Legislators and EPA analysts write the command-and-control regulations, and so they are subject to compromises in the political process. Consequently, real-world environmental laws are full of fine print, loopholes, and exceptions.

Which of the following is not a characteristic of oligopoly?

a large number of competing firms selling non-identical products A large number of competing firms selling non-identical products is a characteristic of monopolistically competitive markets, not oligopolies.

A manufacturing firm has a marketable permit that currently allows for 175 tons of emissions. However, the marketable permit is shrinkable and the firm will only be allowed 150 tons of emissions next year. The manufacturing firm projects that its actual emissions next year will be 160 tons. It is the best interest of the manufacturing firm to purchase permits allowing for _______ tons of emissions.

10 Because the manufacturing firm is projecting 160 tons of emissions and their current permit will only allow for 150 tons of emissions, they will need to purchase permits for 10 tons of emissions.

A manufacturing firm has a marketable permit that currently allows for 700 tons of emissions. However, the marketable permit is shrinkable and the firm will only be allowed 550 tons of emissions next year. The manufacturing firm projects that it's actual emissions next year will be 475 tons. Permits for how many tons of emissions should the manufacturing firm sell?

75 tons of emissions Because the manufacturing firm is projecting 475 tons of emissions and their current permit will allow for 550 tons of emissions, they can sell permits worth 75 tons of emissions.

Which of the following is an example of a positive externality?

Bob paints a nature scene on a large canvas at the park and people passing by stop to watch him paint. A positive externality is a situation where a third party, outside the transaction, benefits from a market transaction by others. In this situation, Bob painting in a public park creates a positive externality for those passing by who enjoy his artwork.

What does the perceived demand curve for a monopolistic competitor look like?

It slopes downward. The demand curve for a monopolistic competitor slopes downward because firms in this industry have market power, which allows them to increases their prices without losing all of their customers. A monopolistic competitor's demand curve is not quite as inelastic as a monopoly's demand curve due to things like product differentiation. However, it is also not quite as elastic as perfectly competitive firm's demand curve. Therefore, it falls somewhere in the middle.

What is the main difference between a monopoly and monopolistic competition?

Monopolistic competition is characterized by an industry with many firms, differentiated products and easy entry and exit, while monopoly is a single firm with high barriers to entry. A monopoly is a single firm with high barriers to entry. Monopolistic competition implies an industry with many firms, differentiated products, and easy entry and exit.

In a cartel, if oligopolists always match price cuts by other firms in the cartel, but do not match price increases, which of the following is not a possible outcome?

One firm in the cartel could lower its prices to attract customers from all of the other firms and then be the dominant firm. If oligopolists always match price cuts by other firms in the cartel, but do not match price increases, then none of the oligopolists will have a strong incentive to change prices, since the potential gains are minimal. If an oligopolist decides to produce more and cut its price, the other members of the cartel will immediately match any price cuts—and therefore, a lower price brings very little increase in quantity sold. If an oligopolist seeks to raise prices, the other oligopolists will not raise their prices, and so the firm that raised prices will lose a considerable share of sales

occurs when an existing firm (or firms) reacts to a new firm by dropping prices very low and, as a result, drives the new firm out of the market. The existing firm then raises prices again.

Predatory pricing By definition, predatory pricing occurs when an existing firm (or firms) reacts to a new firm by dropping prices very low until the new firm is driven out of the market, at which point the existing firm raises prices again.

Which of the following is an example of command-and-control regulation?

The local government setting a limit on ground level ozone allowable within city limits. The local government setting a limit on ground level ozone allowable within city limits is considered an example of command-and-control regulation because addresses how much pollution can be emitted into the environment.

Using the table below, calculate the total profit (π) for this monopoly at output level Q=5.

Total profit is the sum of marginal profits. To find total profit at output level Q=5, add the marginal profits of Q=1 through Q=5. $200+$150+$75+$0+(−$120)=$305

At the end of the year, after taxes, a manufacturing firm has $230,000 in revenues, $90,000 in production costs, and $140,000 in opportunity costs. How much economic profit did the firm make?

When a manufacturing firm ends its year with an accounting profit equal to its production costs and opportunity costs combined, this is referred to as earning zero economic profits. Economic Profit=Total Revenues−Explicit Cost−Implict Cost If Total Revenues=Explicit Cost+Implict Cost then Economic Profit>0

Which of the following is evidence of predatory pricing?

a firm is selling a service for less than its average variable cost A commonly proposed rule for detecting predatory pricing is that if a firm is selling for less than its average variable cost—that is, at a price where it should be shutting down—then there is evidence for predatory pricing.

A legal monopoly is _____________________.

a situation in which there are legal prohibitions against competition For some products, the government erects barriers to entry by prohibiting or limiting competition. Most legal monopolies are considered utilities—products necessary for everyday life—that are socially beneficial to have. As a consequence, the government allows producers to become regulated monopolies, to ensure that an appropriate amount of these products is provided to consumers.

Consider the example of a clothing manufacturer/seller who would like to differentiate its products from those of other firms. Which of the following is an example of a physical aspect that contributes to differentiating products?

adding the manufacturer's logo to all items in the current season's collection Using physical aspects of products to differentiate them from products of competing firms implies that the products themselves are physically designed to be unique or appeal to customer preferences. Adding logos to a line of clothing is an example of product differentiation through physical aspects.

Which of the following does production entail?

all of the above This activity of production goes beyond manufacturing (i.e., making things). It includes any process or service that creates value, including transportation, distribution, wholesale and retail sales. Production involves a number of important decisions that define a firm's behavior. These decisions include, but are not limited to: What product or products should the firm produce? How should the firm produce the products (i.e., what production process should the firm use)? How much output should the firm produce? What price should the firm charge for its products? How much labor should the firm employ?

______, also known as profit margin, is the profit divided by quantity produced, or average revenue minus average cost.

average profit Average profit and profit margin are synonymous. They are equal to price - average cost.

The graph below represents production costs at the button factory. The x-axis represents output, and the y-axis represents cost. Curves represented are marginal cost, average total cost, and average variable cost. The curve labeled 'B' represents what kind of curve?

average total cost Information on total costs, fixed cost, and variable cost can be presented on a per-unit basis. The average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. The average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is also typically U-shaped. The marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.

What is the name for the legal, technological, or market forces that discourage or prevent potential competitors from entering a monopoly market?

barriers to entry Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

A group of firms that have a formal agreement to collectively produce the monopoly output and sell at the monopoly price is called a(n) ________.

cartel By definition, a cartel is a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price.

If the long-run average cost curve has a ___________, competing firms that produce at minimum costs will have to produce the same exact quantity of output.

clear minimum point When the LRAC curve has a clear minimum point, any firm that produces a different quantity from that minimum will have higher costs. All firms who choose to produce at the minimum cost will produce the same output.

When firms informally act together to reduce output and keep prices high, they are engaging in _____________.

collusion When firms act together to hold down industry output, charge a higher price, and divide the profit among themselves, it is called collusion. A group of firms that have a formal agreement to collude is called a cartel.

Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low once the fixed costs of the overall system are in place. This results in what?

economies of scale Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low once the fixed costs of the overall system are in place. This results in situations where there are substantial economies of scale since one established firm can expand output at lower cost than new firms just entering the market.

Which of the following goods does not have a high level of product differentiation?

electricity Goods with high levels of product differentiation show a lot of variety, or small differences, among them. Typically, utilities like electricity, gas, etc. are not products that can be differentiated.

A cost paid out of pocket is an ______ cost.

explicit An explicit cost is an out of pocket cost, or an actual payment such as wages and rent.

Market failure describes a situation in which the market itself ______________________ in a way that balances social costs and benefits.

fails to allocate resources efficiently When there is market failure, the private market fails to achieve efficient output, because either firms do not account for all costs incurred in the production of output and/or consumers do not account for all benefits obtained (a positive externality). In the case of pollution, at the market output, social costs of production exceed social benefits to consumers, and the market produces too much of the product.

What does the perceived demand curve for a perfectly competitive firm look like?

flat A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price

When a long-run average cost curve has a ______, ________ are able to compete in the market.

flat bottom; more firms of different sizes definite minimum; fewer firms of different sizes When a LRAC curve has a unique bottom point, more firms of different sizes are less likely to be able to compete because average costs will be too high. If the long-run average cost curve has a wide, flat bottom, firms of a variety of different sizes are able to compete because average cost stays low for a range of outputs.

All of the following are examples of fixed costs, except:

labor Fixed costs are the costs of the fixed inputs. Because fixed inputs do not change in the short run, fixed costs are expenditures that do not change regardless of the level of production. Whether you produce a great deal or a little, the fixed costs are the same. Labor is not a fixed cost. It is an example of a variable cost because it increases or decreases with output. The more output that is produced, the more labor is needed.

When a $1 loss of money pains an individual 2.25 times more than a $1 gain in money, we refer to this as _______________________.

loss aversion

The graph below represents production costs at the button factory. The x-axis represents output, and the y-axis represents cost. Curves represented are marginal cost, average total cost, and average variable cost. The curve labeled 'C' represents what kind of curve?

marginal cost Information on total costs, fixed cost, and variable cost can be presented on a per-unit basis. The average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. The average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is also typically U-shaped. The marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.

In situations in which there are substantial economies of scale, the ___________ of adding an additional customer is very _________ once the fixed costs of the overall system are in place.

marginal cost; low Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. This results in situations where there are substantial economies of scale.

Your grandma likes to play Bingo every Friday night. One night she wins $50 and spends it on coloring her hair pink even though she has been saving for a new rocking chair. She said because she won the $50 instead of receiving it in her social security check it was "fun money." This is an example of _______________________.

mental accounting Mental accounting is the idea of putting dollars in different mental categories where they take different values, whereas economists typically consider dollars to be fungible, or having equal value to the individual, regardless of the situation.

Your roommate is a smoker who often smokes in the common areas of the apartment you share. You are a nonsmoker who dislikes the smell of smoke. Is this considered a negative externality or a positive externality?

negative externality A negative externality is a situation where a third party, outside the transaction, suffers from a market transaction by others. Having a smoker for a roommate when you do not smoke and do not enjoy the smell is considered a negative externality because you have to deal with the unpleasant (to you) outcomes of your roommate's smoking habit.

A manufacturing firm has a marketable permit that currently allows for 400 tons of emissions. However, the marketable permit is shrinkable and the firm will only be allowed 200 tons of emissions next year. The manufacturing firm projects that it's actual emissions next year will be 200 tons. Which of the following actions would be in the best interest of the manufacturing firm?

not to buy or sell a marketable permit Because the manufacturing firm is projecting 200 tons of emissions next year and current marketable permit will allows for 200 tons of emissions, it is in their best interest not to buy or sell a marketable permit.

______ is the total revenue minus total costs.

profit Profit is found by subtracting total costs from total revenue, which is the income made from selling products.

A natural monopoly occurs when ______________ is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.

quantity demanded A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. In this situation, economies of scale are large relative to the quantity demanded in the market, and that's what creates the natural monopoly.

A manufacturing firm has a marketable permit that currently allows for 1000 tons of emissions. However, the marketable permit is shrinkable and the firm will only be allowed 800 tons of emissions next year. The manufacturing firm projects that it's actual emissions next year will be 700 tons. Which of the following actions would be in the best interest of the manufacturing firm?

sell a marketable permit allowing for 100 tons of emissions Because the manufacturing firm is projecting 100 tons of emissions under what their current marketable permit allows, it is in their best interest to sell a marketable permit allowing for 100 tons of emissions.

The long-run average cost (LRAC) curve is actually based on a group of ______________, each of which represents one specific level of fixed costs

short-run average cost curves The long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will show the least expensive average total cost for any level of output.

The long-run average cost curve is typically _______________________.

slope downward at first then upward towards the end

While a monopolist can technically charge any price for its product, the price is constrained by ________________.

the demand for the firm's product the market demand While a monopolist can charge any price for its product, the demand for the firm's product constrains the price. No monopolist, even one that is thoroughly protected by high barriers to entry, can require consumers to purchase its product. Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve, which implies that the market demand constrains the monopolist's price as well.

Which of the following best describes property rights?

the legal rights of ownership on which others are not allowed to infringe without paying compensation Property rights are the legal rights of ownership on which others are not allowed to infringe without paying compensation. The property rights approach is highly relevant in cases involving environmental protection and the minimization of negative externalities. After all, if an economic actor has a well-defined legal responsibility, then that actor will seek out and pay for the least costly method of reducing the risk or impact of any negative externality it may cause.

The result of a prisoner's dilemma in a duopoly is often that even though Firm A and Firm B could make the highest combined profits by cooperating, _______________________.

the two firms may well end up in a situation where they each end up with lower profits The result of a prisoner's dilemma in a duopoly is often that even though Firm A and Firm B could make the highest combined profits by cooperating in producing a lower level of output and acting like a monopolist, the two firms may well end up in a situation where they each increase output and each earn lower profits. This is because each firm will reason that betraying the cooperative strategy (by expanding output) is the best way to protect itself from potential betrayal from the other firm.

The sum of the fixed plus variable costs is known as _________.

total cost Total cost includes all costs used for production, both fixed and variable costs.

Which of the following types of cost changes with output?

total cost variable cost Variable costs are the costs of the variable inputs (e.g. labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output. Because total cost is the sum of fixed costs plus variable costs, and variable costs increase or decrease with variable inputs, then total cost will increase and decrease along with these variable inputs.

A ______ cost is the cost of inputs that increase or decrease with production.

variable Variable costs are the costs of the variable inputs (e.g. labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output.

When will a firm experience diseconomies of scale?

when LRAC increases as output increases By definition, diseconomies of scale occur when LRAC increases as the firm expands its output.

Which of the following is a potential benefit to consumers of product differentiation?

all of these are benefits Product differentiation benefits consumers in more ways than simply variety. Sellers go above and beyond to attract consumers to more than their product. Often they provide friendly service, quality assurance, free shipping, warranties, and more!

If Wendy considers pizza and salad to both be normal goods, when her income increases, she will maximize her utility by consuming at point __.

B If Wendy's income increases, then her budget constraint will also shift out. If she considers both pizza and salad to be in normal goods, then she will want to purchase more of both while on her new budget constraint. This is only seen at point B. At point C, she is still consuming at her old income level and is not maximizing her utility.

A budget constraint curve for electronic devices is shown above in the figure, with the original budget constraint on Point M. Suppose your income decreases. Which point(s) would potentially be located on your new budget constraint?

B If your income decreases, this means you would buy less of both goods and the possible points lie inside of your current budget constraint. Thus only B is a possible point when your income decreases. Points A & C represent maximum utility if income had increased. And Point M represents the original budget utility.

The figure below shows a budget constraint curve for a consumer who is deciding how many electronic devices to purchase. Currently, the utility-maximizing choice for this consumer is M. Assume electronic devices are a normal good. If the price of electronic devices decreases, assuming income and prices remain the same, then which of the following could be the new utility-maximizing choice?

C If the price of electronic devices decreases, then the budget constraint will rotate outwards in a way such that the budget constraint has a greater maximum quantity of electronic devices. The utility-maximizing choice must be on the budget constraint. If electronic devices are normal goods, then a decrease in the price of electronic devices will result in more electronic devices being consumed. The only point representing this is Point C.

Ebon opened up a small coffee shop which earned him $175,000 in total revenue the first year. To do this, Ebon had to quit his previous job as a barista where he earned $25,000 per year. Ebon calculated his economic profit to be $10,000, but he wants to know what his explicit costs were. What are Ebon's explicit costs?

Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Total Revenue = $175,000 Explicit Costs = X This the variable or unknown we want to solve for. Implicit Costs = $25,000. This is the opportunity cost of Ebon starting his own coffee shop. It represents the money Ebon gave up by not continuing to work as a barista. Economic Profit = $10,000 Recall that Accounting Profit = Total Revenue - Explicit Costs and therefore Economic Profit = Account Profit - Implicit Costs $10,000 = Accounting Profit - Implicit Costs = Accounting Profit - $25,000 Accounting Profit = $35,000 Accounting Profit = Total Revenue - Explicit Costs $35,000=$175,000 - Explicit Costs therefore Explicit Costs = $140,000

Which of the following best describes the condition that leads to a natural monopoly?

Economies of scale are large relative to quantity demanded in a market. A natural monopoly occurs in an industry where the cost structure is such that economies of scale are large relative to quantity demanded. This creates a barrier to entry as entering firms must produce a high quantity to face low cost. Other types of barriers to entry that lead to monopolies are government induced barriers and exclusive control of a natural resource.

A monopolistically competitive industry displays productive and allocative efficiency in the short run and long run.

False A monopolistically competitive industry does not display productive or allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits. Productive efficiency is when goods are produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient. Allocative efficiency represents the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units.

Diseconomies of scale can be represented by the portion of the long-run average cost curve with a downward slope.

False Diseconomies of scale can be represented by the portion of the long-run average cost curve with an upward slope.

Which of the following best defines imperfect competition?

a market type which falls between the extremes of monopoly and perfect competition; firms have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would The vast majority of real-world firms and organizations fall between the extremes of monopoly and perfect competition. We describe these firms as imperfectly competitive. They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would.

Firm A is a monopolistic competitor. Its short-run demand curve can be seen in the graph below. Notice the average cost curve is above the demand curve at the profit-maximizing price, P1. In the short-run, Firm A is productively efficient.

False Productive efficiency means goods are produced at the lowest possible average cost. This firm is producing at a level of output, (Q1,P1) where price is below average cost. This implies that the firm is not earning enough to cover its average costs and is facing economic losses in the short-run. This monopolistically competitive firm is not productively efficient. In general, monopolistically competitive firms are never productively efficient regardless whether they're facing economic losses or profits.

The slope of either the supply or demand curve defines its elasticity.

False The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). Elasticity is the percentage change, which is a different calculation from the slope and has a different meaning. The formula for elasticity is the percentage change of quantity demanded over the percentage change of price.

Kathryn needs to decide how many shirts and vests to buy for her daughter. She has estimated her daughter's total utility of different quantities of shirts and vests in the table below. Kathryn is willing to spend no more than $18 on her daughter. If the price of a shirt is $6 and the price of a vest is $3, then Kathryn should buy 2 shirts and 2 vests for her daughter.

False Use the chart to determine the total utility for each possible combination. It is important to remember that utility is measured in a unit called utils. Recall that not consuming something (i.e. 0 units consumed) gives no utility. Remember that each consumption bundle is on the budget constraint. Therefore, as you consume more of one good, you must decrease the consumption of another good. As a result, as you consume more of one good, your total utility will increase, but as you consume less of the other good your total utility will decrease. Because of these opposite changes to total utility, your total utility might increase, decrease, or remain the same. If your total utility increases, you will prefer this consumption bundle to the previous one. However, if your total utility decreases, you will prefer the previous consumption bundle to this new one. The chart below explains how to decide the most preferred consumption bundle for this specific problem.

A firm competing in a market where the LRAC curve has a clear minimum point has flexibility in its output.

False When the LRAC curve has a clear minimum point, any firm that produces a different quantity from that minimum will have higher costs.

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box in the table below. Assuming that the payoffs are known to both firms, what is the likely outcome?

Firms A and B will collude. Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm A's profits will decline substantially, however, it is likely that Firm A will notice, and if so, Firm A will cheat also, with the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns $1000. If Firm A cheats, assuming Firm B does not cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at least 50% of what it could have earned. The possibility of a small gain ($50) is probably not enough to induce Firm A to cheat, so in this case it is likely that both firms will collude.

Looking at the 3 graphs below how would you describe the market of each firm?

Graph (a) is a perfectly elastic demand curve in perfect competition. The firm can sell as much or as little of the product it wants at a price set by the market. Graph (b) is in a monopoly market. The monopolist sets price on the perceived market demand curve, making its shape steeper than that of a firm in monopolistic competition with many competitors fighting for a piece of the market demand. Graph (c), a firm in monopolistic competition has a demand curve that slopes because the firm has more say in the price it charges for its good than a firm in perfect competition but less than that of a monopolist. Looking at the graphs we can see that Graph (a) is a price taker. At any quantity on its perfectly elastic demand curve, the product is sold at the same price. Graph (b) shows a steep downward-sloping demand curve that would be faced by a monopolist. It is indicative of the monopolist's control over the market price. Graph (c) is for a firm in monopolistic competition. This type of firm has a small portion of its product's total market, so its graph represents the portion of that market's demand curve that it currently holds. That means it has some say in the price it charges for its good. This is the reason it also has a downward sloping demand curve, but not as steep as the market demand curve seen on the monopolist's demand curve, Graph (b).

Your buddy Joseph wants your advice. He presents you with his utility schedule above and want to know how many units of Product B he should purchase to maximize his utility. He tells you the price of Product A is $4 and the price of Product B is $5. Joseph informs you he only wants to spend a total $27 on both products.How many units of Product B do you tell Joseph to purchase?

If Joseph wants to maximize the utility he receives from his limited budget, he will always purchase the item with the greatest marginal utility per dollar of expenditure (assuming he can afford it with his remaining budget). Each of the values for 'Marginal Utility per Dollar' has been solved for for both Product A and Product B in the table below: If he chooses the item with the greatest marginal utility per dollar spent, when his budget is exhausted, the utility-maximizing choice should occur where the marginal utility per dollar spent is the same for both goods. If there are multiple quantities where marginal utilities per dollar are equal, a determination must be made for which possible solutions are on the budget constraint. MU1P1= MU2P2 12$4= 15$5 3=3 Along the budget constraint, the total price of the two goods remains the same. A quantity of 3 units of Product A would cost $12, and 3 units of Product B would cost $15, meeting Joseph's budgeted goal of $27. This means that these quantities at these prices would remain on the budget constraint.

According to the prisoner's dilemma, which of the following are true about oligopolies?

If oligopolists agree to cooperate, each oligopolist must worry about being betrayed. Even when oligopolists agree to cooperate, they are self-interested and want to pursue higher profit opportunities. This could result in firms betraying one another. If each of the oligopolists cooperates in holding down output, then monopoly profits are possible. Oligopoly firms are self-interested like any other type of firm though, so there is always worry for each firm that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. There is always a chance that firms will betray one another in an oligopoly

Sunflower Realty has a monopoly on one of its services. The company is currently producing 406 units and is considering increasing sales to 407 units. Using the table below what is the marginal revenue of the 407th unit?

Marginal Revenue (MR) is the change in total revenue from the sale of one additional unit. The formula for marginal revenue is: MR=changeintotalrevenuechangeinquantity Since the problem asks for the marginal revenue of the 407th unit, we will calculate the change in Total Revenue going from 406 units to 407 units. MR=change in total revenuechange in quantity=18,329−18,270407−406=591=$59 An increase in the quantity sold of 1 unit will result in an addition 59 dollars in revenue.

Sarah is buying and taking over a coffee shop. In order to do so, Sarah will purchase technology which costs $12,000. Sarah will spend $75,000 on the coffee shop building. Sarah expects to earn $120,000 a year at the coffee shop. Sarah is using her own coffee mugs and dishware at her shop, which are valued at $3,000. Calculate Sarah's accounting profit.

Step 1: Calculate costs. Total explicit costs=Cost of business+technology=$75,000+$12,000=$87,000 Step 2: Subtract the explicit costs from the revenue to find accounting profit. Accounting profit=Revenues−Explicit costs=$120,000−87,000=$33,000

Once a water company lays the main water pipes through a neighborhood, the marginal cost of providing water service to another home is fairly low. Where will the demand curve for water intersect the long-run average cost (LRAC) curve for this company?

The demand curve intersects the LRAC curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. So, in this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part.

Historically, when an endangered species is discovered on private land, what has typically been the reaction of the government under a command-and-control approach to environmental law?

The government prohibits the property owner from using his or her land. The discovery of an endangered species on private land has often triggered an automatic reaction from the government to prohibit the landowner from using that land for any purpose that might disturb the imperiled creatures. This would be considered a command-and-control approach to maintaining environmental protection standards over millions of acres of privately owned land. It does not incentivize landowners to protect endangered species.

A person can purchase only two goods: cups of coffee and lottery tickets. Assume this individual has $60, the price of a single cup of coffee is $3.00, and the price of a lottery ticket is $3.75. If the price of a lottery ticket falls to $3.00, then how will the budget constraint change?

The lottery ticket endpoint will shift outward When the price of lottery tickets falls, we can now buy more lottery tickets with the same budget. As a result, the lottery ticket endpoint shifts right. This is because if the consumer spends all their income on lottery tickets, they can purchase more lottery tickets when the price decreases. As a general rule, when the price of a good decreases, the budget constraint rotates outwards and when the price of a good increases, the budget constraint rotates inwards.

Find the average fixed cost for producing 42 sneakers. Round your answer to the nearest hundredth.

To find the average fixed cost, divide the fixed cost by the quantity produced. $11842=$2.81.

Andrew left his role as an economist at the U.S Postal Service where he made $170,000 per year to start his own private economic consulting company. During his first year of private consulting, he made $35,000 in economic profit. If Andrew's clients paid him a total of $400,000 for his consulting services, then what must Andrew's accounting profit be? (Hint: Remember that Economic Profit = Total Revenue - Explicit Costs - Implicit Costs whereas Accounting Profit = Total Revenue - Explicit Costs)

Total Revenue = $400,000 because this is the money that Andrew earned from his business operations. Explicit Costs = X Implicit Costs = $170,000. This is the salary that Andrew could have earned if he did not quit his previous job. It represents the opportunity cost of Andrew starting his own private consulting business. Economic Profit = $35,000 Consider the formula for Economic Profit: Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Substituting the above values into the formula for Economic Profit, we get: $35,000=$400,000−X−$170,000 X=$195,000 Recall that Accounting Profit = Total Revenue - Explicit Costs, therefore Accounting Profit = $400,000−$195,000=$205,000

In monopolistic competition, a firm hopes advertising will either cause its demand curve to become more inelastic (get steeper) or cause demand for the firm's product to increase (shift to the right).

True Advertising is meant to convince people that the products of one firm are differentiated (better) from the products of another firm. In monopolistic competition, advertising will either cause a firm's demand curve to become more inelastic (get steeper) or cause demand for the firm's product to increase (shift to the right). With a more inelastic demand curve or an increase in demand, a firm can charge a higher price or sell more.

True or false? If at the end of the year, after taxes, a manufacturing firm has $150,000 in revenues, $60,000 in production costs, and $30,000 in opportunity costs, then the firm's economic profits total $60,000

True Economic profits differ from accounting profits in that they include any opportunity costs a firm may have incurred. In this case, the production costs and the opportunity costs should be subtracted from revenues, giving the firm an economic profit of $60,000.

True or false?To find average profit, simply divide profit by the quantity.

True Profit is found by subtracting total costs from total revenue. Average profit can be found by subtracting average total cost from average total revenue or dividing profit by output.

The prisoner's dilemma demonstrates that following a rational, self-interested strategy may not result in the best outcome for decision makers.

True The prisoner's dilemma demonstrates that following a rational, self-interested strategy may not result in the best outcome for decision makers. Because each player in the game has a dominant strategy to confess, rational decision making in this game ultimately results in an outcome that is not the optimal one.

The shape of the long-run average cost curve determines the number and size of firms competing in the industry.

True The shape of the long-run average cost curve determines the amount of firms competing in an industry as well as the size of the firms. A LRAC curve with a clear minimum point does not allow for many firms to compete, but a flat-bottomed LRAC curve does.

All of the following statements or scenarios about property rights and individual incentives are true or accurate, except:

When it comes to environmental protection of privately owned land, command-and-control legislation offers greater flexibility and promise than law built on incentives, such as better-defined property rights. When it comes to environmental protection of privately owned land, command-and-control legislation is likely to undermine property rights by prohibiting landowners from using their land in certain ways if doing so is thought to violate environmental policy aims. On the other hand, legislation built on incentives offers greater flexibility and promise. For example, by allowing landowners to maintain control of their own property and finding more productive ways to encourage environmental protection.

All of the following statements about property rights and environmental law are true, except:

When the government undermines property rights by prohibiting a landowner from using his land in a way that may violate environmental policy, it is incentivizing the landowner to protect the environment. Consider the example of endangered species found on private land. While it has often triggered an automatic reaction from the government to prohibit the landowner from using that land for any purpose that might disturb the imperiled creatures, this response does not incentivize landowners to cooperate. If they admit to the government that they have an endangered species, the government effectively prohibits them from using your land. As a result, rumors abounded of landowners who followed a policy of "shoot, shovel, and shut up" when they found an endangered animal on their land. Other landowners have deliberately cut trees or managed land in a way that they knew would discourage endangered animals from locating there. A more productive policy would consider how to provide private landowners with an incentive to protect the endangered species that they find and to provide a habitat for additional endangered species. For example, the government might pay landowners who provide and maintain suitable habitats for endangered species or who restrict the use of their land to protect an endangered species. This is an example of using property rights to encourage environmental protection because it respects the owners right to use his own land.

A manufacturing firm has a marketable permit that currently allows for 200 tons of emissions. However, the marketable permit is shrinkable and the firm will only be allowed 100 tons of emissions next year. The manufacturing firm projects that it's actual emissions next year will be 150 tons. Which of the following actions would be in the best interest of the manufacturing firm?

buy a marketable permit allowing for 50 tons of emissions Because the manufacturing firm is projecting 50 tons of emissions over what their current marketable permit allows, it is in their best interest to purchase a marketable permit allowing for 50 more tons of emissions.

Property rights are an important component of any system intended to minimize negative externalities because they establish ________________, obligating the responsible party to seek out and pay for the least costly method of reducing the risk or impact of negative effects.

legal responsibility When it comes to negative externalities, if neither party involved has a property right, then the two sides may squabble endlessly, doing nothing to prevent the negative outcome. Therefore, property rights establish legal responsibility and are more likely to incentivize things like environmental protection than many command-and-control approaches.

Barriers to entry occur in a monopoly market because ________.

legal, technological, or market forces discourage or prevent potential competitors from entering the market Barriers to entry in a monopoly market occur because of the legal, technological, or market forces that discourage or prevent potential competitors from entering the market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

Firms make production decisions primarily based on _________.

production conditions cost conditions Production decisions depends on the production and cost conditions facing each firm. The answers also depend on the market structure for the product(s) in question. Market structure is a multidimensional concept that involves how competitive the industry is.

Suppose you are taking a luxury tour of a city in a limousine. With just a few passengers, the tour is pleasant and everyone has plenty of space to stretch and move around to see the sights. As more people get in the limo, it starts to become crowded. Given the following chart, at what number of people in the limo (x) does your marginal utility first begin to decrease due to the crowded limo?

x=8 Marginal utility for each number of people in the limo is calculated in the table below. When the number of people in the limo goes from 6 to 8, marginal utility decreases from 130 to 45. Therefore, a passenger's marginal utility begins to decline with 8 people in the limo.