micro econ test 3
When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand? If demand is perfectly elastic, then what is the effect of an increase in price?
0 a decrease in quantity demanded to zero
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
ATC= TC/Q ; MC= change in TC/ change in Q
Consider the markets for BP supreme-grade gasoline, all BP grades of gasoline, and all gasoline. For which of these three markets will demand be most elastic? Demand will be most elastic for
BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline.
Suppose a study shows that the demand for Brooks Brothers' ties is more elastic than the demand for all tiesties. What could be a likely explanation for this? The demand for Brooks Brothers' ties could be more elastic than the demand for all ties because
Brooks Brothers' ties are more narrowly defined
The demand curve for a luxury is less elastic than the demand curve for a necessity.
False
The more time that passes, the more inelastic the demand for a product becomes
False
When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more elastic.
False
What is the difference between the short run and the long run? Is the amount of time that separates the short run from the long run the same for every firm?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology. no
Is it possible for technological change to be negative? If so, give an example.
It is possible for technological change to be negative. An example is when a hurricane damages a firm's facilities
Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city. Similar buildings in the neighborhood rent for $4,000 per month. Jill is considering selling her building and renting space in the suburbs for $3,000 per month. Jill decides not to make the move. She reasons, "I would like to have a restaurant in the suburbs, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $3,000 per month." What do you think of Jill's reasoning?
Jill is incorrectly ignoring the opportunity cost of using the building she owns.
Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged? Explain.
No. An increase in the marginal product of labor will increase the average product of labor.
A student looks at the data in the table to the right and draws this conclusion: "The marginal product of labor is increasing for the first 3 workers hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor workers." Do you agree with the student's analysis? Briefly explain.
No. Marginal product initially increases due to division of labor and then decreases due to the law of diminishing returns.
In recent years, the United States has experienced large increases in oil production. The increases in oil production are due in large part to a new technology, hydraulic fracturing ("fracking"). Fracking involves injecting a mixture of water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. A news story indicates that economies of scale in fracking may be considerably smaller than in conventional oil drilling.
Since firms can reach minimum efficient scale at a relatively low output rate, there will continue to be a large number of firms drilling for oil in the United States.
What is the difference between technology and technological change?
Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs
Briefly explain whether you agree or disagree with the following argument: Adam Smith's idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn't apply in the manufacturing of less complex goods or in other sectors of the economy, such as retail sales.
The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.
Refer to the to graph. For a certain output range (or quantity of pizzas produced per day), marginal cost is greater than average cost. What is this output range? When marginal cost is less than average total cost, average total cost must be
The output range greater than about 525 pizzas per day decreasing
Is Jill Johnson correct when she says the following: "I am currently producing 20,000 pizzas per month at a total cost of $40 comma 000. If I produce 20,001 pizzas, my total cost will rise to $40 comma 001. Therefore, my marginal cost of producing pizzas must be increasing."
Though Jill's average total cost of production is decreasing, her marginal cost of producing pizzas could be increasing or decreasing.
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
What is negative technological change? negative technological change is when
a firm must use more imputs to produce the same output
Which of the following is an example of positive technological change? Positive technological change occurs when
a firms workers go through a training program
What are implicit costs? An implicit cost is How are implicit costs different from explicit costs?
a nonmonetary opportunity cost. An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
What is the law of diminishing returns? the law of diminishing returns states that does it apply in the long run?
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
an example of a technological change is
all of the above
How do specialization and division of labor typically affect the marginal product of labor? In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers,
allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.
Consider firms selling three goodslong dashone firm sells a good with an income elasticity of demand less than zero, one firm sells a good with an income elasticity of demand greater than zero but less than one, and one firm sells a good with an income elasticity of demand greater than one. In a recession, sales of a good with
an income elasticity of demand greater than one will decline the most and sales of a good with an income elasticity of demand less than zero will increase the most.
An increase in the price of a substitute for iPads will lead to __________ in the quantity of iPads demanded, so the cross-price elasticity of demand will be _________. If Amazon.com raises its prices by 10 percent and, as a result, the quantity of books demanded on Barnesandnoble.com increases by 35 percent, what do consumers consider the two Web sites to be?
an increase, positive close substitutes
What is the difference in the short run and the long run? In the short run,
at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.
Your company incurs a cost for store rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of store rent
becomes a variable cost
Suppose a firm's average total cost curve is decreasing with output. What can be said of its marginal cost curve? The firm's marginal cost curve must be
below the average total cost curve
Consider the production of hotdogs. Given the average total cost of producing hotdogs illustrated in the graph to the right, which of the following is true of the marginal cost of producing hotdogs?
both a and b
Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
both a and b
Suppose First City Bank determines that it must lower its average cost of providing banking services in the long run to become profitable. If the bank experiences economies of scale, what could it do? With economies of scale, First City Bank
could lower its long- run average costs by providing more services
Suppose gasoline has few close substitutes available. If so, then an increase in the price of gasoline will likely
decrease the quantity of gasoline demanded by a relatively small amount.
Consider the demand for cigarettes. Suppose the government increases the price of cigarettes by raising cigarette taxes. How will this affect the demand for cigarettes over time? If the price of cigarettes increases, then the quantity of cigarettes demanded will
decreasedecrease, and this effect will likely become larger(in absolutevalue) over time.
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost? As the level of output increases, the difference between the value of average total cost and average variable cost
decreases because average fixed cost decreases as output increases.
In his autobiography, T. Boone Pickens, a geologist, entrepreneur, and oil company executive, wrote: It's unusual to find a large corporation that's efficient ... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work. pickens was describing
diseconomies of scale, because he is referring to the inefficieny of a large scale business operation.
When a positive technological change occurs
either a or b
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _______ in this range.
elastic
Suppose the owner of a Dollar General store raises the price of the merchandise in her store. In turn, total revenue at her store decreases by 2525 percent. The demand for the store's merchandise is
elastic
The price of organic apples rises and apple growers find that their revenue decreases. Is the demand for organic apples elastic or inelastic?
elastic
Amazon allows authors who self-publish their e-books to set the prices they charge. One author was quoted as saying: "I am able to drop prices and, by sheer volume of sales, increase my income." The demand for this author's books was price
elastic because a decrease in price resulted in higher revenue.
The entrance fee into Yellowstone National Park in northwestern Wyoming is "$30 for a private, noncommercial vehicle; $25 for a motorcycle or a snowmobile; or $15 for each visitor 16 and older entering by foot, bike, ski, etc." The fee provides the visitor with a seven-day entrance permit into Yellowstone and nearby Grand Teton National Park. The demand for entry into Yellowstone National Park for visitors in private, noncommercial vehicles is Of the three ways to enter the park in a private, noncommercial vehicle; on a motorcycle; and by foot, bike, or ski which way would you expect to have the largest price elasticity of demand, and which would you expect to have the smallest price elasticity of demand?
elastic because when the price is high and the quantity demanded is low, demand is elastic. The private, noncommercial vehicle has the largest price elasticity of demand and visitors 16 and older entering by foot, bike, ski, etc. have the smallest price elasticity of demand.
Consider firms that introduce new products, such as DVDs in 2001. When firms introduce new products, how do they typically determine the price elasticity of demand for those products? Firms with new products often
estimate price elasticity of demand by experimenting with different prices
Firms often rely on market experiments to calculate the price elasticity of demand for a new product.
false
Any cost that remains unchanged as output changes represents a firm's Any cost that changes as output changes represents a firm's Which of the following is most likely to be a fixed cost for a farmer? Which of the following is most likely to a variable cost for a business firm?
fixed cost variable cost insurance premiums on property cost of shipping products
One study found that the price elasticity of demand for soda is minus−0.78, while the price elasticity of demand for Coca-Cola is minus−1.22. The price elasticity of Coca-Cola is (interpret the absolute value of these elasticitiies, i.e., ignore the minus sign):
greater than it is for soda as a product because there are more substitutes for Coca-Cola than soda.
what happens when the quantity demanded is very responsive to changes in price the percentage change in quantity demanded will be
greater than the percentage change in price.
What is a production function? A firm's production function is best described as What does the short-run production function hold constant? A short-run production function holds constant
illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs. the amount of capital
The short-run average cost can never be less the long-run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run.
The law of diminishing returns applies Refer to the table below. When do diminishing returns in the production of pizzas start?
in the short run when the 3rd worker is hired
An accountant increases the price he charges for his services by 14 percent. In response, the demand for his services decreases by 2 percent. Will the accountant's revenue from his accounting services increase, decrease, or remain unchanged? The accountant's revenue will
increase
If the demand for orange juice is elastic, will a decrease in the price of orange juice increase or decrease the revenue received by orange juice sellers? if the price of orange juice decreases, revenue will
increase
If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain. If manufacturers raise prices, then their revenue will
increase because the percentage increase in price will be larger than the percentage decrease in quantity.
As you move up a linear demand curve, the price elasticity of demand in absolute value On the lower part of a linear demand curve below the midpoint, the demand is ________ and raising the price causes total revenue to _________.
increases inelastic; increase
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be
increasing
According to a news story about the bus system in the Lehigh Valley in Pennsylvania, "Ridership fell 14 percent in 2012 after a 33 percent increase" in bus fares. Given this information, the demand for bus trips is____ The best explanation for this result is that
inelastic bus trips are a necessity for those without cars
The price elasticity of demand in the United States for crude oil has been estimated to be minus−0.061 in the short run and minus−0.453 in the long run. The demand for crude oil
is more price elastic in the long run than in the short run because in the long run a substitute for crude oil may be found.
The price elasticity of demand for a particular brand of raisin bran is, in absolute value
larger than the price elasticity of demand for all breakfast cereals.
In general, the demand for a good will be _________ elastic the ___________ the share of the good in the average consumer's budget.
less, smaller
Can we conclude from this information that Apple is making a profit of about $424 per iPhone? Briefly explain. Apple's profit is
likely less than $424 per iPhone because Apple also has fixed costs of production.
The GPA you earn in a particular semester is your ________ GPA, and your cumulative GPA for all completed semesters is your ________ GPA.
marginal average
The marginal cost curve intersects both the average variable cost and the average total cost curves at their
minimuim points
Compare the demand for sugar with demand for food The demand for sugar is likely
more inelastic because sugar tends to represent a smaller fraction of a consumer's budget.
The cost of electricity used to power the lights used in Mr. Goltz' businesses are fixed costs because these costs Goltz wrote that reducing fixed costs results in savings that "fall right to the bottom line" because
must be paid regardless of the volume of output. profit, the bottom line, is revenue minus fixed costs minus variable costs, so a reduction in fixed costs increases profit. Your answer is correct.
If the price of Blu minus ray players rises while the demand for Blu minus ray discs falls, is the cross-price elasticity of demand between the pair of products likely to be positive or negative? Therefore, the cross-price elasticity of demand between "substitutes" is most likely _____ and the cross-price elasticities of demand between "complements" is most likely ______
negative positive, negative
Suppose a firm has no fixed costs, so all of its costs are variable, even in the short run. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape? If the firm's marginal costs are $5 at every level of output, what shape will the firm's average total cost have?
no the average total cost curve will be continually increasing horizontal
Refer to the to graph on the right. From the origin up until point A, from point A until point B,
output increases at an increasing rate output increases at a decreasing rate
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the
production function
A sportswriter writing about the Cleveland Indians baseball team made the following observation: "If the Indians suddenly slashed all tickets to $10, would their attendance actually increase? Not all that much and revenue would drop dramatically." The sportswriter is assuming that the demand for Indians tickets is
relatively price inelastic.
According to an article in the Wall Street Journal, some small publishers have argued that Amazon has been increasing the prices it sells their books for on its Web site. Amazon was increasing the prices by reducing the discount it offered consumers on the retail prices of the books. One small nonfiction publisher said that Amazon had reduced the discount on its books from about 30 percent to about 16 percent. According to the author of the article: "For this publisher, that means less revenue and less profit as some buyers reject the more expensive books." Some buyers will no longer buy the publisher's books at a higher price. The publisher will earn less revenue only if
sales fall significantly. more than one in absolute value.
Sally looks at her college transcript and says to you, "How is this possible? My grade point average (GPA) for this semester's courses is higher than my GPA for last semester's courses, but my cumulative GPA still went down from last semester to this semester." Explain to Sally how this is possible.
sallys GPA for this semster is lower than her cumulative GPA
Suppose Sheri owns a restaurant that serves pizza using three inputs: workers, restaurant space (and layout), and ovens. If workers are fixed, restaurant space (and layout) is fixed, and ovens are variable, then Sheri is producing pizza in the
short run
A study analyzed the costs to a pharmaceutical firm of developing a prescription drug and receiving government approval. An article in the Wall Street Journal noted that included in the firm's costs was "the return that could be gained if the money [used to develop the drug] were invested elsewhere." Briefly explain whether you agree that this return should be included in the firm's costs. this return
should be included in the firm's costs because the opportunity cost of the firm's investment is one of the firm's implicit production costs.
What information must economists have to estimate the price elasticity of demand? To estimate the price elasticity of demand, economists need to know
the demand curve for a product
Refer to the table below. Which of the following costs are implicit costs? Which of the following are sometimes called accounting costs?
the forgone salary and interest explicit costs
What is the production function? The production function is the relationship between
the inputs employed by a firm and the maximum output it can produce with those inputs.
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed? Economies of scale happen when the firm's long run average total cost ________ as output increases.
the long run average cost curve decreases
If the marginal product of labor is falling, is the marginal cost of production rising or falling? Briefly explain. If the additional output from each new worker is falling,
the marginal cost of that output is rising because the only additional cost to producing more output is the additional wages paid to hire more workers.
Income elasticity of demand is Use income elasticity to distinguish a normal good from an inferior good. For a normal good, the income elasticity of demand will be Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
the percentage change in quantity demanded divided by the percentage change in income. positive, but for an inferior good, the income elasticity of demand will be negative. Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.
What is the formula for the price elasticity of demand? Why isn't elasticity just measured by the slope of the demand curve?
the percentage change in quantity demanded divided by the percentage change in price. The slope can change dramatically comma depending on the units chosen for quantity and priceslope can change dramatically, depending on the units chosen for quantity and price.
The cross-price elasticity of demand is If the cross-price elasticity of demand is negative, then the products are:
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. complements, but if it is positive, then the products are substitutes.
In economics, the best definition of technology is Further, positive technological change is defined as
the process a firm uses to turn inputs into outputs both a and b
What is technology? Technology is An example of technological change is
the processes a firm uses to turn inputs into outputs of goods and services all of the above
What is the difference between total cost and variable cost in the long run? In the long run,
the total cost of production equals the variable cost of production.
he more substitutes available for a product, the greater the price elasticity of demand.
true
Which costs are affected by the level of output produced?
variable costs
Consider the market for Purity milk. The demand for this product would become more elastic if it
were defined more narrowly
Economies of scale occur For which of the following reason(s) may firms experience economies of scale?
when a firm's long-run average costs decrease with output. all of the above
What are diseconomies of scale? Diseconomies of scale is What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
when a firm's long-run average costs increase with output. Firms have difficulty coordinating production.
Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up.
Suppose that last semester your semester GPA was 1.50 and your resulting cumulative GPA was 2.51. Next, suppose that this semester your semester GPA will be 2.40. If so, then your cumulative GPA
will decrease because your "marginal" GPA will be below your cumulative GPA.
An article in the New York Times about the New York Metropolitan Opera (the Met) suggests that the popularity of opera might be increased if the Met reduced its ticket prices. But the article observes that such ticket price cuts would only be possible if the Met received a gift from "a very deep-pocketed donor." The authors of the article are assuming a cut in ticket prices, and assuming there is no gift from a "very deep-pocketed donor," ______ increase the Met's revenue. The authors are assuming the price elasticity of demand for tickets to the Met is
will not inelastic
Firms experience economies of scaleLOADING... for several reasons. What is one such reason? A firm might experience economies of scale because
workers become more specialized, enabling them to become more productive, as output expands
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
yes. if marginal cost is less than avergae total cost, then avergae total cost will be decreasing
Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost of $50,000 If I produce 10,001 pizzas, my total cost will rise to $50 ,050. Therefore, my marginal cost of producing pizzas must be increasing."
Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing.
