Micro final exam study guide

The Golden Rule is an example of a private solution for

internalizing externalities

The length of the short run

is different for different types of firms.

If marginal cost is below average total cost, then average total cost

is falling

A firm's opportunity costs of production are equal to its

explicit costs + implicit costs.

For any competitive market, the supply curve is closely related to the

firms' costs of production in that market.

At the profit-maximizing level of output,

marginal revenue equals marginal cost.

Table 14-9Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $5 1 $8 $9 2 $16 $14 3 $24 $20 4 $32 $27 5 $40 $35 6 $48 $44 7 $56 $54 8 $64 $65 9 $72 $72 Refer to Table 14-9. If the firm's marginal cost is $5, it should

increase production to maximize profit.

Research into new technologies

provides positive externalities because it creates knowledge others can use

Antitrust laws may

restrict the ability of firms to merge.

Positive externalities

result in smaller than efficient equilibrium quantity

Scenario 13-10Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. Refer to Scenario 13-10. An economist would calculate the total profit for one photo frame to be

$15

Table 14-2The table represents a demand curve faced by a firm in a competitive market. Price Quantity $3 0 $3 1 $3 2 $3 3 $3 4 $3 5 Refer to Table 14-2. For this firm, the average revenue from selling 3 units is

$3

​Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian's savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. What are Sebastian's implicit costs from running his own business?

$30,600

Table 14-14The following table presents cost and revenue information for Bob's bakery production and sales. Quantity Total Cost Marginal Cost Price Total Revenue Marginal Revenue 0 $5.00 --- $3.25 --- 1 $5.50 $3.25 2 $6.50 $3.25 3 $8.00 $3.25 4 $10.00 $3.25 5 $12.50 $3.25 6 $15.50 $3.25 7 $19.00 $3.25 8 $23.00 $3.25 Refer to Table 14-14. What is Bob's total fixed cost?

$5

Table 14-13Diana's Dress Emporium COSTS REVENUES QuantityProduced TotalCost MarginalCost QuantityDemanded Price TotalRevenue MarginalRevenue 0 $100 -- 0 $120 -- 1 $150 1 $120 2 $202 2 $120 3 $257 3 $120 4 $317 4 $120 5 $385 5 $120 6 $465 6 $120 7 $562 7 $120 8 $682 8 $120 Refer to Table 14-13. What is the marginal cost of the 1st unit?

$50

​Table 13-16 QuantityTotal CostFixed Cost Variable Cost Marginal Cost Average Fixed Cost Average Variable Cost Average Total Cost 0 $24-------- 1$16 2 $50 3$108 4$40 Refer to Table 13-16. What is the marginal cost of the 4th unit of output?

$52

Figure 14-14 Refer to Figure 14-14. Assume that the market starts in equilibrium at point W in panel (b) and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is not correct?

Point Y is a long-run equilibrium point.

The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" was the

Sherman Act.

Table 13-7The Flying Elvis Copter Rides QuantityTotalCostFixedCostVariableCostMarginalCostAverageFixedCostAverageVariableCostAverageTotalCost0$50$50$0--------1$150ABCDEF2GHI$120JKL3MNOPQ$120R Refer to Table 13-7. What is the value of K?

$110

​Table 14-16 The table represents the demand information for a firm in a competitive market. QuantityTotal Revenue 8 $120 9$135 10 $150 11 $165 12 $180 13 $195 ​ Refer to Table 14-16. For this firm, when output is equal to 12 units, average revenue is

$15

Table 13-17Consider the following table of long-run total cost for four different firms: Quantity 1 2 3 4 5 6 7 Firm 1 $180 $350 $510 $660 $800 $930 $1,050 Firm 2 $120 $250 $390 $540 $700 $870 $1,050 Firm 3 $150 $300 $450 $600 $750 $900 $1,050 Firm 4 $210 $340 $490 $660 $850 $1,060 $1,290 Refer to Table 13-17. Which firm's long-run marginal cost decreases as output increases?

Firm 1

Which of the following statements is correct?

Only for competitive firms does average revenue equal marginal revenue.

In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure: Output Total Cost 0 $0 1 $10 2 $12 3 $15 4 $24 5 $35 Which of the following is a point on the long-run supply curve?

P=$5, Q=1,500.

Which of the following statements is not correct?

Part of the deadweight loss associated with monopoly is measured by the monopolist's economic profit.

Which of these assumptions is often realistic for a firm in the short run?

The firm can vary the number of workers it employs but not the size of its factory.

Figure 10-10 Refer to Figure 10-10. Which of the following statements is correct?

The private cost of producing the 160th unit of output is $16. The social cost of producing the 160th unit of output is $22. The external cost of producing the 160th unit of output is $6. *All of the above are correct.

In setting the production level, a firm's cost curves

by themselves do not tell us what decisions the firm will make.

For a firm in a perfectly competitive market, the price of the good is always

equal to marginal revenue.

Refer to Figure 15-12. Which area represents the deadweight loss from monopoly?

g

Scenario 13-15Joan grows pumpkins. If Joan plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 500 pumpkins. If she plants 2 bags, she gets 800 pumpkins. If she plants 3 bags, she gets 900 pumpkins. A bag of seeds costs $100, and seeds are her only cost. Refer to Scenario 13-15. Joan's total-cost curve is

increasing at an increasing rate

When a market is characterized by an externality, the government

can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality

Corrective taxes are typically advocated to correct for the effects of

negative externalities

A key characteristic of a competitive market is that

producers sell nearly identical products.

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

when the number of interested parties is large and bargaining costs are high

Marginal cost is equal to

ΔTC/ΔQ.

The term market failure refers to

a market that fails to allocate resources efficiently

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because

the market-based solution is less costly to society. the market-based solution can result in a greater reduction in pollution. the market-based solution raises revenue for the government. *All of the above are correct.

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In long-run equilibrium, market price is determined by

the minimum point on the firms' average total cost curve.

Honey producers provide a positive externality to orchards because

the orchard owner does not have to purchase bees to pollinate his flowers

Which of the following statements is not correct?

To maximize profit, firms should produce at a level of output where price equals average variable cost.

The fundamental reason that marginal cost eventually rises as output increases is because of

diminishing marginal product.

Perfect price discrimination

increases profits to the firm. b) increases total surplus. c) decreases consumer surplus.

Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to

pay your roommate at least $25 but no more than $50 to clean up after herself

Table 13-5 Number ofWorkers Output 0 0 1 10,000 2 19,000 3 27,000 4 32,000 5 35,000 6 36,000 Refer to Table 13-5. The marginal product of the third worker is

8,000 units

Table 10-3 Quantity Private Value Private Cost External Benefit 1 $22 $11 $10 2 $20 $14 $10 3 $18 $17 $10 4 $16 $20 $10 5 $14 $23 $10 6 $12 $26 $10 Refer to Table 10-3. The social value of the 4th unit of output that is produced is

$26

Scenario 15-5An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc. Refer to Scenario 15-5. How much profit will the airline earn if it sets the price of each ticket at $600?

$40,000

Table 14-12Bill's Birdhouses COSTS REVENUES QuantityProduced TotalCost MarginalCost QuantityDemanded Price TotalRevenue MarginalRevenue 0 $0 -- 0 $80 -- 1 $50 1 $80 2 $102 2 $80 3 $157 3 $80 4 $217 4 $80 5 $285 5 $80 6 $365 6 $80 7 $462 7 $80 8 $582 8 $80 Refer to Table 14-12. What is the marginal cost of the 5th unit?

$68

Figure 10-2. The graph depicts the market for plastic. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, what price will the firm charge per unit of plastic?

$7.00

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

table 13-7 Number of Workers Total Output Marginal Product 0 0--1 40285 3125 4 355 306215 Refer to Table 13-7. At which number of workers does diminishing marginal product begin?

3

Figure 14-9In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Refer to Figure 14-9. If there are 300 identical firms in this market, what level of output will be supplied to the market when price is $1.00?

30,000

​​​Table 13-7 Number of Workers Total Output Marginal Product 0 0--1 40285 3125 4 355 306215 ​Refer to Table 13-7. ​What is total output when 1 worker is hired?

40

Figure 10-2. The graph depicts the market for plastic. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, how much plastic will be produced?

650

Figure 13-9The figure below depicts average total cost functions for a firm that produces automobiles. Refer to Figure 13-9. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?

ATCA

Table 14-1 Quantity Price 0 $5 1 $5 2 $5 3 $5 4 $5 5 $5 6 $5 7 $5 8 $5 9 $5 Refer to Table 14-1. Over which range of output is average revenue equal to price?

Average revenue is equal to price over the entire range of output.

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

Firm B will no longer pollute, and Firm A will not reduce its pollution at all.

Which of the following statements is correct?

Government should tax goods with either positive or negative externalities. *Government should tax goods with negative externalities and subsidize goods with positive externalities. Government should subsidize goods with either positive or negative externalities. Government should tax goods with positive externalities and subsidize goods with negative externalities.

Which of the following statements best expresses a firm's profit-maximizing decision rule?

If marginal revenue is greater than marginal cost, the firm should increase its output. b) If marginal revenue is less than marginal cost, the firm should decrease its output. c) If marginal revenue equals marginal cost, the firm should continue producing its current level of output.

Figure 10-4 Refer to Figure 10-4. The socially optimal quantity would be

Q2

Figure 13-10 Refer to Figure 13-10. The firm experiences diseconomies of scale if it changes its level of output from

Q4 to Q5.

A positive externality arises when a person engages in an activity that has

a beneficial effect on a bystander who does not pay the person who causes the effect

​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $40. Assuming no transaction costs, which of the following represents an efficient solution?

Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel accepts, and both parties are better off

Which of the following is NOT an example of a negative externality?

a decrease in your property value from neglecting your lawn and garden

Figure 13-8 Refer to Figure 13-8. Which of the following statements is correct?

a) Average total cost is rising for quantities higher than D because marginal cost is higher than average total cost. b) Average variable cost is declining for quantities less than B because marginal cost is lower than average variable cost. c) Average variable cost is minimized at B because at that quantity, marginal cost equals average variable cost. *d) all of the above

Suppose that for a particular business there are no implicit costs. Then

accounting profit will be the same as economic profit.

A negative externality arises when a person engages in an activity that has

an adverse effect on a bystander who is not compensated by the person who causes the effect

For a competitive firm,

average revenue equals marginal revenue.

Which of the following expressions is correct?

average total cost = (total cost)/(quantity of output)

Figure 13-6 Refer to Figure 13-6. Why doesn't the total cost curve begin at the origin (the point 0,0)?

because fixed costs are positive when output is zero

Table 14-7Suppose that a firm in a competitive market faces the following revenues and costs: Marginal Marginal Quantity Cost Revenue 12 $5 $7.50 13 $6 $7.50 14 $7 $7.50 15 $8 $7.50 16 $9 $7.50 17 $10 $7.50 Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners?

continue to operate at 14 units

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has earned $4,500 in monthly revenue. In the short run, Susan should

continue to operate her business, but in the long run she will probably face competition from newly entering firms.

A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if

it has some degree of monopoly-pricing power.

If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then

its average total cost is less than $10.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should

make fewer than 20 wedding cakes per month.

Economists assume that the typical person who starts her own business does so with the intention of

maximizing profits.

The long-run supply curve for a competitive industry

may be upward-sloping if higher-cost firms enter the industry.

The efficient scale of the firm is the quantity of output that

minimizes average total cost.

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its

quantity of output is higher than it was previously. b) average total cost is higher than it was previously. c) marginal revenue is higher than it was previously.

Price discrimination is the business practice of

selling the same good at different prices to different customers.

Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that

there are economies of scale in retail sales.

Figure 10-10 Refer to Figure 10-10. The graph represents a market in which

there is a negative externality

Table 10-3 Quantity Private Value Private Cost External Benefit 1 $22 $11 $10 2 $20 $14 $10 3 $18 $17 $10 4 $16 $20 $10 5 $14 $23 $10 6 $12 $26 $10 Refer to Table 10-3. The table represents a market in which

there is a positive externality

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. Suppose that the federal government gives grants to these researchers equal to the their per-unit production externality. What is the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced?

they are equal