Micro Midterm #1

Jamal is an engineer working at a large lithium-ion battery producer. He recently made a breakthrough causing the production cost of lithium-ion batteries used in smartphones to go down. In the market for smartphones, this innovation will cause the equilibrium quantity to _____ and the equilibrium price to _____. a) rise; rise b) rise; fall c) fall; rise d) fall; fall

b) rise; fall

The supply curve is upward-sloping because: a) the marginal cost curve is downward-sloping. b) the marginal cost curve is upward-sloping. c) an increase in output arises from fewer units of an input, such as labor. d) a decrease in output arises from an additional unit of an input, such as labor.

b) the marginal cost curve is upward-sloping.

- Number of substitutes available for that good - Price of the good relative to ones budget

Determinants of Price Elasticity of Demand

Price Elasticity of Good X Equation

% Δ Quantity of Good X / % Δ in Price of Good X

Midpoint Method Formula (Percentage Changes)

(ΔX/X) x 100

Inferior Good

A good for which, other things being equal, an increase in income leads to a decrease in demand.

Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand

Long Run

All factors are variable

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Allocative Efficiency

As we consume more and more units of the same good, our extra enjoyment from consuming each additional unit will fall.

Diminishing Marginal Utility

Variable Cost

Changes with output

- Positive price relationship - Supply increases when other price rises

Complements

An increase in the price of one good causes buyers to buy less of the other good. Demand curve of other good shifts to the left

Complements

PPF is a straight line Used when resources are homogenous

Constant Opportunity Cost

Fixed Cost

Doesn't change with output

Small price change and large quantity change

Elastic

The flatter the demand curve is, the more _____ the demand will be

Elastic

The more substitutes a good has, the more _____ demand is going to be

Elastic

Examples of PPF - Individual - Factory - Country

Grade in econ or psych Cars or trucks Agriculture or manufacturing

Used when some resources are better suited to each task PPF is a curved line Specialized workers Specialized equipment

Increased Opportunity Cost

Large price change and small quantity change

Inelastic

The more inexpensive a good is, the more _____ demand is going to be

Inelastic

The steeper the demand curve is, the more _____ the demand will be

Inelastic

If price increases, the budget line will shift _____.

Inward

If cutting the price of frozen pizza by 30% leads to an increase in the quantity demanded by 6%, what is the absolute value of the price elasticity of demand for frozen pizza? a) −5 b) 5 c) −0.2 d) 0.2

d) 0.2

As a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.

Law of Diminishing Marginal Returns

If budget decreases, the budget line will shift _____.

Left

Marginal Rate of Substitution Equation

MUx/MUy

Short Run

Not all factors are variable

The most desirable alternative is given up as the result of a decision. Does the benefit outweigh the cost?

Opportunity Cost

If price decreases, the budget line will shift _____.

Outward

Budget Line Equation

P1Q1 + P2Q2 = Y

Total Revenue Equation

Price x Quantity

Describes the trade-offs between two production options for one producer.

Production Possibility Frontier

- Central authority allocates resources - Focuses on equity - Socialism

Pure Command Economy

- Market forces of S and D allocate resources through the price mechanism - Focuses on efficiency - Capitalism

Pure Market Economy

Parallel shift of the graph - outward = more resources - inward = fewer resources Does not change technology - slope of graph stays the same

Resources Change (PPF)

If budget increases, the budget line will shift _____.

Right

- Negative price relationship - Supply decreases when other price rises

Substitutes

An increase in the price of one good causes buyers to buy more of the other good. Demand curve of other good shifts to the right

Substitutes

Total Cost Equation

TC = FC + VC

Changes the slope of the PPF If technology for one good changes, you can make more of that good Total output of the other good doesn't change

Technology Change (PPF)

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. Does the benefit outweigh the cost?

The Marginal Principle

Used to measure the amount of enjoyment or satisfaction a buyer receives from consuming different goods.

Utility

A consumer will maximize his/her satisfaction when they consume at a level where the marginal utility per dollar fore each good is the same.

Utility Maximization Rule

What does the shaded area in the graph below represent? a) Total revenue b) Price elasticity of demand c) Market demand d) Total profit

a) Total revenue

If the price of eggs were to rise by 15%, and if the price elasticity of demand for eggs is around −0.2, will the quantity demanded for eggs increase or decrease, and by what percent? a) Increase by 3% b) Decrease by 3% c) Decrease by 75% d) Increase by 75%

b) Decrease by 3%

E-books are highly price-elastic. For every copy of an e-book sold at $14.99, it would sell 74% more if priced at $9.99. If customers buy 100,000 copies of a particular e-book when priced at $14.99, which price gives higher revenue? Please choose the correct answer from the following choices, and then select the submit answer button. a) The $14.99 price point yielding $1,738,000 in revenue. b) The $9.99 price point yields $239,260 more in revenue than at $14.99. c) The $14.99 price point yields $239,260 more in revenue than at $9.99. d) The revenue from both price points would be the same.

b) The $9.99 price point yields $239,260 more in revenue than at $14.99.

A clothing manufacturer finds a cheaper supplier of wool for their winter coats. During this time, an unexpected cold front moves across the country. What effect will this have on price and quantity? a) The effect on price is unknown; quantity falls. b) The effect on price is unknown; quantity rises. c) Price falls; quantity falls. d) Price rises; the effect on quantity is unknown.

b) The effect on price is unknown; quantity rises.

When your suppliers decrease the prices of your inputs, they decrease your _____, and this will shift your supply curve to _____. a) fixed costs; the right b) marginal costs; the right c) fixed costs; the left d) marginal costs; the left

b) marginal costs; the right

Marginal Utility Equation

change in total utility/change in quantity consumed

When the government increased the minimum wage by 50%, it led to a 75% increase in workers providing labor. Based on the information given, what is the price elasticity of supply for labor? a) 0.375 b) 0.007 c) 0.67 d) 1.50

d) 1.50

On weeknights an Uber driver can expect to earn $110 driving a six-hour shift. Surge pricing on Saturday nights mean that Uber drivers can expect to earn $140 driving a six-hour shift. On weeknights, there are 200 drivers on the road, which rises to 300 on Saturdays. Calculate the price elasticity of supply of Uber drivers using the midpoint formula. a) 40% b) 0.825 c) 24% d) 1.67

d) 1.67

If cutting the price of shoes by 5% leads to an increase in the quantity demanded by 10%, what is the absolute value of the price elasticity of demand for shoes? a) 0.5 b) −0.5 c) −2.0 d) 2.0

d) 2.0

When your selling price is _____the marginal cost, you would neither increase nor decrease your profits. a) greater than or less than b) less than c) greater than d) exactly equal to

d) exactly equal to

Marginal Utility per Dollar Equation (Bang for Your Buck)

marginal utility/price

Extra cost of producing one additional unit of production.

Marginal Cost

- Combination of market forces and central authority allocates resources - Try to balance efficiency and equity

Mixed Economy

All the following factors may shift an individual demand curve except a change in: a) individual's expectations b) the price of a good c) individual's income d) individual's preferences

b) the price of a good

How is the economic surplus generated by a decision calculated? a)It is the total benefits plus total costs arising from the decision. b) It is the sum of benefits arising from the decision. c) It is the total benefits minus total costs arising from the decision. d) It is the sum of costs arising from the decision.

c) It is the total benefits minus total costs arising from the decision.

Recall that the demand curve presents your marginal benefit curve. With this in mind, and with no change in the availability of water, why is it that your willingness to pay for water is relatively small compared to other, nonessential to life, goods? a) Because most people prefer other alternatives b) Because your water consumption is based on total benefit, not marginal benefit c) Because consumption has no effect on price d) Because your water consumption is based on marginal benefit, not total benefit

d) Because your water consumption is based on marginal benefit, not total benefit

A guitar manufacturer finds a cheaper source for wood in the production of their electric guitars. During this time, a sharp decrease occurs in the popularity of rock music in favor of electronic dance music created using computers. What effect will this have on price and quantity? a) Price falls; quantity falls b) Price rises; the change in quantity is unknown c) Price rises; quantity rises d) Price falls; the change in quantity is unknown

d) Price falls; the change in quantity is unknown

Lisa has a stand at the local farmer's market where she sells honey from her farm. Every week, Lisa sells out of honey while still having people waiting in line to buy some. What is happening in the market for Lisa's honey? a) Quantity supplied exceeds quantity demanded, creating a shortage. b) Quantity supplied exceeds quantity demanded, creating a surplus. c) Quantity demanded exceeds quantity supplied, creating a surplus. d) Quantity demanded exceeds quantity supplied, creating a shortage.

d) Quantity demanded exceeds quantity supplied, creating a shortage.

When your suppliers increase the prices of your inputs, they increase your _____, and this will shift your supply curve to _____. a) fixed costs; the right b) fixed costs; the left c) marginal costs; the right d) marginal costs; the left

d) marginal costs; the left

When following the Rational Rule for Sellers in Competitive Markets, it is NOT true that: a) your supply curve is upward-sloping because of rising marginal costs. b) your supply curve is your marginal cost curve. c) Price = Marginal cost. d) your supply curve is downward-sloping because of rising marginal costs.

d) your supply curve is downward-sloping because of rising marginal costs.