Microeconomics 201

A homeowner will be away from her house for six months. The monthly mortgage payment on the house is $300. The utilities, to be paid by the owner, cost $100 per month if the house is occupied; otherwise zero. If the owner wishes to minimize her losses from the house, she should rent the house for as much as the market will bear, as long as monthly rent is greater than which of the following? (Assume wear and tear to be zero regardless of whether the house is occupied.) (Hint: Remember the concept of sunk cost.) -$0 -$100 -$200 -$400

$100

In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be -$25. -$2,500. -$5,000. -$7,500.

$2500

(I) The market for new issues of stock is called the primary market.(II) The New York Stock Exchange is an example of a secondary market in which previously issued shares are traded between investors. -I is true; II is false. -I is false; II is true. -Both I and II are true. -Both I and II are false.

Both I and II are true

If Jane's marginal benefit as a consumer in the jeans market is larger than the price of a pair of jeans, -Jane will not purchase any more jeans. -Jane can benefit by purchasing more jeans. -the opportunity cost of a pair of jeans is lower than the price. -Jane will decrease her total utility by purchasing more jeans.

Jane can benefit by purchasing more jeans

JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls.Refer to Scenario 7-1. According to the substitution effect, which of the following is most likely to occur? -JoAnn will purchase less cola and more sparkling water. -JoAnn will purchase more cola and less sparkling water. -JoAnn will purchase more of all goods due to her higher real income. -JoAnn's demand curve will decrease (shift in), causing her to purchase less cola

JoAnn will purchase more cola and less sparkling water.

Marginal Utility

The additional satisfaction received from the consumption of an additional unit of a good.

he random walk theory implies that stock prices -go down, then up, and then down again. -go up and then down in a predictable pattern. -follow systematic trends. -are unpredictable based on past trends.

are unpredictable based on past trends.

If consumers would be willing to purchase the same quantity of a good no matter what its price was, the demand curve would -be a vertical line, and demand would be perfectly inelastic. -be a horizontal line, and the demand would be perfectly elastic. -not exist. -be identical to the supply curve for the good.

be a vertical line, and demand would be perfectly inelastic

Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry -has an income elasticity of two. -is a normal good. -is a luxury good. -is all of the above.

is all of the above

Investment in a broad portfolio of stocks is most attractive for -short-term investors. -long-term investors. -investors seeking a steady rate of return. -investors who will need the funds for other purposes in about 10 years.

long-term investors.

If a firm in a competitive price-searcher market raises its price, it will -lose all of its sales. -increase its sales. -lose only some of its sales. -have to go out of business.

lose only some of its sales

A perfectly inelastic demand curve indicates that -a producer can sell as many units as desired at the market price but no units above the market price. -for a given percent change in price, the quantity demanded rises by the same percentage. -price has no effect on the quantity demanded. -the percent change in price is less than the percent change in quantity demanded.

price has no effect on the quantity demanded.

A competitive price-taker market in long-run equilibrium is described as efficient because firms -produce at the low point on their average cost curve. -produce where marginal cost yields a profit. -earn no more than the cost of capital. -are not profitable.

produce at the low point on their average cost curve.

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then: -product A is more price elastic than product B. -product B is more price elastic than product A. -consumers are more sensitive to price changes in product A than in product B. -product B is more price inelastic than product A. -products A and B must be substitutes.

product B is more price elastic than product A

If the demand for a product increases as the result of a decline in income, it can be concluded that the -product is an inferior good. -demand for the product is inelastic. -price elasticity of demand for the product equals unity. -demand for the product is elastic.

product is an inferior good.

Assume that a college student purchases only coffee and Snickers. The substitution effect associated with a decrease in the price of a Snickers will result in -an increase in the consumption of coffee only. -a decrease in the consumption of coffee only. -an increase in the consumption of Snickers and a decrease in the consumption of coffee. -a decrease in the consumption of Snickers and an increase in the consumption of coffee

-an increase in the consumption of Snickers and a decrease in the consumption of coffee.

When the marginal product of labor diminishes, -average fixed cost rises. -average variable cost is constant. -marginal cost rises. -average total cost must rise. -total cost rises at a diminishing rate.

-marginal cost rises.

If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ____, indicating the demand is ____. -2; elastic -2; inelastic -0.5; elastic -0.5; inelastic

2; elastic

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase in football ticket prices would be expected to cause a -4.5 percent decrease in quantity demanded. -4.5 percent increase in quantity demanded. -45 percent decrease in quantity demanded. -45 percent increase in quantity demanded. -450 percent increase in quantity demanded

45 percent decrease in quantity demanded.

Proprietorship

A business firm owned by an individual who possesses the ownership rights to the firm's profits and is personally liable for the firm's debts.

Partnership

A business firm owned by two or more individuals who possess ownership rights to the firm's profits and are personally liable for the debts of the firm.

Contestable Market

A market in which the costs of entry and exit are low, so firms risk little by entering; efficient production and zero economic profits should ultimately prevail.

Price Discrimination (Differential Pricing)

A practice whereby a seller charges different consumers different prices for the same (basic) good or service.

Inferior Good

A product that has a negative income elasticity coefficient.

Normal Good

A product that has a positive income elasticity coefficient.

Which of the following is true? -The buyer of a firm's stock is purchasing a fractional share in the firm's future net revenues. -When investors believe that a business decision by the management of a firm will increase the firm's future earnings, the price of the firm's stock will tend to rise. -Changing stock prices provide the board of directors and managers of a firm with a strong incentive to make good decisions and undertake productive projects. -All of the above are true.

All of the above are true.

Portfolio

All the stock, bonds, or other securities held by an individual or corporation for investment purposes.

Corporation

An "artificial person" created by law whose shareholders possess ownership rights to the firm's profits, and have limited liability.

Residual Claimant

An individual who personally receives the excess, if any, of revenues over costs in a business endeavor.

Which of the following is true? -When firms in a price-taker market are earning zero economic profit, they will shut down. -When firms in a price-taker market are earning positive economic profits, new firms will enter the industry causing the market price to fall until the firms in the industry are earning only zero economic profit. -When firms in a price-taker market are earning economic losses, some firms will exit the industry causing the market price to rise until the remaining firms are earning zero economic profit. -Both b and c are true.

Both b and c are true

Which of the following is an implication of the random walk theory? -Experts will be able to make money by picking and choosing the best stocks. -There is a systematic pattern to the movement of prices in the stock market. -Stock market investors can expect to earn a fairly steady real rate of return of about 7 percent annually. -Even experts will be unable to predict the future movement of stock prices with any degree of accuracy.

Even experts will be unable to predict the future movement of stock prices with any degree of accuracy.

Fixed Costs

Expenses incurred by a firm that do not change with output.

Variable Costs

Expenses incurred by a firm that rise as output is increased, but fall as output is decreased.

Sunk Costs

Expenses that have already been incurred as a result of past decisions, and can't be recovered any longer.

Differentiated Products

Goods or services that can be distinguished from other goods and services by such characteristics as quality, design, location, or method of production.

Which of the following statements best describes the price, output, and profit conditions of competitive price-searcher markets? -Price will equal marginal cost at the profit-maximizing level of output; profits will be positive in the long-run. -Price will always equal average variable cost in the short run and either profits or losses may result in the long run. -Marginal revenue will equal marginal cost at the short run, profit-maximizing level of output; in the long run, economic profit will be zero. -Marginal revenue will equal average total cost in the short run; long-run economic profits will be zero.

Marginal revenue will equal marginal cost at the short run, profit-maximizing level of output; in the long run, economic profit will be zero.

Explicit Costs

Monetary payments by a firm, usually to purchase the services of productive resources.

Which of the following characteristics is true for a competitive price searcher but not for a price taker? -The firm earns zero profits in the long run. -The firm has an incentive to operate efficiently. -A reduction in market demand will lead to short-run losses. -Price is above marginal cost in long-run equilibrium.

Price is above marginal cost in long-run equilibrium

The market for new issues of stock is called the -primary market. -secondary market. -The New York Stock Exchange (NYSE). -The Chicago Board of Trade.

Primary Market

Economies of Scale

Reductions in the firm's per-unit costs that are associated with the use of large plants to produce a large volume of output.

Which one of the following goods would likely have the most inelastic demand? -Kellogg's corn flakes -salt -a new Toyota automobile -fresh green beans

Salt

Price Searchers

Sellers that face a downward sloping demand curve for their product; the amount they are able to sell varies inversely with the price that they charge.

Price Takers

Sellers who must accept the market price in order to sell their product because their output is small relative to the total market.

Marginal Cost

The change in total cost that is required to produce an additional unit of output.

Marginal Product

The change in total product that results from a unit increase in the employment of a variable input.

Marginal Revenue

The change in total revenue that results from the sale of an additional unit of a product.

Implicit Costs

The opportunity costs associated with a firm's use of the resources that it owns.

Stock Option

The right to buy a specified number of shares in a corporation at a designated price.

Which of the following is the best example of "creative destruction"? -The imprudent use of a credit card by a family that already has a high level of debt. -The virtual elimination of the film camera by the digital camera. -The failure of a business because of poor management. -The failure of a business because of higher cost resulting from government regulation.

The virtual elimination of the film camera by the digital camera.

Suppose there are only two goods, apples and oranges. What happens if the price of each good increases by 15 percent? -The consumer will substitute apples for oranges. -The consumer will substitute oranges for apples. -There is no substitution effect because relative prices have remained constant. -Demand for both goods increases. -Demand for both goods decreases.

There is no substitution effect because relative prices have remained constant.

Stock analysts often argue that lower interest rates are good for the stock market. Does this argument make sense? -No; lower interest rates will tend to slow down the economy and this will be bad for the stock market. -Yes; the lower rates of interest will increase the value of future income (and capital gains) and stock prices will rise to reflect this factor. -No; the lower rates of interest will reduce the value of future income (and capital gains) and this will cause stock prices to fall. -Yes; the lower interest rates will cause inflation and inflation is generally good for the stock market.

Yes; the lower rates of interest will increase the value of future income (and capital gains) and stock prices will rise to reflect this factor.

For a firm in a price-taker market, the firm's demand curve is -a horizontal line at the market price that is equal to the firm's marginal revenue curve. -an upward-sloping line that is equal to the firm's marginal cost above AVC. -a downward-sloping line that lies below the firm's marginal revenue curve. -undefined because it cannot determine the price it charges for its output.

a horizontal line at the market price that is equal to the firm's marginal revenue curve.

When firms in a price-taker market are temporarily able to charge prices that exceed their production costs, -the firms will earn long-run economic profit. additional firms will be attracted into the market until price falls to --the level of per-unit production cost. -the firms will earn short-run economic profits that will be offset by long-run economic losses. -the existing firms must be colluding or rigging the market, otherwise, they would be unable to charge such high prices.

additional firms will be attracted into the market until price falls to the level of per-unit production cost.

If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should -bowl less, so the marginal satisfaction from expenditures in this area will increase. -spend more on hamburgers, so total satisfaction from that activity will increase. -eliminate spending on hamburgers. -bowl more and spend less on hamburgers.

bowl more and spend less on hamburgers.

If people buy less chewing gum at every price when their incomes fall, then -chewing gum is a normal good. -the demand for chewing gum is positively sloped. -demand for chewing gum has increased. -the price of chewing gum has increased. -there has been a decrease in population that changed demand.

chewing gum is a normal good

If the price of a good is $0, a consumer will -consume an infinite quantity. -consume all units with positive marginal utility. -consume the entire amount supplied. -consume until total utility becomes 0

consume all units with positive marginal utility

If price is above average variable cost and below average total cost, a profit-maximizing price taker should -immediately shut down; failing to do so is contrary to the idea of profit maximization in a competitive market. -continue producing as long as it expects the market price to rise above average total cost in the near future. -attempt to push price upward by slowly reducing output. -cut price so more units can be sold.

continue producing as long as it expects the market price to rise above average total cost in the near future.

Terri currently consumes 10 hamburgers and 2 shirts per month. At her current rates of consumption, her marginal utility of hamburgers is 10 and her marginal utility of shirts is 50. If the price of hamburgers is $2 each, while the price of a shirt is $25, Terri -is maximizing her utility. -could improve her total utility by buying fewer hamburgers and more shirts. -could improve her total utility by buying fewer shirts and more hamburgers. -could improve her total utility by spending less on both goods

could improve her total utility by buying fewer shirts and more hamburgers.

If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should -decrease his spending on cola. -decrease his spending on cola and decrease his spending on shirts. -decrease his spending on shirts. -increase his spending on cola and decrease his spending on shirts.

decrease his spending on cola.

The exit of existing firms from a competitive market will -increase market supply and increase market prices. -increase market supply and decrease market prices. -decrease market supply and increase market prices. -decrease market supply and decrease market prices.

decrease market supply and increase market prices.

When new firms have an incentive to enter a competitive price-taker market, their entry will -increase the price of the product. -drive down profits of existing firms in the market. -shift the market supply curve to the left. -increase demand for the product.

drive down profits of existing firms in the market.

Ron works for Betty at Betty's Pizza Palace. Betty has many work rules, and Ron believes if there were fewer rules and more flexibility, he could do a better job. Betty probably has the rules because -Ron, like her other employees, is a residual claimant. -due to the principal-agent problem, some employees are likely to shirk when the owner is absent. -she is maximizing sales rather than profits. -with regard to their jobs, employees seldom know what is best.

due to the principal-agent problem, some employees are likely to shirk when the owner is absent.

Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a ____ rate of return, and the variation in the rate of return has been ____. -low; low -low; high -high; low -high; high

high; low

The difference between zero accounting profit and zero economic profit is that -economists include opportunity cost in zero economic profit, while accountants do not include opportunity cost in zero accounting profit. -economists do not include opportunity cost in zero economic profit, while accountants do include opportunity cost in zero accounting profit. -economists include opportunity cost in zero accounting profit, while accountants do not include opportunity cost in zero economic profit. -economists do not include opportunity cost in zero accounting profit, while accountants do include opportunity cost in zero economic profit.

economists include opportunity cost in zero economic profit, while accountants do not include opportunity cost in zero accounting profit.

When a firm is operating in a price-taker market, marginal revenue is equal to the change in output divided by the change in total -revenue. -equal to price. -always less than price. -equal to zero when the market is in long-run equilibrium.

equal to price

Which of the following would be most likely to push stock prices higher? -higher interest rates and the expectation of larger future corporate profits -higher interest rates and the expectation of smaller future corporate profits -lower interest rates and the expectation of larger future corporate profits -lower interest rates and the expectation of smaller future corporate profits

lower interest rates and the expectation of larger future corporate profits

A price-taker firm will tend to expand its output so long as its -marginal revenue is positive. -marginal revenue is greater than the market price. -marginal revenue is less than the market price. -marginal cost is less than the market price.

marginal cost is less than the market price

Al's Donuts produces about 600 dozen doughnuts daily. If flour prices increase 20 percent -only marginal cost will shift up. -only marginal cost and average total cost will shift up. -marginal cost, average variable cost, and average total cost will shift up. -marginal cost, average total cost, and average fixed cost will shift up.

marginal cost, average variable cost, and average total cost will shift up.

Price searchers can be expected to charge a price that -is the highest at which consumers will purchase any units. -they expect to provide the largest possible flow of gross revenue. -minimizes their per-unit costs of production. -maximizes their profit.

maximizes their profit

Assume a competitive price-searcher firm is earning an economic profit. The marginal revenue from selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. The firm should -change neither its price nor its output level -reduce its price and increase its output level -increase its price and reduce its output level -reduce both its price and its output level -increase both its price and its output level

reduce its price and increase its output level

If a government wanted to increase the prosperity of a nation, it could best serve this goal by -protecting domestic industries from international trade, thus encouraging domestic growth. -regulating the way in which firms can operate. -reducing barriers that restrict the ability of potential competitors to enter markets. -subsidizing firms that are in danger of going out of business.

reducing barriers that restrict the ability of potential competitors to enter markets.

If demand is inelastic, an increase in the price of a good will cause total expenditures on the good to -fall. -remain constant since the decrease in quantity sold is exactly offset by the price increase. -rise. -rise if it is a normal good and fall if it is an inferior good.

rise

An inferior good is a good whose quantity demanded -rises when its price falls. -falls when the price of a related good falls. -falls when the consumer's total utility rises. -rises when the consumer's income falls

rises when the consumer's income falls

Marginal cost is best defined as -a cost that does not vary with the rate of output. -the difference between fixed and variable cost at any level of output. -the amount added to total cost when one more unit of output is produced. -the difference between price and average total cost at the profit-maximizing level of output.

the amount added to total cost when one more unit of output is produced.

If the price of apples increases, total expenditures on apples will decline if -there are few substitutes for apples. -the supply of apples is inelastic. -the demand for apples is elastic. -apples are a normal good.

the demand of apples is elastic

Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America? -the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost -an increased tendency of small investors to buy and sell stock frequently, using stock tips from investment experts -the virtual disappearance of business failures among corporations with publicly traded stock shares -all of the above

the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost

The minimum points of the average variable cost and average total cost curves occur where -the marginal cost curve lies below the average variable cost and average total cost curves. -the marginal cost curve intersects those curves. -the average variable cost and average total cost curves intersect. -the slope of total cost is the smallest

the marginal cost curve intersects those curves

Suppose that competitive price-searcher firms are experiencing losses. In the transition from this initial situation to a long-run equilibrium, -the number of firms in the market decreases. -each existing firm experiences a decrease in demand for its product. -each firm experiences an upward shift to its marginal cost and average total cost curves. -each existing firm's average total cost falls to bring economic profit back to zero.

the number of firms in the market decreases.