Microeconomics Final
Demand will be more elastic when
the number of good substitutes is large
For most students attending public universities, the largest cost component of going to college is
the opportunity cost in terms of forgone current income from the time spent attending college.
The forces of supply and demand assure that
the price of a good will eventually rise in response to an excess demand for that good.
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
the quantity demanded of physicals increases and the quantity supplied of physicals decreases.
The expression "There's no such thing as a free lunch" means
the use of resources to produce a good has an opportunity cost because of scarcity.
Other things equal, the demand for a good tends to be more inelastic when
there are fewer available substitutes
When price is greater than marginal cost for a firm in a competitive market,
there are opportunities to increase profit by increasing production.
The Laffer Curve indicates that
when tax rates are high, a rate reduction may lead to an increase in tax revenue.
Average fixed costs
will always decrease as output expands
Suppose that the federal government grants a 50 cent per gallon subsidy to buyers of propane and that the demand for propane is highly inelastic while the supply is highly elastic. Under these circumstances, the benefit of the subsidy
will go primarily to consumers
A homeowner will be away from her house for six months. The monthly mortgage payment on the house is $1,000. The owner's cost of utilities is $100 if the house is unoccupied but $300 if the owner rents it out. If the owner wishes to minimize her losses from the house while away, 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.)
$200
Which of the following would reduce the supply of football jerseys?
A new tax imposed on the producers of football jerseys
According to Adam Smith's invisible hand principle, productive actions that promote the general welfare of society will be undertaken when
competitive markets direct the actions of self-interested individuals.
Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.
Which of the following is most consistent with economizing behavior?
If you get the same satisfaction from a turkey sandwich and a salad, you should purchase the one that costs the least.
If a government price control succeeds in affecting price, it can be expected to lead to a corresponding
decrease in the quantity of sales if the price is forced down and an increase in the volume of sales is the price is forced up
If government taxes a firm which pollutes this will
decrease the supply of the good produced
The burden of a tax will fall primarily on buyers when the
demand for the product is highly inelastic and the supply is relatively elastic.
When property rights are clearly defined and enforced, private owners will
develop and direct their property toward uses that others value highly because the market will generally reward them for doing so.
In the long run, a firm might experience rising average total costs due to
diseconomies of scale
If a firm doubles all of its inputs and its output triples, it is said to be experiencing
economies of scale
If a Subway restaurant near campus reduces its sandwich prices by 15 percent, and as a result, its total revenue from sandwich sales increases, this indicates that the price elasticity of demand was
elastic
If Caleb thinks the last dollar spent on fishing yields more satisfaction than the last dollar spent on candy bars, and Caleb is a utility-maximizing consumer, he should
fish more and spend less on candy bars
If people buy less flowers at every price when their incomes fall, then
flowers are a normal good.
Suppose a tax is imposed on two products X and Y, both of which have identical supply elasticities. The demand for good X is highly elastic, while the demand for good Y is highly inelastic. The deadweight loss (or excess burden) will be
larger for good X than good Y.
If production of a good creates external benefits, a competitive market will likely produce
less output than is efficient
As output rises, marginal product eventually diminishes and
marginal cost increases.
When the marginal product of labor diminishes,
marginal cost rises
A local doughnut shop produces about 600 dozen doughnuts daily. If flour prices increase 20 percent
marginal cost, average variable cost, and average total cost will shift up.
As people have more time to adjust to a price change,
both supply and demand become more elastic
A tax imposed on the sellers of a good will
raise the price paid by buyers and lower the equilibrium quantity.
High transaction costs will tend to
reduce the number of mutually beneficial exchanges that occur.
Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would
result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
If demand is inelastic, an increase in the price of a good will cause total expenditures on the good to
rise
Suppose a typical firm in a particular industry is making positive economic profits. These economic profits
signal owners of factors of production to move resources into this industry.
If a decrease in the demand for cabbage leads to economic losses for cabbage farmers,
some existing cabbage farmers will exit the industry
When economists say the price elasticity of supply is elastic, they mean that
suppliers are willing to produce much larger amounts of their good.
In voluntary exchange, if the seller of a product gains,
the buyer must also gain; mutual gain provides the foundation for exchange.
"If James had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much." This quote illustrates
the fallacy of composition
When a firm generates external benefits, a more efficient outcome would result if
the firm produced a larger output level.
The minimum points of the average variable cost and average total cost curves occur where
the marginal cost curve intersects those curves.
Other things being equal, the effect of a decrease in the price of raspberries would be illustrated by
an increase in the quantity demanded for raspberries.
The price elasticity of demand for a commodity is determined primarily by the
attractiveness of the substitutes for the good.
Which of the following best explains why making automobiles completely safe is not efficient?
After some level of safety is reached, making cars even safer will not be worth the additional cost.
Other things constant, which of the following would you expect to increase the output growth rate of a country?
An increase in the rate of investment as a share of total output.
Which of the following will become smaller and smaller as the firm expands output?
average fixed cost
Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result?
Both price and quantity will decrease.
Which of the following about economic decision making is true?
Changes in personal costs and benefits will exert a predictable impact on the choices of human decision makers.
The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?
Cows can be privately owned while in many countries elephants can not.
Use the table below to choose the correct answer. The table outlines the production possibilities of Robinson Crusoe and Joe Friday. If Crusoe and Friday want to maximize their consumption possibilities,
Crusoe should specialize in producing good Y and Friday in producing good X; trade should occur to maximize joint consumption.
In which of the following cases will the total spending on a good decrease?
Demand is elastic, and price increases.
How would a decrease in consumer income affect the market for lawn mowers?
Demand would decrease, leading to a reduction in price and a reduction in quantity sold.
If you were a government official and wanted to raise the price of rye, which of the following actions would you take?
Encourage farmers to grow less rye.
Assume that supply decreases greatly and demand decreases slightly. Which of the following will happen?
Equilibrium price will rise and equilibrium quantity will fall
Suppose demand decreases and supply decreases. Which of the following will happen?
Equilibrium price will rise, fall, or stay the same while equilibrium quantity will decrease.
There are 1,000 identical firms in a price-taker industry. In the short run, the total revenues of each firm are less than total costs. What will happen in the long run?
Firms will exit the market, and the product price will rise
Which of the following provides the best explanation for diseconomies of scale?
Large management structures may be bureaucratic and inefficient
Which of the following must be true if average variable costs are decreasing?
Marginal cost is less than average variable cost.
Which of the following must be true if average total costs are rising?
Marginal costs must be greater than average total costs.
If Mateo can produce tacos at a lower opportunity cost than Emmett, then
Mateo has a comparative advantage in the production of tacos.
If the supply of a good decreased, what would be the effect on the equilibrium price and quantity?
Price would increase, and quantity would decrease.
If the demand for a good increased, what would be the effect on the equilibrium price and quantity?
Price would increase, and quantity would increase.
Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?
Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem.
Suppose both the equilibrium price and quantity rise for a particular product. Which of the following best explains this situation?
Supply and demand simultaneously increased and the shift in supply was less than the shift in demand.
How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers?
The amount available to others is unaffected
How will a reduction in the price of cotton influence the market for blue jeans?
The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right.
Suppose an increase in the price of microwaves leads to an increase in total expenditures on the microwaves. Which of the following is true for this price change?
The demand for microwaves is inelastic
Which of the following about costs is true?
The difference between the ATC and AVC curves will decline as output expands.
Suppose external benefits are present in a market which results in the actual market price of $14 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?
The efficient outcome would be greater than 150 units.
Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?
The efficient outcome would be less than 325 units
Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?
The efficient price would higher than $18 while the efficient output would be less than 400 units.
In the short run, the firm's average fixed costs
always decline as output increases.
Which of the following describes a situation in which demand must be elastic?
Total revenue decreases when the price of toothpaste rises.
If you paid $100 for a truckload of lettuce on Monday, how much should you be willing to sell it for on Friday, the day before it spoils?
Whatever you can get for it.
A decrease in supply will cause
a decrease in quantity demanded.
Which of the following would most likely cause both a decrease in the price of televisions and a decrease in the number sold?
a decrease in the demand for televisions
Which of the following would most likely increase the demand for televisions?
a decrease in the price of DVD players, a product that is complementary with televisions
Which of the following will cause a decrease in the demand for peanut butter?
a doubling of the price of bread
Assuming that bus travel is an inferior good, a decrease in consumer income, other things being equal, will cause
a rightward shift in the demand curve for bus travel.
If the federal government placed a 50 cent per pack excise tax on cigarette manufacturers, and if as a result, the price to consumers of a pack of cigarettes went up by 40 cents, the
actual burden of this tax falls mostly on consumers
If education creates external benefits,
actual market outcomes provide less than the efficient quantity of education.
If a decision maker uses marginal analysis, then the relevant costs are the
additional costs of a particular activity or product
When a good is nonexcludable,
all of the above are true
If a price searcher is producing at a level of output such that its marginal cost is $16 and its marginal revenue is $9, the firm should
increase price and reduce its rate of output.
Other things constant, an increase in the demand for bicycles will
increase the demand for bicycle workers and increase their wages
If the demand for a good is elastic, then total revenue
increases as price decreases.
Suppose a city that operates local electric and natural gas companies wants to raise revenues by increasing its rates for electricity and natural gas. The price rise will increase city revenues if the elasticity of demand for electricity and natural gas is
inelastic
When a shortage of a good is present due to a price ceiling,
non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good.
The most important implicit cost generally omitted from the accounting statement of a firm is the
opportunity cost of the equity capital invested by the owners.
Competitive price-taker firms respond to changing market conditions by varying their
output
According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study
outweighs the extra cost
In the short run, a profit-maximizing firm in a price-taker market will definitely stop production if
price is less than average variable cost
An important difference between the situation faced by a profit-maximizing competitive price-searcher firm in the short run and the situation faced by that same firm in the long run is that in the short run,
price may exceed average total cost, but in the long run, price will equal average total cost.
When economists say the quantity demanded of a product has increased, they mean the
price of the product has fallen, and consequently, consumers are buying more of it.
When economists say the quantity supplied of a product has increased, they mean the
price of the product has risen, and consequently, suppliers are producing more of it.
The government sometimes provides public goods because
private markets would not produce the efficient quantity of the goods.
In a competitive market, profit can be considered a reward to businesses that
produce a good that consumers value more highly than its component resources.
Suppose a country attempts to be self-sufficient and doesn't trade with any other countries. From an economic perspective, citizens of this nation can be expected to
produce less total value than they could if they specialized and engaged in trade with other nations.
Price controls will tend to cause misallocation of resources because
production (or opportunity) cost no longer corresponds to market price.
As new firms enter a competitive price-searcher market, it can be expected that
profits of existing firms will decrease
