Microeconomics Final Exam Prep
A firm is producing 4 units of output at an average total cost of $40. When the firm produces 5 units of output, average total cost rises to $50. What is the marginal cost of the fifth unit of output? $10 $30 $120 $90
$90
Price Elasticity
% change in demand / % change in price
Suppose that the marginal utility of good Y = 2X^2 and the marginal utility of good X = 4XY. What is the slope of the indifference curve when Y = 7 and X = 2? Assume that good X is on the horizontal axis and good Y is on the vertical axis. 0.143 -0.143 -14 -7
-7
In the market for used cars, the demand and supply equations are given by QD = 12,000 - 0.4P and QS = 0.1P + 5,000, where P is the price per car and Q measures the quantity of cars. What is the size of the deadweight loss at a price floor of $15,000? $750,000 $1 million $250,000 $500,000
$1 million
If the inverse demand function for a monopoly's product is P= 50 - (1/3)Q, then which of the following is the firms marginal revenue function? MR= 150-6Q MR=1/3 MR=50-(2/3)Q None of the above
MR=50-(2/3)Q
If a regulatory agency is successfully engaging in optimal price regulation, then they are setting the legal limit on the price of the good equal to.. The average cost of producing the good The marginal cost of producing the good the average variable cost of producing the good the regulated firms profit maximizing price level
Marginal Cost of producing the good
An isoquant represents levels of capital and labor that lead to the same level of profit lead to the same level of output lead to the same level of total costs All of the above
lead to the same level of output
Which of the following factors are likely to result in fewer fixed costs? stronger labor unions unreliable resale markets longer time horizons greater capital requirements for production
longer time horizons
Genetically modified soybean seed is an example of a new technology that has increased productivity. As a result, this new technology _____ production costs and _____ the supply of soybeans. lowered; decreased raised; decreased lowered; increased raised; increased
lowered; increased
In Louisiana, it was a crime to sell burial caskets without a funeral director's license. This law was a source of _____ for licensed funeral directors and an example of _____. market power; a natural monopoly scale economies; a natural monopoly market power; a government-sanctioned barrier to entry product differentiation; scale economies
market power; a government-sanctioned barrier to entry
The utility function U = Y/X violates the assumption(s) of: more is better. rankability. completeness. rankability and completeness.
more is better.
As firms enter a monopolistically competitive industry, the existing firms' demand curves will: shift outward and become more inelastic. shift inward and become more elastic. remain unchanged. shift outward and become more elastic.
shift inward and become more elastic.
Marginal rate of substitution
the rate at which one is willing to trade off or substitute exactly 1 unit of good X for more of good Y, and be equally well off. MUx/MUy = -(Change in Qy/Change in Qx)
Engel Curve
the relationship between the quantity demanded of a single good and income, holding prices constant. Income increases over time and quantity demanded increases then eventually starts to decrease
Government encouragement of monopoly: through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market. results in the regulated firm producing beyond the competitive output level. reduces the market power of regulated firms. usually leads to lower prices and higher consumer surplus.
through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.
Randy likes baseball more than football, football more than basketball, and basketball more than baseball. Which assumption about consumer preferences does this violate? completeness and rankability The more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good. transitivity more is better
transitivity
Debbie, a popular wedding photographer, is able to photograph a wedding every Saturday of the year. She charges couples $4,000 for a complete set of photographs that cost her $2,200 to print and develop. Suppose that on one Saturday Debbie photographs her niece's wedding without charge, but her niece insists on paying Debbie $2,200 to cover her printing and developing costs. What is Debbie's economic cost of photographing her niece's wedding? $2,200 $0 $1,800 $4,000
$1,800
Suppose a firm lowers its price to $10, raising the quantity sold from 4 to 5 units. if the marginal revenue of the 5th unit is $2, the firm must have lowered its price by: $8 $2 $4 $10
$2
Suppose a firm lowers its price to $10, raising the quantity sold from 4 to 5 units. If the marginal revenue of the fifth unit is $2, the firm must have lowered its price by: $2. $10. $4. $8.
$2.
Chauncey's Burgers sells hamburgers in a monopolistically competitive industry. Chauncey faces an inverse demand curve of P = 9 - 0.4Q, where Q is measured in hamburgers per hour and P is the price per hamburger. The total cost is TC = 20 + Q, and marginal cost is constant at $1. What is Chauncey's hourly profit? $20 $35 $15 $70
$20
In a perfectly competitive industry, there are two types of firms: low-cost producers and high-cost producers. The minimum average total cost of the high-cost producers is $150. The low-cost producers have a long-run total cost curve given by LTC = 150Q - 15Q^2 + 0.4Q^3, where LMC = 150 - 30Q + 1.2Q^2. How much economic rent does the low-cost producer earn? $710 $45,000 $3,125 $14,000
$3,125
Suppose the outboard motor market is characterized by Stackelberg competition. The market inverse demand curve for outboard motors is P = 10,000 - 50Q, where Q is the total market output produced by Mercury Marine and Yamaha, qM + qY. Suppose that the marginal cost for both firms is constant at $1,000. If Yamaha is the first-mover, what is the equilibrium price? $4,000 $3,250 $2,600 $1,800
$3,250
The market for plywood is characterized by the following demand and supply equations: QD = 800 - 10P and QS = 50P - 1,000, where P is the price per sheet of plywood and Q measures the quantity of plywood. What is the size of the deadweight loss if the government imposes a price ceiling of $25 per sheet of plywood? $8,900 $4,418 $3,750 $6,000
$3,750
The demand and supply of ethanol are given by QD = 8,000 - 2,000P and QS = 1,000P - 1,000, where P is price per gallon and Q measures gallons per minute. If the government subsidizes ethanol at $0.30 per gallon, what is the deadweight loss? $119 $440 $7,800 $30
$30
In market A, a firm with market power faces an inverse demand curve of P = 10 - Q and a marginal cost that is constant at $2. In market B, a firm with market power faces an inverse demand curve of P = 8 - 0.75Q and a marginal cost of $2. Producer surplus in market A is _____ than in market B. $8 higher $4 higher $2 lower $1 lower
$4 higher
Suppose the market for relay switches is considered perfectly competitive and is in equilibrium at a price of $5,000 per pallet of relay switches. Callahan Relay produces relay switches at an average total cost given by ATC = Q + 1,500,000/Q and marginal cost given by MC = 2Q, where Q measures pallets of relay switches. If Callahan Relay maximizes profit, how much profit will it earn? $4.75 million $2.5 million $125,000 $88,000
$4.75 million
In the blackberry market, the quantity demanded is given by QD = 2,600 - 500P, and the quantity supplied is given by QS = -400 + 100P. What are the equilibrium price and equilibrium quantity? $2.50 and 900 pounds $4.25 and 3,000 pounds $1.80 and 2,200 pounds $5 and 100 pounds
$5 and 100 pounds
Bubba Golf, a manufacturer of golf clubs, can sell 3 drivers at $600 each. To sell 4 drivers, Bubba Golf must lower the price to $580 each. The marginal revenue of the fourth club is: $20. $60. $520. $580.
$520.
If the inverse demand curve for a good is given by P = 100 - 4Q, the price elasticity of demand is elastic at a price of _____ and inelastic at a price of _____. $35; $30 $55; $35 $40; $60 $60; $50
$55; $35
The inverse demand curve for a monopolist changes from P = 100 - 2Q to P = 120 - 2Q, while the marginal cost of production remains unchanged at a constant $20. After the change in the demand curve, the profit-maximizing price rises from _____, and the profit-maximizing output rises from _____. $10 to $20; 100 units to 120 units $50 to $60; 10 units to 12 units $60 to $70; 20 units to 25 units $40 to $60; 20 units to 30 units
$60 to $70; 20 units to 25 units
The demand and supply of movie tickets are given by QD = 30 - 3P and QS = 4P - 19, where P is the price per ticket and Q is in thousands of tickets. If the government places a $1 tax on each ticket, the prices that consumers pay with and without the tax are _____ and _____, respectively. $4.30; $3.80 $7.50; $6.80 $7.57; $7 $8; $7
$7.57; $7
Gloria runs her own candy shop. Last year, she spent $215,000 purchasing candy to sell in her store and paid $35,000 in rent. She had no other direct costs associated with operating her business and her total revenues for the year were $295,000. Assume that during the same year, if she did not run her own shop she would have worked at her friends shop for a salary of $50,000. Gloria's economic profit was __________ and her accounting profit was ________. -$5,000 $45,000 $60,000 $15,000 $45,000 $80,000 $45,000 $60,000
-$5,000 $45,000
There are 10 consumers in the market, each with the following demand curve: Q = 100 - 0.5P. In a graph of the market demand curve, its slope (ΔP/ΔQ) would equal: -1.50. -2.25. -0.50. -0.20
-0.20
At the profit-maximizing quantity, the firm's marginal cost is $40 and it charges a price of $60. What is the price elasticity of demand at the profit-maximizing quantity? -1.5 -0.67 -3 -0.5
-3
Necessities
0<ED<1
Inelastic
0<abs(ED)<1
Inferior Goods
0>ED Higher income = falling comsumption Less Elastic
Suppose a firm's short-run production function is given by Q = 16L^.8. What is the marginal product of the fourth worker? 10 36 1.85 49
10
In Cournot competition, the market inverse demand curve is P = 240 - 0.5Q, where Q is the total output produced by Firm A and Firm B, qA + qB. The marginal cost for each firm is constant at $30. If Firm B produces 140 units of output, how much output should Firm A produce? 34 80 90 140
140
A firm's demand curve is given by Q = 100 - 0.67P. What is the firm's corresponding marginal revenue curve? 150 - 0.67Q 150 - 3Q 100 - 0.67Q 150 - 1.5Q
150 - 3Q
Suppose that MUx = Y and MUy = X. The prices of good X and good Y are $5 and $4, respectively. How many units of good X does the consumer buy if she has $410 of income? 25 15 41 33
41
The consumer's budget constraint is $6 = 0.50G + P, where G is packs of gum and P is bags of pretzels. The marginal utility of pretzels is MUP = G^0.5, and the marginal utility of gum is MUG = 0.5G^(-0.5) * P. The consumer's utility function is U = G^0.5P. the utility-maximizing bundle consists of _____ packs of gum and _____ bags of pretzels. 2; 5 8; 2 4; 4 6; 3
4; 4
If the demand curve is QD = 10 - 2P, then the lowest price at which no consumer is willing to buy the good (i.e., the demand choke price) is: 5. 2. 7. 10.
5
The price elasticity of demand is -1.25, and the share of the tax borne by consumers is 0.80. What is the price elasticity of supply? 1. 6 1.56 5
5
A two-firm cartel that produces at a constant marginal cost of $20 faces a market inverse demand curve of P = 100 - 0.50Q. Initially, both firms agree to act like a monopolist, each producing 40 units of output. If one of the firms cheats on the agreement (assuming the other firm is compliant and continues to produce at 40 units), how much output should the cheating firm produce to maximize profits? 80 units 41 units 44 units 60 units
60 units
The production function q= 0.25L^.4 * K^.8 exhibits Increasing returns to scale Constant returns to scale Decreasing returns to scale Varying returns to scale
???
The production function q= 4L^.2 * K^.4 exhibits Constant returns to scale Increasing returns to scale Decreasing returns to scale Varying returns to scale
?????
Why is the type of product sold in an industry an important characteristic? Expensive products are usually sold by perfectly competitive firms. Service industries cannot differentiate their products, which makes it easy for new firms to enter the industry. A firm that sells intangible goods is usually considered a monopoly. A firm that can differentiate its product from that of rivals may be able to charge a higher price for a superior product.
A firm that can differentiate its product from that of rivals may be able to charge a higher price for a superior product.
If a market produces less than the output level that a competitive equilibrium would result in, then Social welfare is not maximized The market price will exceed the firm's marginal cost for the last unit produced Deadweight loss occurs All of the above
All of the Above
Deadweight loss occurs in an otherwise efficient competitive market when less than competitive equilibrium output is produced More than competitive equilibrium output is produced The marginal cost of producing the good is lower than the goods equilibirum price All of the above
All of the above
Economists classification of a markets structure will depend upon The number of firms in the market The diversity of products available to consumers in the market The ease with which a firm could potentially enter or exit the market All of the above
All of the above
Variables that affect elasticity of demand
Availability of close substitutes Breadth if Market Type of product Percentage of income time horizon
The output of firms is determined simultaneously in _____ competition but sequentially in _____ competition. Cournot; Stackelberg collusion; Cournot Stackelberg; Cournot Cournot; Bertrand with differentiated goods
Cournot; Stackelberg
Brenda's utility function for regular-flavored toothpaste (R) and mint-flavored toothpaste (M) is given by U = 2R + 4M. Which of the following statements is TRUE? MRSMR = 2M/R. Brenda is willing to give up two tubes of regular-flavored toothpaste for one tube of mint-flavored toothpaste. Brenda's indifference curves are vertical. Brenda's indifference curves are horizontal.
Brenda is willing to give up two tubes of regular-flavored toothpaste for one tube of mint-flavored toothpaste.
Suppose the wage rate is $25 per hour and the rent on capital is $50 per hour. The equation for the isocost line is given by: C = 2K/L. C = 25L + 50K. C = 75LK. C = 75(L + K).
C = 25L + 50K.
Suppose the wage rate is $25 per hour and the rent on capital is $50/hour. The equation for the isocost line is given by: C=75LK C=25L + 50K C=75(L + K) C=2K/L
C=25L + 50K
Income Effect
Change in optimal consumption choices associated with a change in income holding relative prices constant
Cher's marginal rate of substitution of necklaces (N) for earrings (E) is 5 (MRSEN = 5). This information implies that: Cher is willing to trade away five necklaces for one more pair of earrings, holding her utility constant. Cher should own five times as many necklaces as pairs of earrings. Cher will move to a higher indifference curve if she trades away five necklaces for one more pair of earrings. the slope of the indifference curve is 5 and thus upward sloping
Cher is willing to trade away five necklaces for one more pair of earrings, holding her utility constant.
The market for macaroni and cheese has only two consumers, David and Wallace. Market demand for macaroni and cheese will tend to be more elastic if: David and Wallace consider macaroni and cheese to be an inferior good rather than a normal good. David and Wallace consider macaroni and cheese to be an economic "bad." David and Wallace consider macaroni and cheese to be a necessity good rather than a luxury good. David and Wallace consider macaroni and cheese to be a normal good rather than an inferior good.
David and Wallace consider macaroni and cheese to be a normal good rather than an inferior good.
Which of the following is not an assumption underlying the supply and demand model? The focus is on supply and demand in a single market. Different firms sell their goods at different prices. All goods sold in the market are identical. There are many producers and consumers in the market.
Different firms sell their goods at different prices.
Answer the following question. Ricki, CC, and Brett are the only consumers in the market for leather jackets; their inverse demand curves, respectively, are as follows: P = 200 - 10Q RP = 200 - 50Q CCP = 200 - 20QB What is the equation for the market demand curve for leather jackets?
Don't understand this one...
Beth has $200 of income to spend on e-books (E), priced at $10 per book, and Zumba (Z) classes, priced at $8 per class. Which of the following consumption bundles is infeasible? E = 10 and Z = 13 E = 2 and Z = 22 E = 20 and Z = 0 E = 8 and Z = 15
E = 10 and Z = 13
Complements
ED<0
Substitutes
ED>0
Normal Goods
ED>0 Higher income = Higher Consumption More elastic than Inferior
Luxury Goods
ED>1
Julie spends all of her income on gasoline and pizza. Gasoline costs $4 per gallon and pizza costs $2 per slice. When Julie's income is $50 per week, she purchases 5 gallons of gasoline and 15 slices of pizza. When her income rises to $80 per week, she buys 15 gallons of gasoline and 10 slices of pizza. Which of the following statements is true? Both gasoline and pizza are inferior goods. Both gasoline and pizza are normal goods. Gasoline is a luxury good. Pizza is a luxury good.
Gasoline is a luxury good.
Which situation will likely give rise to diminishing marginal product of labor? A landscaping firm replaces all of its self-propelled lawnmowers with push mowers. Nevaeh's Kitchen undertakes a massive expansion, doubling both the size of its kitchen and number of cooks. Hell's Kitchen, which has enough counter space for three cooks per shift, decides to hire a fourth cook per shift. Plasma television manufacturers are going out of business because of increased competition from LCD televisions.
Hell's Kitchen, which has enough counter space for three cooks per shift, decides to hire a fourth cook per shift.
Which of the following statements is (are) TRUE? I. If labor and capital are perfect substitutes in production, the isoquant is a downward-sloping line. II. If a company needs to use inputs in fixed proportion such that the capital to labor ratio is always 2, the firm's isoquants are L-shaped. III. If the production function is given by Q = min(14, 7), the firm can produce, at minimum, 21 units of output. I, II, and III I and II I III
I and II
Suppose the price of good X, a Giffen good, increases. Which of the following statements are TRUE? I. The substitution effect of the price increase causes consumers to buy less of good X. II. The substitution effect of the price increases causes consumers to buy more of good X. III. The income effect of the price increase causes consumers to buy more of good X. IV. The income effect of the price increase causes consumers to buy less of good X. II and III II and IV I and IV I and III
I and III
Which of the following statements is (are) TRUE? I. The firm's total cost is the sum of its fixed and variable costs. II. Over the long term, the costs of the firm's inputs tend to become fixed. III. In the long run, the firm can adjust the use of all of its inputs. I I and III I, II, and III II
I and III
Which of the following statements is TRUE? I. Oligopoly is a form of imperfect competition. II. Oligopoly firms produce only differentiated products. III. Unlike perfectly competitive markets, oligopoly markets have only a small number of firms. II and III I and III I I, II, and III
I and III
With which of the following scenarios should a perfectly competitive firm shut down in the short run? I. P = $80, VC = $180,000, and Q = 2,000 II. TR = $45,000, AVC = $500, ATC = $600, and Q = 84 III. P = $11.55, ATC = $15, and AFC = $2 II III I and III II and III
I and III
Which of the following statements is (are) TRUE? I. As market prices increase, industry output rises because individual firms have upward-sloping marginal cost curves. II. As market prices increase, industry output rises because high-cost producers enter the industry. III. As market prices increase, industry output rises because individual firms have upward-sloping short-run supply curves. II and III III I, II, and III II
I, II, and III
Which of the following characteristics relates to perfect competition? I an industry is dominated by several large firms II consumers cannot distinguish one firms product from another III New firms can easily enter the industry I & II II II & III III
II & III
Suppose a firm's total cost is given by TC = 100 + 4Q + 2Q^2. Which of the following statements is (are) TRUE? I. AVC = 4Q + 2Q^2 II. AFC = 100/Q III. ATC = 2Q + 4 + 100/Q IV. FC = 100 + 4Q III I and II I and IV II and III
II and III
Suppose that a firm is earning a 12% return on capital in a perfectly competitive industry, and the market return outside the industry is 9.5%. Which of the following statements is TRUE? In the short run, the firm is making a negative return on capital of 2.5%. In the short run, the firm is making a below-market return of 2.5%. In the long run, the firm's return on capital will be 0%. In the long run, the firm's return on capital will be 9.5%.
In the long run, the firm's return on capital will be 9.5%
A firm should shut down in the short run if It cannot earn revenues that cover its total costs It cannot earn revenues that cover its variable costs It cannot earn revenues that cover its fixed costs All of the above
It cannot earn revenues that cover its variable costs
To maximize profits, a firm should produce where: ATC < P < AVC. MR = MC. TR/Q = TC/Q. P = AVC.
MR = MC.
Suppose a firm is producing 2,475 units of output by hiring 50 workers (W = $20 per hour) and 25 units of capital (R = $10 per hour). The marginal product of labor and marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost of producing 2,475 units of output? No, the firm should use more labor and less capital. No, the firm should use more of both labor and capital. Yes, the ratio of the number of workers to the wage equals the ratio of the number of units of capital to the rental rate. No, the firm should use more capital and less labor
No, the firm should use more capital and less labor
Suppose a firm is producing 2,475 units of output by hiring 50 workers (W=$20/hour) and 25 units of capital (R=$10/hour). The marginal product of labor and marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost of producing 2,475 units of output? Yes, the ratio of the number of workers to the wage equals the ratio of the number of units of capital to the rental rate No, the firm should use more labor and less capital No, the firm should use more capital and less labor No, the firm should use more of both labor and capital
No, the firm should use more capital and less labor
Which of the following supply curves (where P is price per bushel and QS measures number of bushels) generates $64 of producer surplus at a market price of $10 per bushel? QS = 10P - 3 QS = 7.5P - 1.5 QS = 6P - 8 QS = 2P - 4
QS = 2P - 4
In a Cournot market with two firms, the inverse market demand curve is P = 50 - 2Q, where Q = q1 + q2 (Firm 1's output = q1; Firm 2's output = q2). If Firm 2 produces 10 units of output, what is Firm 1's residual demand curve? P = 40 - q1 P = 30 - 2q1 P = 10 - 2q1 P = 40 - 2q1
P = 30 - 2q1
Consider two firms engaged in Bertrand competition with differentiated goods and zero marginal costs. Firm A's demand curve: qA = 120 - 3PA + 2PB Firm B's demand curve: qB = 120 - 3PB + 2PA In a Nash equilibrium, what is each firm's price? PA = $10; PB = $10 PA = $30; PB = $30 PA = $5; PB = $5 PA = $20; PB = $20
PA = $30; PB = $30
What Factors influence demand
Price # of Consumers Consumer Wealth Consumer tastes Prices of related goods
What factors influence Supply
Price Production Costs Number of sellers Sellers outside options
Variables that affect elasticity of supply
Production capacity Time horizon
The firm's long-run total cost is given by LTC = 100Q - 10Q^2 + (1/3)Q^3, and long-run marginal cost is given by LMC = 100 - 20Q + Q^2. At what output level does the firm have economies of scale? Q < 88 Q < 15 Q < 175 Q < 4,000
Q < 15
Suppose the market for a good is composed of 1,000 identical consumers. The market's demand curve is given by QM = 150,000 - 25P. What is the equation for an individual consumer's demand curve? Q = 150 - 0.025P Q = 6,000,000 - 40P Q = 6 - 4P Q = 150,000,000 - 25,000P
Q = 150 - 0.025P
Which of the following is a Cobb-Douglas production function? Q = 2K/3L Q = f(K, L) Q = 5K + 2.5L Q = K^0.50 * L^0.75
Q = K^0.50 * L^0.75
There are 100 consumers in the market for good X, each with a demand curve given by Q = 2/P. What is the market demand curve for good X? QM = 200/P QM = 0.5P QM = 200 - 200P QM = 1/50P
QM = 200/P
For Sara, ramen noodles are a normal good, however Sean considers ramen noodles to be inferior. If Sara and Sean have the same amount of income: Sean's demand for ramen noodles will be less price elastic than Sara's. Sean's substitution effect will be stronger than Sara's substitution effect. Sean's income effect will be stronger than Sara's income effect. Sean's demand for ramen noodles will be more price elastic than Sara's.
Sean's demand for ramen noodles will be less price elastic than Sara's.
A firm produces two goods Q1 and Q2. For economies of scope to occur, it must be TRUE that: TC(Q1,0) + TC(0,Q2) < TC(Q1,Q2). (TC(Q11,0) + TC(0,Q12))/(TC(Q11, Q12)) < 1. TC(Q1,0) + TC(0,Q2) > TC(Q1,Q2).
TC(Q1,0) + TC(0,Q2) > TC(Q1,Q2).
Marginal Utility
The additional utility a consumer receives from an additional unit of a good or service
The Internet has made learning to play a musical instrument easier than ever, with thousands of Web sites offering free music lessons. What happens in the musical instruments market as a result of the availability of these free lessons? The demand curve shifts out, which in turn causes the supply curve to increase. The overall effect on price is ambiguous. The price of musical instruments falls, causing an increase in the quantity demanded. The supply curve increases, pushing down the price. The demand curve shifts out, pushing up the price.
The demand curve shifts out, pushing up the price.
Which of the following statements best exemplifies the firm's constrained minimization problem? The firm desires to produce a given quantity of output by choosing values of L and K that minimize RK + WL. The firm desires to produce as much output as possible by choosing values of L and K that minimize RK + WL. The firm desires to produce a given quantity of output by choosing values of W and R that minimize RK + WL. The firm desires to produce as much output as possible subject to the constraint that C = RK + WL.
The firm desires to produce a given quantity of output by choosing values of L and K that minimize RK + WL.
Which of the following statements is (are) TRUE? Short-run average total cost curves intersect the long-run average total cost curve at its minimum point. The long-run average total cost curve indicates that it is more costly to produce output in the long run, especially when input prices are rising because of inflation. The long-run average total cost curve is derived by tracing out all of the firm's short-run average total cost curves. It is not possible for two short-run average total cost curves to cross.
The long-run average total cost curve is derived by tracing out all of the firm's short-run average total cost curves
Suppose the market for sprouts is in long-run equilibrium. In the short run, what will happen if an E. coli outbreak reduces the demand for sprouts? The market price of sprouts will fall, causing each firm to produce fewer sprouts. Existing firms will expand output to make up for the decrease in demand. The marginal cost curve will shift upward for each producer, causing prices to rise and profits to fall. The marginal cost curve will shift downward for each producer, leaving prices unchanged.
The market price of sprouts will fall, causing each firm to produce fewer sprouts.
Market conditions change for a monopolist with an original marginal cost of MC = 5 + 10Q. The inverse demand curve rotates from P = 40 - 5Q to P = 47 - 2Q. What happens to the profit-maximizing price following the rotation of the demand curve? The price falls from $18 to $15. The price rises from $26 to $34. The price rises from $31.25 to $41. The price falls from $18.60 to $11.20.
The price rises from $31.25 to $41.
The marginal rate of technical substitution is a term used to describe The slope of a consumers indifference curve The slope of a consumers budget constraint The slope of a firms isocost curve The slope of a firms isoquant
The slope of a firms isoquant
In the market for used cars, the demand and supply equations are given by QD = 12,000 - 0.4P and QS = 0.1P + 5,000, where P is the price per car and Q measures the quantity of cars. What happens at a price floor of $20,000? Consumers want to buy 7,000 cars. There is a surplus of 7,000 cars. There is a surplus of 3,000 cars. Consumers want to buy 3,000 cars.
There is a surplus of 3,000 cars.
Which of the following statements is FALSE? Inputs into a utility function may include wool socks, DVD rentals, roller coaster rides, asparagus, and Sunday church services. A utility function gives the relationship between a consumer's well-being and the quantities of goods consumed. Utility is the difference between the consumer's assets and her liabilities. One person's utility cannot be compared to another person's utility.
Utility is the difference between the consumer's assets and her liabilities.
Will two consumers with different preferences have the same MRS at optimal bundles? Why or why not?
Yes because they are faced with the same price constraints
Budget Constraint
a curve that describes the entire set of consumption bundles a consumer can purchase when spending all of their income = (Income/Py) - (Px/Py)(Qx)
Utility
a measure of happiness or satisfaction Cobb-Douglas form: U= T^+D^
Which of the following will not cause demand for apples to increase or decrease? a reduction in the price of a complement for apples. a decrease in the number of consumers in the market. a reduction in the price of apples. an increase in income
a reduction in the price of apples
Perfectly inelastic
abs(ED)=0
unit elastic
abs(ED)=1
Perfectly elastic
abs(ED)=infinity
Elastic
abs(ED)>1
In the market for oranges, we observe that the equilibrium price increased and the equilibrium quantity increased. What could have caused this change? an increase in demand an increase in supply a decrease in supply an increase in supply and a decrease in demand
an increase in demand
Why are the slopes of isocost lines constant? because the marginal rate of technical substitution of labor for capital is constant because firms must use capital and labor inputs in fixed proportions because firms must use less labor if employing more capital because firms can hire as much of an input as they desire without changing wages or rental rates
because firms can hire as much of an input as they desire without changing wages or rental rates
In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price _____, and the price in the perfectly competitive market would _____. by $75; increase to $75 to $115; remain unchanged at $60 by $15; increase by $15 by less than $15; increase to $75
by less than $15; increase to $75
A basic assumption of the short run is that a firm: Can employ more workers and add more capital to the production process Cannot adjust its workforce or the amount of capital it uses Can reduce the number of workers it uses but it cannot adjust how much capital it uses Can freely adjust the amount of labor and capital it employs
can reduce the number of workers it uses but it cannot adjust how much capital it uses
A basic assumption of the short run is that a firm: can reduce the number of workers it uses, but it cannot adjust how much capital it uses. can freely adjust the amount of labor and capital that it employs. can employ more workers and add more capital to the production process. cannot adjust its workforce or the amount of capital it uses.
can reduce the number of workers it uses, but it cannot adjust how much capital it uses.
Suppose that two firms are competing on price. The firms produce identical goods, and the marginal cost of each firm is constant at $15. If one firm is charging a price of $18, the other firm should: cut its output to raise the market price well above $18. raise its price to $18.01. charge $17.99. also charge $18.
charge $17.99.
An entrepreneur gathers the following information to make a decision on whether to stay open for business or to shut down permanently: Future operating revenues = $18 million Future operating costs = $14 million Sunk costs = $8 million The entrepreneur should: shut down because the operating revenues are insufficient to cover the operating costs and sunk costs. continue to operate because the operating revenues exceed the operating costs. continue to operate to help pay off the sunk costs. shut down because the sunk costs are greater than zero.
continue to operate because the operating revenues exceed the operating costs.
If the government subsidizes the production of a good: deadweight loss results because not enough of the good is exchanged. consumer surplus and producer surplus both fall. deadweight loss results because too much of the good is exchanged. total surplus is higher than it would have been without the subsidy.
deadweight loss results because too much of the good is exchanged.
The government wants to transfer welfare from buyers to sellers by collecting a $1 tax on a good from buyers and subsidizing sellers $1 for each unit of the good sold. This policy will: increase the equilibrium quantity. increase the equilibrium price. decrease the equilibrium price. decrease the equilibrium quantity.
decrease the equilibrium price
Between 1994 and 2008, the share of the workforce employed in manufacturing _____ and manufacturing output _____. decreased; decreased decreased; increased increased; increased increased; decreased
decreased; increased
Suppose that a firm faces the production function y = K*L and is currently minimizing costs in the long run with marginal product of labor and marginal product of capital given by K and L, respectively. If the price of capital falls by 50%, the capital-to-labor ratio will: increase by 50%. increase fivefold. double. decrease by 50%.
double
Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves: diseconomies of scope. economies of scope. quadratic returns to scale. diseconomies of scale and diseconomies of scope.
economies of scope.
In a perfectly competitive industry, the equilibrium price is $56 and the minimum average total cost of the industry's firms is $40. If this is a constant-cost industry, we can expect that in the long run, firms will _____ the market, shifting the industry's short-run supply curve _____. enter; outward until the minimum average total cost rises to $56. exit; inward until firms are breaking even. enter; outward until the new equilibrium price is $40. enter; inward until firms are making positive profit.
enter; outward until the new equilibrium price is $40.
In monopolistic competition, the long-run equilibrium price _____ marginal cost because _____. exceeds; firms face downward-sloping demand curves exceeds; there are significant barriers to entry less than; firms set their production plans simultaneously equals; firms earn zero economic profit
exceeds; firms face downward-sloping demand curves
The income effect of a price change predicts that a _____ in a good's price will _____ consumer purchasing power, leading to a(n) _____ in consumption of _____ goods. fall; decrease; decrease; normal rise; increase; decrease; inferior fall; increase; increase; normal rise; increase; increase; inferior
fall; increase; increase; normal
Subsidy
government payment to encourage or protect a certain economic activity (opposite of a tax)
Monroe consumes crab cakes and tuna. Monroe's utility increases with the consumption of crab cakes, but his utility neither increases nor decreases with the consumption of tuna. Assuming tuna is on the x-axis and crab cake is on the y-axis, what do Monroe's indifference curves look like? downward-sloping lines vertical lines upward-sloping lines from the origin horizontal lines
horizontal lines
A consumer's bundle includes the inferior good X and the normal good Y. According to the income effect, a(n) _____ in the price of good X or a(n) _____ in the price of good Y will cause the consumer to buy more of good X. decrease; increase increase; decrease increase; increase decrease; decrease
increase; increase
Suppose that good X and good Y are substitutes and good X and good Z are complements. When the price of a good Y _____ or the price of good Z _____, the demand for good X shifts outward. increases; decreases increases; increases decreases; decreases decreases; increases
increases; decreases
The Nash equilibrium in Bertrand competition with identical goods: occurs when each firm produces where marginal revenue equals marginal cost. occurs when each firm sets price equal to average total cost. occurs when each firm sets price equal to marginal cost. does not exist
occurs when each firm sets price equal to marginal cost.
Suppose that each firm in an industry has a total cost curve given by TC = 7,000 + 50Q. The lowest average total cost of producing 1,000 units of output occurs when: two firms each produce 500 units of output. four firms each produce 250 units of output. 10 firms each produce 100 units of output. one firm produces all 1,000 units of output.
one firm produces all 1,000 units of output.
Stu owns an ice cream parlor that is usually closed during the winter. This winter, however, Stu is considering opening his business in February instead of March. If Stu opens his store in February, he will earn total revenue of $4,000 for the month, incurring variable costs of $3,500 and fixed costs of $1,500. If the store remains closed during February, Stu will earn no revenues and incur fixed costs of $1,500. Stu should: stay closed in February because the $500 of operating profit is insufficient to cover the $1,500 of fixed costs. open in February because the $4,000 of total revenue exceeds the $1,500 of fixed costs. stay closed in February because he will lose $1,000 if he opens. open in February because the $4,000 of total revenue exceeds the $3,500 of variable costs.
open in February because the $4,000 of total revenue exceeds the $3,500 of variable costs.
On some days Gus makes his own salad for lunch, preferring to use either iceberg or romaine lettuce, topped off with lots of fresh tomatoes. The cross-price elasticity of demand for iceberg lettuce with respect to romaine lettuce is _____, and the cross-price elasticity of demand for iceberg lettuce with respect to tomatoes is _____. positive; negative negative; positive negative; zero zero; positive
positive; negative
Consider a two-firm oligopoly facing a market inverse demand curve of P = 100 - 2(q1 + q2), where q1 is the output of Firm 1 and q2 is the output of Firm 2. Firm 1's marginal cost is constant at $12, while Firm 2's marginal cost is constant at $20. In Cournot equilibrium, how much output does each firm produce? q1 = 16; q2 = 12 q1 = 14; q2 = 11 q1 = 18; q2 = 8 q1 = 20; q2 = 14
q1 = 16; q2 = 12
In Stackelberg competition, the market inverse demand curve is P = 20 - 2(q1 + q2), where q1 and q2 are Firm 1's and Firm 2's output measured in hundreds of units. Firm 1, the first-mover, has a marginal cost of $4, and Firm 2 has a marginal cost of $2. How much output does each firm produce? q1 = 80; q2 = 106 q1 = 260; q2 = 245 q1 = 150; q2 = 120 q1 = 350; q2 = 275
q1 = 350; q2 = 275
Which assumption(s) allow(s) us to draw indifference curves? free disposal and more is better rankability and completeness cardinal measurement and cardinal ranking that the more we have of a good, the less we are willing to give up to get even more of it
rankability and completeness
Suppose a firm with a production function Q = KL (where MPL = K and MPK = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental per unit of capital (R) is $2. If it decreases output to 45 units, long-run average total cost _____ at 125 units of output to _____ at 45 units of output. rises from $1.80; $2 falls from $0.80; $0.60 falls from $1.80; $1.15 rises from $0.80; $1.33
rises from $0.80; $1.33
When demand and supply are linear, consumer surplus is equal to: the entire area between the demand curve and the price. See Section 3.1. the area between the supply curve and the price, out to the quantity that is exchanged. the area between the demand curve and the price, out to the quantity that is exchanged. the entire area between the supply curve and the price.
the area between the demand curve and the price, out to the quantity that is exchanged.
Rent-seeking refers to: the ability of some landlords to charge above competitive rental rates. any illegal activity designed to increase a firm's market power. the government's attempt to limit collusive price setting by industrial groups. the costly actions that firms undertake in their attempt to receive monopoly privilege from the government.
the costly actions that firms undertake in their attempt to receive monopoly privilege from the government.
In the long run, because firms can adjust both capital and labor: firms fire workers, replacing the labor productivity with capital. the impact of diminishing marginal returns is lessened. firms will grow. production is more expensive because firms must invest in both labor and capital.
the impact of diminishing marginal returns is lessened.
Tax Incidence
who actually bears the burden of the tax Es / [Es+abs(Ed)] abs(Ed) / [Es+abs(Ed)]
In the short run, the marginal product of labor: always increases because laborers become more efficient with experience. continues to increase so long as the firm adds labor slowly. is always diminishing. will eventually fall.
will eventually fall.
