Microeconomics
A seller's opportunity cost measures the
value of everything she must give up to produce a good.
In many cases the Coase theorem does not work well because
transaction costs are too high.
Economic models
are usually composed of diagrams and equations.
College-age athletes who drop out of college to play professional sports
are well aware that their opportunity cost of attending college is very high.
Average total cost is very high when a small amount of output is produced because
average fixed cost is high.
A firm that produces and sells furniture gets to choose
how many workers to hire in both the short run and the long run.
Economics is the study of
how society manages its scarce resources.
Welfare economics is the study of
how the allocation of resources affects economic well-being.
Because a monopolist must lower its price in order to sell another unit of output,
marginal revenue is less than price.
The term used to describe a situation in which markets do not allocate resources efficiently is
market failure.
A group of buyers and sellers of a particular good or service is called a(n)
market.
Corrective taxes are typically advocated to correct for the effects of
negative externalities.
As a result of a decrease in price,
new buyers enter the market, increasing consumer surplus.
Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect
new firms to enter the market.
Free entry means that
no legal barriers prevent a firm from entering an industry.
Which of the following pairs of goods includes a good that is excludable and rival in consumption as well as a good that is excludable and not rival in consumption?
pizza, cable TV
An example of an externality is the impact of
pollution from a factory on the health of people in the vicinity of the factory.
The size of a tax and the deadweight loss that results from the tax are
positively related.
Which of the following is not held constant in a demand schedule?
price
When a perfectly competitive firm decides to shut down, it is most likely that
price is below the firm's average variable cost.
When supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged.
Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the
smaller is the price elasticity of supply.
The Tragedy of the Commons occurs because
social and private incentives differ.
When negative externalities are present in a market
social costs will be greater than private costs.
Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the
social value exceeds the private value at the private market solution.
When fixed costs are ignored because they are irrelevant to a business's production decision, they are called
sunk costs.
Brady Industries has average variable costs of $1 and average total costs of $3 when it produces 500 units of output. The firm's total fixed costs equal
$1,000.
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each.
$15.
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each.
$4.
A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market.
(ii) and (iii) only
Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Fixed costs for Sonia's yoga studio include the cost of the (i) tank tops. (ii) wages paid to the other yoga instructors. (iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio.
(iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio.
When the price of a bracelet was $28 each, the jewelry shop sold 128 per month. When it raised the price to $32 each, it sold 112 per month. Using the midpoint method, the price elasticity of demand for bracelets is
1.
A manufacturer produces 400 units when the market price is $10 per unit and produces 600 units when the market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about
2.2
Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are
7,500.
Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy?
8 houses
Which of the following is not an example of a barrier to entry?
A college student starts a part-time tutoring business.
Which of the following statements is not valid when the market supply curve is vertical?
An increase in market demand will increase the equilibrium quantity.
New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for oak tables if the price of maple tables rises, the price of oak wood rises, more buyers enter the market for oak tables, and the price of the glue used in the production of the new oak tables increased?
Price will rise, and the effect on quantity is ambiguous.
Which of the following is an example of a positive, as opposed to normative, statement?
Prices rise when the government prints too much money.
Ty lives in an apartment building and gets a benefit from playing his stereo. Olivia, who lives next door to Ty and often loses sleep due to the loud music coming from Ty's stereo, bears a cost from the noise. Olivia is threatening to call the police to force Ty to turn down his stereo. Under which of the following conditions would Ty be able to offer Olivia some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly?
The benefit of the music to Ty must exceed the cost of the noise to Olivia.
Which of the following events would explain the shift of the production possibilities frontier from A to B?
The economy experienced a technological advance in the production of books.
Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct?
The effective price received by sellers is $0.40 per bottle less than it was before the tax.
For a particular good, a 12 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
The good is a necessity.
After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?
The marginal cost of going to Ft. Lauderdale decreases.
Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?
They are equal.
Which of the following examples illustrates an oligopoly market?
a city with two firms who are licensed to sell school uniforms for the local schools
Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect
a decrease in market output and an increase in the price of the product.
A market structure with barriers to entry is
a monopoly.
An increase in the price of blueberries would lead to a(n)
a movement up and to the right along the supply curve for blueberries.
A price floor will be binding only if it is set
above the equilibrium price.
Consumer surplus is
a. a concept that helps us make normative statements about the desirability of market outcomes. b. represented on a graph by the area below the demand curve and above the price. c. a good measure of economic welfare if buyers' preferences are the primary concern.
Which of the following is an example of an externality?
a. cigarette smoke that permeates an entire restaurant b. a flu shot that prevents a student from transmitting the virus to her roommate c. a beautiful flower garden outside of the local post office
A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its
a. quantity of output is higher than it was previously. b. average total cost is higher than it was previously. c. marginal revenue is higher than it was previously.
As the number of sellers in an oligopoly becomes very large,
a. the quantity of output approaches the socially efficient quantity. b. the price approaches marginal cost. c. the price effect is diminished.
An oligopolist will increase production if the output effect is
greater than the price effect.
A monopoly market is characterized by
barriers to entry.
The quantity sold in a market will decrease if the government decreases a
binding price ceiling in that market.
A good will have a more inelastic demand, the
broader the definition of the market.
In a market economy, supply and demand are important because they
can be used to predict the impact on the economy of various events and policies.
Positive statements are
claims about how the world is.
The parable called the Tragedy of the Commons applies to goods such as
clean air and clean water.
Rational people make decisions by
comparing marginal costs and marginal benefits.
The benefit to buyers of participating in a market is measured by
consumer surplus.
Which of the following would likely have the smallest deadweight loss relative to the tax revenue?
head tax (that is, a tax everyone must pay regardless of what one does or buys)
A circular-flow diagram is a model that
helps to explain how participants in the economy interact with one another. helps to explain how the economy is organized.
A movement downward and to the left along a supply curve is called a(n)
decrease in quantity supplied.
A tax on the sellers of coffee mugs
decreases the size of the coffee mug market.
Total surplus is represented by the area below the
demand curve and above the supply curve, up to the equilibrium quantity.
You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery. The first step you would take would be to
determine the price elasticity of demand for the bakery's products.
The market demand curve for a monopolist is typically
downward sloping.
Macroeconomics is the study of
economy-wide phenomena.
When the price of chai tea lattés is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. Maxine's demand for chai tea lattés is
elastic, and her demand curve would be relatively flat.
The size of the deadweight loss generated from a tax is affected by the
elasticities of both supply and demand.
The law of demand states that, other things equal, when the price of a good
falls, the quantity demanded of the good rises.
Which of the following goods is excludable but not rival in consumption?
fire protection in a small town
The government provides public goods because
free-riders make it difficult for private markets to supply the socially optimal quantity.
Over time, housing shortages caused by rent control
increase, because the demand for and supply of housing are more elastic in the long run.
A deadweight loss is a consequence of a tax on a good because the tax
induces buyers to consume less, and sellers to produce less.
Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it
is always in their best interest to leave their quantities supplied unchanged.
Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action
is needed when private solutions fail to arise.
A monopoly is an inefficient way to produce a product because
it produces a smaller level of output than would be produced in a competitive market.
Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of
lemons and sugar.
A key determinant of the price elasticity of supply is the
length of the time period.
If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-maximizing price they will charge for their product will be
less than the monopoly price.
Economies of scale occur when
long-run average total costs fall as output increases.
When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to
marginal cost.
Stewart is a lobsterman. His traps are
private goods and the lobster he catches are common resources.
The value and cost of goods are easiest to determine when the goods are
private goods.
A key characteristic of a competitive market is that
producers sell nearly identical products.
A perfectly competitive market
promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.
The phenomenon of free riding is most closely associated with which type of good?
public goods
When a tax is placed on a product, the price paid by buyers
rises, and the price received by sellers falls.
If one person's use of a good diminishes another person's enjoyment of it, the good is
rival in consumption.
When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing
scarcity
Internalizing a positive externality will cause the demand curve to
shift to the right.
A rational decision maker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost.
Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that
the nation is not using all available resources or is using inferior technology or both.
When quantity demanded has increased at every price, it might be because
the price of a complementary good has decreased.
An example of an opportunity cost that is also an implicit cost is
the value of the business owner's time.
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold.