Microeconomics Midterm Review

Total utility of consuming 2 pizzas/week

55

The goal of utility maximization is to allocate your _______ in order to maximize your _________.

resources; satisfaction

Budget share

the larger the share of your budget an item accounts for by the product, the greater your incentive to look for substitutes when the price of the item rises

price elasticity of demand

the percentage change in quantity demanded relative to a percentage change in price

If marginal utility is positive, then as consumption increases:

total utility will increase

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs (Principle of Increasing Opportunity Cost)

According to economists, the satisfaction people get from their consumption activities is called:

utility

Growing rice requires extensive irrigation in California. Economists consider water to be a ___________ for rice farmers in California.

want (farmers could switch to growing other grains if the price of water increased)

Taking a limousine to a five-star restaurant in New York is a:

want to both Joe Average and Richie Rich

Marginal Utility of the 4th dinner: Number of Dinners Out Per Week 1 2 3 4 Total Utility 100 ? 235 250 Marginal Utility - 75 ? ?

15 (250-235)

Refer to the accompanying table. The total utility of consuming two dinners out per week is: Number of DinnersOut Per Week 1 2 3 4 Total Utility 100 ? 235 250 Marginal Utility - 75 ? ?

175 (100 total utility + 75 marginal utility)

Time cleaning windows (hrs/day) 0 1 2 3 4 5 Total # of windows cleaned 0 7 11 14 16 17 How many hours a day should John spend cleaning windows

2 (John's opportunity cost of spending an hour cleaning windows is $7. His benefit from the first hour cleaning windows is $2 × 7 = $14. His benefit from his second hour cleaning windows is $2 × 4 = $8, and his benefit from his third, fourth and fifth hour cleaning windows is $6, $4 and $2, respectively. Thus, his benefit of spending an hour cleaning windows is only greater than his opportunity cost for the first 2 hours he spends cleaning windows.)

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Dusty can buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

20;10 ($30/$1.50) & ($30/$3)

If Terry's total utility is maximized when he owns 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs.

Less than

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic

Total revenue minus both explicit and implicit costs defines a firm's:

profit

inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

After subsistence levels of food, shelter, and clothing are provided, economists refer to all other goods and services as:

"wants"

For a given seller, the accompanying figure shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. What is this seller's reservation price for the 250th unit? (Graph)

$4 (A seller's reservation price is the smallest dollar amount for which the seller would be willing to sell an additional unit, which is generally equal to the seller's opportunity cost of producing that unit.)

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. Time cleaning windows (hrs/day) 0 1 2 3 4 5 Total # of windows cleaned 0 7 11 14 16 17 What is John's opportunity cost of cleaning windows for an hour?

$7 (Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows)

Time cleaning windows (hrs/day) 0 1 2 3 4 5 Total # of windows cleaned 0 7 11 14 16 17 The first hour John spends cleaning windows costs him ________ that he could have earned in the grocery store.

$7 (John is paid $7 per hour @ the grocery store)

Marginal Utility of the 5th apple: #'s of Apples 1 2 3 4 5 Total Utility 20 35 45 50 45 Marginal Utility ___ 15 10 5 ?

-5

Marginal utility of the 7th pizza

-5

Martha's current marginal utility from consuming orange juice is 75 utils per ounce and her marginal utility from consuming coffee is 50 utils per ounce. If orange juice costs 25 cents per ounce and coffee costs 20 cents per ounce, is Martha maximizing her total utility from the two beverages? At her current level of consumption, Martha is receiving: ? utils per dollar spent on orange juice. At her current level of consumption, Martha is receiving: ? utils per dollar spent on coffee. Therefore, Martha _________ maximizing her total utility because MUoj/Poj is ________________ MUc/Pc.

300 250 is not; not equal to

Marginal utility of the 6th pizza is:

5 consumption increase from 5 to 6 pizzas a week and total utility increases from 100 to 105.

The marginal utility of the 3rd dinner is: Number of Dinners Out Per Week 1 2 3 4 Total Utility 100 ? 235 250 Marginal Utility - 75 ? ?

60 235( 3 dinners total utility) - 175 (2 dinners total utility)

Refer to the accompanying figure. The total utility of consuming 4 pizzas a week is: (Graph)

90

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product

The tendency for marginal utility to decline as consumption increases beyond some point is called:

Law of Diminishing Marginal Utility

The law of diminishing marginal Utility (Table): Units 1 2 3 4 MU of Good A 30 27 15 8 MU of Good B 40 33 24 14

Applies to both Good A & Good B

Which of the following would be considered a factor of production in the provision of bus service?

Bus Drivers

As Lynn eats more pizza, we would typically expect her marginal utility from eating pizza to:

Decrease (The Law of Diminishing Marginal Utility; an additional unit of a good tends to diminish as consumption increase)

It is impossible for total utility to be _____________ when marginal utility is ________.

Decreased; positive (... the last unit of the good consumed added to total utility so total utility must be increased)

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the first three pies you ate.

Increased (Since you enjoyed the first three pies, they must have added to your total utility)

Joe is shopping for a new computer. A computer can be delivered to Joe's home for $1,200. Alternatively, Joe can pick up the same computer at the warehouse for $1,000. How should Joe buy the computer?

Joe should drive to the warehouse if his cost of driving to the warehouse is less than $200

The tendency for consumers to purchase more of a good or service as its price falls is captured by the:

Law of Demand

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:

MUc/Pc will fall

The additional utility gained from consuming an additional unit of a good is called:

Marginal utility

The rational spending rule is derived from the consumer's desire to:

Max Utility

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. You got ______ utility from eating the first pie than from eating the third pie.

More

Which of the following factors would impact a buyer's reservation price for a given good or service?

Peer Influence

Blair has vast riches and consumes thousands of dollars' worth of consumer goods each week, yet she is never satisfied. Why not?

People's wants are unlimited

Time cleaning windows (hrs/day) 0 1 2 3 4 5 Total # of windows cleaned 0 7 11 14 16 17 If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services.

Supply (John's opportunity cost of cleaning another window is his reservation price, the minimum amount you would have to pay him to get him to clean another window.)

Which of the following is the most likely to be a fixed factor of production at a farm?

The land on which the farm is located

Shelter for homeless people is an example of:

a need

The long run is best defined as:

a period of time sufficiently long that all factors of production are variable

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed.

Suppose a cup of tea costs $0.60 and a scone costs $1.20. If Edith spends all of her income on these two goods, and at her current level of consumption, she receives a marginal utility of 6 utils from the last cup of tea she buys and a marginal utility of 24 utils from the last scone she buys, then Edith should:

buy less tea & more scones ( (6)MUt/(.60)Pt) =10 ((24)MUs/(1.20)Ps) = 20

According to the law of demand, when the price of shoes ______, people will consume ______ shoes.

falls; more

Refer to the accompanying figure. As Jeff watches more movies, his marginal utility: the line is decreasing

gets smaller

An imperfectly competitive firm is one that:

has some influence over the market price

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce (firms have no control over the market price)

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit

For a given seller, the accompanying figure shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. As the market price of this good increases, the quantity produced by this seller will ______.

increases

Cory gets 18, 23, and 25 units worth of total utility from consuming 10, 11, and 12 raw oysters, respectively, and the price per oyster is 25 cents. Thus, one can infer that Cory:

is experiencing diminishing marginal utility

In some countries, medical care is provided free-of-charge to citizens and is paid for by the government. In those countries, medical care:

is rationed by some non-monetary method

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increases the output (no one will buy if she increases the price)

The primary objective of most private firms is to:

maximize profit (earn profit for the owners)

In most markets, scarce goods or services are rationed among competing users using:

monetary prices

The _________ combination of goods is the combination that yields the highest total utility given a consumer's income

optimal

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

If a consumer buys two different goods, the rational spending rule requires that the:

ratio of MU to Price be equal for the two goods

The law of demand indicates that as the cost of an activity:

rises, less of the activity will occur

Joaquin's marginal utility from an additional slice of pumpkin pie is 4 utils and his marginal utility from an additional slice of pecan pie is 6 utils. If a slice of pumpkin pie costs $2.50, and a slice of pecan pie costs $3.00, then Joaquin:

should reallocate his spending towards pecan pie & away from pumpkin pie (Since Joaquin's marginal utility per dollar spent on pumpkin pie is 4/2.5 = 1.6 utils, while his marginal utility per dollar of pecan pie is 6/3 = 2 utils, Joaquin should reallocate his spending towards pecan pie and away from pumpkin pie to maximize his utility.)

Higher education is a __________ and assigned textbooks are ______________.

want; wants