Microeconomics Spring 2016

The cross-price elasticity of demand between bread and potatoes is estimated to be 0.5. This implies bread and potatoes are: A: normal goods. B: complements. C: substitutes. D: unrelated.

C: substitutes. Explanation: The cross-price elasticity of demand between substitutes is positive: an increase in the price of one will lead to an increase in the demand for the other.

Superstar professional athletes can sustain their economic rents because: A: their opportunity costs of playing their sport are high. B: they are represented by highly-skilled agents. C: team owners will pay anything to win a championship. D: they have unique talents that they can sell to the highest bidder.

D: they have unique talents that they can sell to the highest bidder. Explanation: Economic rent often arises when competitors bid on a unique input, driving its price up.

A monopoly that results from economies of scale is called a(n): A: large-scale monopolist. B: cost-plus firm. C: natural monopoly. D: antitrust violator.

C: natural monopoly. Explanation: A monopoly that results from economies of scale is called a natural monopoly.

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it's clear that this firm: A: is not maximizing its profit. B: should shut down. C: should not shut down if its total variable cost is less than $750. D: should produce more than 500 units a day.

C: should not shut down if its total variable cost is less than $750. Explanation: A firm will only shut down if its total revenue is less than its total variable cost. If this firm produces 500 units of output and the price of each unit is $1.50, then we know this firm's total revenue is $750. Thus, this firm should not shut down if its total variable cost is less than $750.

Refer to the figure below. http://picpaste.com/pics/b-4UkjCNps.1462931429.jpg If a price ceiling were imposed at $4, total economic surplus would be ______, which is ______ less than when the market is unregulated market. A: $8; $24 B: $24; $16 C: $48; $8 D: $24; $8

D: $24; $8 Explanation: If this market were unregulated, total economic surplus would be $32. With the price ceiling of $4, consumer surplus would be $20, and producer surplus would be $4, so total economic surplus would be $24, which is $8 less than when the market is unregulated.

When the price of hot dogs is $1.50 each, 500 hot dogs are sold every day. After the price falls to $1.35 each, 510 hot dogs are sold every day. At the original price, what is the price elasticity of demand for hot dogs? A: 2 B: 66.67 C: 5 D: 0.2

D: 0.2 Explanation: The percentage change in quantity demanded is 0.02 (=10/500) and the percentage change in price is 0.1 (=$0.15/$1.50), so elasticity is 0.02/0.1 = 0.2.

If the absolute value of slope of the demand curve is 2.5, price is $6 per unit, and the quantity demanded is 8 units, then the price elasticity of demand is: A: 0.533. B: 1.6. C: 1.875. D: 0.3.

D: 0.3. Explanation: The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (6/8) × (1/2.5) = 0.3.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. http://picpaste.com/pics/a-QhytF931.1462929268.jpg The long-run equilibrium price in this industry is: A: $5. B: $15. C: $0. D: $10.

D: 10 Explanation: When price is equal to $10 (the minimum of the ATC curve) all firms in the market earn zero economic profit.

For a given seller, the figure below shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. If the market price of this good is $6, how many units would this seller produce? http://picpaste.com/pics/aa-Zchw7NfS.1462929665.jpg A: 300 B: 250 C: 50 D: 150

A: 300 Explanation: The seller will continue to produce as the opportunity cost of producing an additional unit is less than or equal to price.

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. http://picpaste.com/pics/bbbb-6AJlT0KX.1462931892.jpg At the monopolist's profit-maximizing level of output, deadweight loss equals the area: A: JLN B: ALN C: JKN D: C0N

A: JLN Explanation: The monopolist's profit-maximizing level of output is F and the socially optimal level of output is H. Deadweight loss is the area to the right of F below the demand curve and above the marginal cost curve.

Suppose the price P on a given demand curve results in a price elasticity of demand equal to 1. Any price higher than P will lie on the ______ part of the demand curve, and any price lower than P will lie on the ______ part of the demand curve. A: elastic; inelastic B: unit elastic; inelastic C: inelastic; elastic D: elastic; unit elastic

A: elastic; inelastic Explanation: Along a straight-line demand curve, the price elasticity of demand at the midpoint equals one. At higher prices, demand is elastic with respect to price, and at lower prices demand is inelastic with respect to price.

Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, government sets the price for prescription drugs. One can conclude that the: A: government has set the price below the equilibrium price. B: government has set the price too high. C: buyers are hoarding prescription drugs. D: government has set the price above the equilibrium price.

A: government has set the price below the equilibrium price. Explanation: If there is excess demand in a regulated market you know that the regulated price is lower than the equilibrium price.

Economics is best defined as the study of: A: how people make choices in the face of scarcity and the implications of those choices for society as a whole. B: supply and demand. C: the financial concerns of businesses and individuals. D: inflation, interest rates and the stock market.

A: how people make choices in the face of scarcity and the implications of those choices for society as a whole. Explanation: Economics is the study of how people make choices under conditions of scarcity and the implications of those choices for society as a whole.

The supply curve illustrates that firms: A: increase the quantity supplied of a good when its price rises. B: decrease the quantity supplied of a good when input prices fall. C: decrease the quantity supplied to earn higher profits. D: increase the supply of a good when its price rises.

A: increase the quantity supplied of a good when its price rises. Explanation: At higher prices, more sellers find that the price they can sell an item for is greater than their opportunity cost to produce that item.

Both a perfectly competitive firm and a monopolist find that: A: it is best to expand production until the benefit and the cost of the last unit produced are equal. B: price and marginal revenue are the same. C: price is less than marginal revenue. D: they can sell as many units of output as they want at the market price.

A: it is best to expand production until the benefit and the cost of the last unit produced are equal. Explanation: All firms maximize profit by expanding output whenever the marginal benefit of producing an additional unit exceeds its marginal cost.

In the lecture, your instructor pointed out that ΔQ/ΔP is a convenient component of the elasticity coefficient formula because: A: it is handy for all of the above reasons. B: it allows us to see a changing elasticity as we move down a straight line demand curve. C: it is constant along a straight line demand curve which allows us to compute elasticity at a point on the demand curve. D: it is the inverse of the slope of the demand curve. Know the slope and you know this component.

A: it is handy for all of the above reasons. Explanation: That term comes from solving the following equation: ε = ΔQ/Q by inverting the denominator and multiplying so we get ΔQ/ΔP * P/Q. The slope of the demand curve ΔP/ΔQ is constant so ΔP/P the inverse of the slope is also constant. We can then look at points and compare different points by inserting values for P and Q.

If a market is in equilibrium and demand increases while supply decreases, the change in the equilibrium price is ________ and the change in the equilibrium quantity is _________. A: positive; indeterminate B: indeterminate; positive C: positive; positive D: positive; negative

A: positive; indeterminate Explanation: An increase in demand and a decrease in supply both cause price to increase, but will have opposite effects on quantity.

Imperfect price discrimination occurs when a monopolist: A: price discriminates but some buyers pay less than their reservation price. B: charges a single price to all buyers. C: price discriminates but some buyers pay more than their reservation price. D: charges all buyers exactly their reservation price.

A: price discriminates but some buyers pay less than their reservation price. Explanation: With imperfect price discrimination, the monopolist price discriminates but at least some buyers are charged less than their reservation price.

Because monopolists charge a price in excess of marginal cost, it must be the case that monopolists: A: produce less than the socially optimal level of output. B: produce more than the socially optimal level of output. C: earn a negative economic profit. D: earn a positive economic profit.

A: produce less than the socially optimal level of output. The marginal benefit to society of the last unit produced is measured by price. Thus, if price is greater than marginal cost, this implies that the marginal benefit to society of the last unit produced is greater than the marginal cost to society of the last unit produced, so that society would benefit if output were to increase.

If a perfectly competitive firm produces an output level at which price is less than marginal costs, then the firm should: A: reduce output to earn greater profits or smaller losses. B: leave its output level unchanged provided it is covering its variable cost. C: expand output to earn greater profits or smaller losses. D: raise its price.

A: reduce output to earn greater profits or smaller losses. Explanation: If price is less than marginal cost, then the firm should decrease output because the revenue generated from the last unit produced was less than the cost of producing the last unit.

The production possibilities curve shows: A: the maximum production of one good for every possible production level of the other good. B: how increasing the resources used to produce one good increases the production of the other good. C: the minimum production of one good for every possible production level of the other good. D: how increasing the production of one good allows production of the other good to also rise.

A: the maximum production of one good for every possible production level of the other good. Explanation: The production possibilities curve describes the maximum amount of one good that can be produced for every possible level of production of the other good.

Suppose the marginal cost of the 1st hour of talking on the phone is $50, the marginal cost of the 2nd hour is $75, and the marginal cost of the 3rd hour is $105. In this case, the total cost of talking on the phone for 3 hours is: A: $315 B: $230 C: $105 D: $150

B: $230 Explanation: To find total cost, you add the marginal cost of each hour: $50 + $75 + $105 = $230.

Assume point A on a linear production possibilities curve represents the combination of 12 coffees and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis. The absolute value of the slope of the production possibilities curve between points A and B equals: A: 1/3 B: 3 C: 4 D: 6

B: 3 Explanation: Moving from point A to point B, 9 coffees are given up in exchange for 3 additional cappuccinos. Slope is rise/run. In this case, the rise is -9 and the run is +3, so the absolute value of the slope is 3.

If 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand? A: 1/6. B: 3. C: 30. D: 1/3.

B: 3. Explanation: The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here -60/20 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.

Gertie saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they were $29.99. Therefore: A: Gertie should not buy the jeans because the price is not equal to her reservation price. B: Gertie should buy the jeans because the price is less than her reservation price. C: Gertie should buy the jeans because the price is more than her reservation price. D: Gertie should not buy the jeans because they will be of lower quality than she expected.

B: Gertie should buy the jeans because the price is less than her reservation price. Explanation: We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price.

Refer to the figure below. Suppose that the government requires that resources be used efficiently. Which of the following would the government definitely not allow? http://picpaste.com/pics/bb-hELUyrRt.1462931569.jpg A: Production at any point other than C. B: Production at point D. C: Specialization in medical care production. D: Specialization in warhead production.

B: Production at point D. Explanation: Point D is inefficient. It lies under the production possibilities curve.

Suppose a monopolist offers a $20 mail-in rebate on an item with a list price of $100. In order for the rebate to be a perfect hurdle, it must be the case that: A: some buyers with a reservation price greater than $80 use the rebate. B: buyers use the rebate if and only if they have a reservation price between $80 and $100. C: all buyers with a reservation price greater than $80 use the rebate. D: buyers use the rebate if and only if their cost of filling out the rebate is less than $20.

B: buyers use the rebate if and only if they have a reservation price between $80 and $100. Explanation: A perfect hurdle is one that segregates buyers precisely according to their reservation prices, imposing no cost on those who jump the hurdle.

If two products are substitutes, then the: A: cross-price elasticity of demand between them will be negative. B: cross-price elasticity of demand between them will be positive. C: income elasticity of demand for both will be high. D: price elasticity of demand for both will be positive.

B: cross-price elasticity of demand between them will be positive. Explanation: If two goods are substitutes, then if the price of one increases, the quantity demanded of the other will increase, implying that the cross-price elasticity of demand between the two goods is positive.

To increase total revenue, firms with ______ demand should lower price, and firms with ______ demand should increase price. A: inelastic; elastic B: elastic; inelastic C: unit; inelastic D: elastic; unit

B: elastic; inelastic Explanation: If demand is elastic, then a fall in price will increase total revenue (since the resulting percentage increase in quantity demanded will be comparatively large), and if demand is inelastic, then an increase in price will increase total revenue (since the resulting fall in quantity demand will be comparatively small).

49 Refer to the figure above. At a price of $9, the market will experience ______________ in the amount of __________ units. A: excess demand; 5 units B: excess supply; 5 units C: equilibrium; 4 units D: excess supply; 6 units

B: excess supply; 5 units Explanation: At a price of $9 demanders will want to purchase 1 unit and suppliers will want to supply 6 units, a difference of 5 units.

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______. A: marginal; average variable; maximum B: marginal; average total; minimum C: average fixed; marginal; minimum D: average variable; marginal; maximum

B: marginal; average total; minimum Explanation: The marginal cost curve must intersect both the average variable cost and average total cost at their respective minimum points.

A situation is efficient if it is: A: possible to find a transaction that will make at least one person better off without harming others. B: not possible to find a transaction that will make at least one person better off without harming others. C: possible to find a transaction that will make everyone better off. D: possible to find a transaction that will make at least one person better off, even if others are made worse off.

B: not possible to find a transaction that will make at least one person better off without harming others. Explanation: A situation is efficient if no change is possible that will help some people without harming others.

Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will: A: often lead to increasing inequality. B: often lead to the most efficient allocation of resources. C: always lead an economy to ruin. D: always lead to the most efficient allocation of resources.

B: often lead to the most efficient allocation of resources. Explanation: Adam Smith's theory of the invisible hand posits that the actions of independent, self-interested buyers and sellers will often (but not always) result in the most efficient allocation of resources.

Under cost-plus regulation, a regulated firm is permitted to charges prices that cover the explicit cost of production plus a markup to cover the: rev: 10_13_2015_QC_CS-29119 A: extra cost associated with the state ownership of natural monopolies. B: opportunity cost of the resources supplied by the firm's owners. C: cost of winning a government contract. D: owner's economic rent.

B: opportunity cost of the resources supplied by the firm's owners. Explanation: Cost-plus regulation is a method of regulation under which the regulated firm is permitted to charge prices that cover the explicit cost of production plus a markup to cover the opportunity cost of the resources supplied by the firm's owners.

"Market power" refers to a firm's ability to: A: undercut its competitors' prices. B: raise its price without losing all of its sales. C: force consumers to buy high-priced products. D: influence the price its competitors charge.

B: raise its price without losing all of its sales. Explanation: Market power is defined as a firm's ability to raise price and not lose all of its sales.

Suppose one could either rent a car or take a train to travel to Chicago from Washington, D.C. If the price of train tickets increases: A: the demand for train tickets will decrease. B: the demand for rental cars will increase. C: the demand for train tickets will increase. D: the demand for rental cars will decrease.

B: the demand for rental cars will increase. Explanation: Rental cars and train tickets are substitutes. The increase in the price of the train ticket decreases quantity demanded, not demand.

If the price elasticity of demand for pineapples is 0.75, then a 4% increase in the price of pineapples will lead to a: A: 0.75% increase in the quantity of pineapples demanded. B: 0.75% decrease in the quantity of pineapples demanded. C: 3% increase in the quantity of pineapples demanded. D: 3% decrease in the quantity of pineapples demanded.

D: 3% decrease in the quantity of pineapples demanded. Explanation: The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.75 and price increases by 4 percent, then quantity demanded must fall by 3 (= 0.75 × 4) percent. Recall that price and quantity demanded move in opposite directions.

If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to: A: 0.30. B: 30. C: 0.333. D: 3.

D: 3. Explanation: The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here +3/-1 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.

Refer to the table below. Martha's opportunity cost of making of a pie is: http://picpaste.com/pics/Time_to_bake_a_pie-SAXEsADh.1462393862.jpg A: 8 cakes. B: 4/3 of a cake. C: 80 cakes. D: 3/4 of a cake.

D: 3/4 of a cake. Explanation: In the time it takes Martha to make a pie, she could have made 3/4 (= 60/80) of a cake.

Refer to the figure below. The marginal utility of the 6th pizza is: http://picpaste.com/pics/pizza-ANbH7sKe.1462394081.jpg A: 17.5 B: 95 C: 100 D: 5

D: 5 Explanation: Marginal utility is the additional utility gained from consuming an additional unit of a good. Here, when consumption increases from 5 to 6 pizzas a week (an one-unit increase), total utility increases from 100 to 105. Therefore, marginal utility is 5.

Suppose Chris's marginal utility from the first taco he eats is 15, and his marginal utility from the second taco he eats is 12. One can infer that: A: Chris should eat one taco. B: Chris should eat two tacos. C: Chris's average utility from eating two tacos is 27. D: Chris's total utility from eating two tacos is 27.

D: Chris's total utility from eating two tacos is 27. Explanation: The total utility from consuming any given number of units of a good can be computed by adding the marginal utilities of all the units consumed.

Suppose a monopolist faces the demand curve shown below: http://picpaste.com/pics/Monopolist_demand_curve_a-xBiKRvLi.1462393166.jpg This demand curve can be used to determine: A: the marginal cost associated with producing different levels of output. B: the impact of advertising on demand. C: the total cost associated with producing different levels of output. D: the monopolist's total revenue at different price and quantity combinations.

D: the monopolist's total revenue at different price and quantity combinations. Explanation: At any given price, the demand curve tells us the number of units the monopolist can sell. Thus, it is possible to determine the monopolist's revenue (P × Q) at different price and quantity combinations.

The monopolist will maximize profits at the output level for which: A: price equals marginal cost. B: price equals average total cost. C: marginal revenue equals marginal cost. D: marginal revenue equals average total cost.

C: marginal revenue equals marginal cost. Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output at which marginal revenue equals marginal cost.

Suppose that at your current consumption of two goods, A and B, MUA/PA = 25 and MUB/PB = 20. In order to maximize, your utility you should: A: leave your spending unchanged. B: purchase less of A and more of B. C: purchase more of A and less of B. D: purchase less of A and B.

C: purchase more of A and less of B. Explanation: If the ratio of marginal utility to price is higher for good A than for good B, then you should reallocate your spending away from good B and towards good A since the utility gained from spending an additional dollar on good A will exceed the utility lost from spending a dollar less on good B.

Refer to the figure above. If the price of the plastic used to make action figures rises, supply will: http://picpaste.com/pics/aaa-RXyZS8qH.1462930221.jpg A: shift from Current Supply to Supply B. B: remain at Current Supply because Demand for Shrek figures is so strong. C: shift from Current Supply to Supply A. D: not change because a change in raw material prices cannot affect market prices.

C: shift from Current Supply to Supply A Explanation: An increase in input prices will cause supply to shift leftward.

For the demand curve shown, find the total amount of consumer surplus that results in the gasoline market if gasoline sells for $60 per gallon. http://picpaste.com/pics/Demand_for_gasoline-I4OWCUy1.1462381593.jpg Instruction: Enter your response as a whole number. Consumer surplus: $_______ per year.

$100,000 Explanation: 1/2 (base) x (height) = 1/2 (10,000 gallons/ year) x ($20/ gal) = $100000 per year

If the demand for a good is highly elastic, that good is likely to have: A: few close substitutes. B: many close complements. C: many close substitutes. D: few close complements.

C: many close substitutes. Explanation: If a good has many close substitutes, a small increase in its price will motivate consumers to purchase the close substitutes.

The difference between a monopolistic competitor and a perfect competitor is: A: the monopolistic competitor can make economic profits in the long run whereas the perfect competitor can not. B: in monopolistic competition there is only one firm whereas in perfect competition there are many firms. C: the perfect competitor sells a standardized (homogeneous) product whereas the monopolistic competitor sells a similar but non-homogeneous product. D: the perfect competitor can make an economic profit in the long run whereas the monopolistic competitor may or may not make an economic profit in the long run.

C: Explanation: The monopolistic competitor is one of many firms just like in perfect competition. However, the monopolistic competitor sells a differentiated product whereas the perfect competitor sells a perfectly homogeneous product.

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is: A: $5. B: $20. C: $35. D: $15.

C: $35. Explanation: Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.

When the price of hot dogs is $1.50 each, 500 hot dogs are sold every day. After the price falls to $1.35 each, 510 hot dogs are sold every day. At the original price, what is the price elasticity of demand for hot dogs? A: 2 B: 5 C: 0.2 D: 66.67

C: 0.2 Explanation: The percentage change in quantity demanded is 0.02 (= 10/500) and the percentage change in price is 0.1 (= $0.15/$1.50), so elasticity is 0.02/0.1 = 0.2.

Casey earns $150 a week and consumes only fish and shrimp. The price of fish is $3 a pound and the price of shrimp is $5 a pound. Casey can buy a maximum of ______ pounds of fish or a maximum of ______ pounds of shrimp. A: 15; 30 B: 30; 50 C: 50; 30 D: 30; 15

C: 50; 30 Explanation: If Casey spent the entire $150 on fish, he could buy 30 pounds ($150/$3 = 50) and if he spent the entire $150 on shrimp, he could buy 30 pounds ($150/$5 = 30).

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. http://picpaste.com/pics/units_per_day-87Uhp9Rv.1462395204.jpg The profit-maximizing price for this monopolist to charge is: A: E. B: C. C: B. D: A.

C: B. Explanation: MC = MR at F units of output. From the demand curve, we can see that this corresponds to a price of B.

Refer to the figure below. If Pat and Chris were to specialize in the task in which each has a comparative advantage: http://picpaste.com/pics/aaaaa-S6jQOwe2.1462930754.jpg A: both Pat and Chris would plant bulbs because they both have an absolute advantage in that task. B: Chris would plant bulbs and Pat would remove trash. C: Chris would remove trash and Pat would plant bulbs. D: Pat and Chris would each spend half of their time each task.

C: Chris would remove trash and Pat would plant bulbs. Explanation: Chris's opportunity cost of removing trash is lower than Pat's, so Chris should specialize in removing trash. Pat's opportunity cost of planting bulbs is lower than Chris's, so Pat should specialize in planting bulbs.

Which of the following statements best expresses why economic efficiency should be society's first goal? A: Efficiency gives the poor an incentive to improve their economic status. B: Since the consensus on what is a fair distribution of goods is impossible, efficiency is the next best goal. C: Efficiency maximizes total economic surplus and thereby allows other goals to be more easily achieved. D: People are not really concerned about the problems of the poor, so government must address them instead.

C: Efficiency maximizes total economic surplus and thereby allows other goals to be more easily achieved. Explanation: While efficiency is not the only goal that matters, when total economic surplus is maximized, we are able to more easily meet our other goals.

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. http://picpaste.com/pics/aaaa-ybUQ0zTF.1462930613.jpg The socially optimal level of output is ______ units per day. A: I B: G C: H D: F

C: H Explanation: The socially optimal level of output occurs where the marginal benefit of an additional unit of output (which is given by the demand curve) equals its marginal cost.

An oligopoly market is characterized by: A: the same characteristics as found in perfect competition except the product is differentiated rather than standardized. B: several firms selling a differentiated product with entry of new potential firms into the market being relatively easy. C: a few, usually large firms with entry of new potential firms into the market being difficult. The oligopolist may make economic profits in the long run. D: one firm selling a highly differentiated product with potential entry into the market being very difficulty.

C: a few, usually large firms with entry of new potential firms into the market being difficult. The oligopolist may make economic profits in the long run. Explanation: As the correct answer states, oligopoly is a small number of usually large firms with entry into the market being restricted.

To increase total revenue, firms with ______ demand should lower price, and firms with ______ demand should increase price. A: inelastic; elastic B: unit; inelastic C: elastic; inelastic D: elastic; unit

C: elastic; inelastic Explanation: If demand is elastic, then a fall in price will increase total revenue (since the resulting percentage increase in quantity demanded will be comparatively large), and if demand is inelastic, then an increase in price will increase total revenue (since the resulting fall in quantity demand will be comparatively small).

Suppose a monopolist faces the demand curve shown below: http://picpaste.com/pics/Monopolist_demand_curve_a-xBiKRvLi.1462393166.jpg If you were to draw the monopolist's marginal revenue curve, it would: A: lie on top of the demand curve. B: intersect the vertical axis at $35. C: intersect the horizontal axis at 35. D: have a slope equal to the reciprocal of the slope of the demand curve.

C: intersect the horizontal axis at 35. Explanation: For any straight-line demand curve, the corresponding marginal revenue curve will have twice the slope of the demand curve and the same vertical intercept as the demand curve. As a result, the horizontal intercept of the marginal revenue curve will be half the horizontal intercept of the demand curve.

According to the Power Point lecture, demand for electricity tends to be ______ in the short run than in the long run. A: more elastic B: more variable C: less elastic D: less important

C: less elastic Explanation: When consumers have more time to adapt to a price change, the change in quantity demanded will be higher, implying that the price elasticity of demand will be higher in the long run than in the short run.

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school-aged children. Childcare for their children costs $12,000 per year. Given that Chris doesn't want to stay home with the kids, regardless of what Pat does, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than: A: $12,000 per year. B: $25,000 per year. C: $37,000 per year. D: $13,000 per year.

D: $13,000 per year. Explanation: The benefit of staying Pat home with the kids is the $12,000 per year saved on childcare plus the value of Pat spending more time with the kids. The cost of Pat staying home with the kids is $25,000 in foregone earnings. Thus, weighing costs and benefits, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than $13,000 per year.

Suppose it takes Paul 3 hours to bake a cake and 2 hours to move the lawn, and suppose it takes Tom 2 hours to bake a cake and 1 hour to mow the lawn. Which of the following statements is correct? A: Paul has the absolute advantage in mowing the lawn. B: Paul has the absolute advantage in baking cakes C: Paul has the comparative in mowing the lawn D: Paul has the comparative in baking cakes

D: Paul has the comparative in baking cakes Explanation: For Paul, in the time it takes him to bake a cake, he could have mowed the lawn 1.5 times, and the time it takes him to move the lawn, he could have made 2/3 of a cake. For Tom, in the time it takes him to bake a cake, he could have mowed the lawn 2 times, and in the time it takes him to mow the lawn, he could have baked 1/2 of a cake. Thus, Paul has a comparative advantage in baking cakes (because 1.5 < 2), and Tom has a comparative advantage in mowing the lawn (because 1/2 < 2/3). Tom has an absolute advantage in both tasks since he can do each more quickly than Tom.

According to the Power Point lecture, the only thing that can change the quantity demanded is: A: an increase in the number of potential consumers in the market. B: a change in the price of a substitute good. C: a change in income. D: a change in the price of the reference good or service.

D: a change in the price of the reference good or service. Explanation: A change in the quantity demanded is represented by a movement along a single demand curve. The only thing that can cause that is a change in the price of the reference good or service ceteris paribus.

According to the Power Point lecture, a monopolist can: A: charge just about any price it wants. B: always make a profit. C: sell any quantity it decides to produce. D: charge an arrange of possible prices but is still subject to the law of demand.

D: charge an arrange of possible prices but is still subject to the law of demand. Explanation: A monopolist faces a downward sloping demand curve so when it raises its price it will generally lose customers.

If the absolute value of the slope of the demand curve is 0.25, price is $8 per unit, and quantity demanded is 12 units, then demand for this good is: A: unit elastic. B: inelastic. C: perfectly elastic. D: elastic.

D: elastic Explanation: The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (8/12) × (1/0.25) = 2.67 (approximately). Since this this greater than 1, we know that the demand for this good is elastic.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. http://picpaste.com/pics/bbb-NXkU9jdM.1462931690.jpg If the market supply curve is given by S1, then in the long run firms will: A: exit the market, leading the market supply curve to shift out to S2. B: enter the market, leading the market supply curve to shift out to S3. C: neither enter nor exit the market, so the market supply curve will remain at S1. D: enter the market, leading the market supply curve to shift out to S2.

D: enter the market, leading the market supply curve to shift out to S2. Explanation: If the market supply curve is given by S1, then the equilibrium price will be $15. At that price, all firms in the market earn an economic profit, prompting new firms to enter the market in the long run. Entry will continue until all firms in the market are earning zero economic profit. As a result, the market supply curve will shift from S1 to S2.

A perfectly price discriminating monopolist charges each buyer: A: more than his or her reservation price. B: the perfectly competitive equilibrium price. C: exactly his or her marginal cost. D: exactly his or her reservation price.

D: exactly his or her reservation price. Explanation: Perfect price discrimination is the practice of charging each buyer exactly his or her reservation price.

Suppose you believe that plaid flannel shirts are an inferior good, and want to test this with economic data. You expect to find that the income elasticity for plaid flannel shirts is: A: greater than one. B: greater than zero, but less than one. C: close to zero. D: less than zero.

D: less than zero. Explanation: The income elasticity of demand for a good is the percentage by which quantity demanded changes in response to a one percent change in income. For inferior goods, an increase in income leads to a decrease in consumption (and a decrease in income leads to an increase in consumption), implying that the income elasticity of demand is negative for inferior goods.

Refer to the figure below. At P = 8 and Q = 4, D1 is ______ elastic than D2, which is shown graphically as D1 being _____ D2. http://picpaste.com/pics/aaaaaa-zfKZEdps.1462931142.jpg A: more; flatter than B: more; steeper than C: less; flatter than D: less; steeper than

D: less; steeper than Explanation: At any given price and quantity, a steeper demand curve is a less elastic demand curve.

The additional utility gained from consuming an additional unit of a good is called: A: costly utility B: an util C: total utility D: marginal utility

D: marginal utility Explanation: Marginal utility is the additional utility gained from consuming an additional unit of a good. The word "additional" is synonymous with "marginal."

A perfectly competitive firm's supply curve is the portion of its ______ cost curve that lies above its ______ cost curve. A: marginal; average total B: average variable; marginal C: average total; marginal D: marginal; average variable

D: marginal; average variable Explanation: A perfectly competitive firm's will always choose the level of output such that the marginal cost is equal to price. If price is below the minimum of the average variable cost curve, however, it will shut down. Thus, a perfectly competitive firm's short run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.

Consumer surplus measures: A: the difference between the quantity demanded and the quantity supplied at a given price. B: the difference between a buyer's marginal utility from consuming a product and the price actually paid. C: the increase in a buyer's total utility when the buyer purchases additional units of a good. D: the difference between the most a buyer would be willing to pay for a product and the price actually paid.

D: the difference between the most a buyer would be willing to pay for a product and the price actually paid. Explanation: Consumer surplus is defined as the difference between a buyer's reservation price for a product and the price actually paid.

John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Expense: Amount: Labor $2,000 Food and drink $500 Electricity $100 Vehicle lease $150 Rent $500 Interest on loan for equipment $1,000 a) Calculate John's annual accounting profit. $_____ b) Suppose John could earn $1,000 per year as a recycler of aluminum cans, but he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle. Is the café making an economic profit? _____, the café is making an economic _____of $ _____ per year c) Should John stay in the cafe business?

a) $750 b) Yes, profit, $25 c) Yes, he should stay in the café business. Explanation: a) John's accounting profit is his revenue minus his explicit costs: $5,000 - $4,250 = $750 b) In this case, John's opportunity cost of running the café is $725 per year ($1,000 − $275 = $725). Thus, the café is making an economic profit of $25 per year ($5,000 − $4,250 − $725 = $25). Since the café is earning an economic profit, John should stay in the café business.

Tom has a weekly allowance of $24, all of which he spends on pizza and movie rentals, whose prices are $6 per slice and $3 per rental, respectively. We can assume that pizza slices and movie rentals are available only in whole-number amounts. Instruction: Enter your responses as a whole numbers. a. For the given levels of pizza consumption, calculate how many rentals Tom can afford with his remaining income. Pizza: 0 1 2 3 4 Rentals: i:__ ii: __ iii: __ iv: __ v: __ b. Using the utility values in the table below, how many pizza slices and how many movie rentals should Tom consume each week to maximize his total utility? Pizza slices per week 0 1 2 3 4 5 6 7 8 Utils/week from pizza 0 20 36 48 58 66 72 76 78 Movie rentals per week 0 1 2 3 4 5 6 7 8 Utils/week from rentals 0 40 46 50 54 56 57 57 57 Pizza slices to be consumed per week: i: ___ correct. Movie rentals to be consumed per week: ii: ___ correct.

a. i: 8 ii: 6 iii: 4 iv: 2 v: 0 b. i: 3 ii: 2

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $80,000 a year. The firms that employ designers of normal ability each collect $500,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. However, the 200th company employs Janus Jacobs, an unusually talented designer. Because of Jacob's talent, this company collects $1,500,000 in revenue a year. a. How much will Jacobs earn? Instruction: Enter your response as an integer value. $ _____ per year. What proportion of his annual salary will be economic rent? Instruction: Enter your response as a percentage rounded to the nearest whole number. _____% b. Will the advertising company for which Jacobs works be able to earn an economic profit? _____

a. $1,080,000, 93% b. No Explanation: a. The company that employs Jacobs will collect $1,000,000 more in revenue than the other advertising companies in New Orleans. Thus, Jacobs will earn $1,080,000 per year: the normal salary for a designer ($80,000) plus the additional revenue Jacobs generates for the firm that hires her ($1,000,000). Since Jacobs' economic rent is $1,000,000 per year, 93 percent of his salary is economic rent. b. No. If the company that employs Jacobs tries to pay her the salary of a normal designer, the owners of other companies will have an incentive to offer Jacobs a higher salary to bid her away because she generates $1,000,000 per year in additional revenue for whichever company hires her. In fact, Jacobs' salary will be bid up until no economic profit remains, which occurs when she earns $1,080,000 per year.

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram: http://picpaste.com/pics/Market_for_used_DVDs-jaG65LS7.1462381279.jpg Use the following values for the graph above: A 10.00 B 9.60 C 9.00 D 6.60 E 5.00 F 2 G 5 H 17 I 50 Calculate the following at the equilibrium price of $9.00. a. The weekly consumer surplus at the market equilibrium price. Instruction: Enter your response rounded to two decimal places. $ _____ per week. b. The weekly producer surplus at the market equilibrium price. Instruction: Enter your response rounded to two decimal places. $ _____ per week. c. The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week (total economic surplus). Instruction: Enter your response rounded to two decimal places. $ _____ per week.

a. $2.50 b. $10.00 c. $12.50 Explanation: a. Consumer surplus is the triangular area between the demand curve and the equilibrium price. Its area is equal to (1/2)(base)(height). The base is 5 units and the height is 1 units, measured in dollars. Therefore, consumer surplus is (1/2)($5/unit)(1 units/week) = $2.50 per week. b. Producer surplus is the triangular area between the equilibrium price and the supply curve. Using the base-height formula, it is (1/2)($5/unit)(4 units/week) = $10.00 per week. c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in used DVDs is the sum of the gains from trading in used DVDs — namely, the total economic surplus generated per week, which is $12.50 per week.