Midterm 2

In general, supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause:

A relatively greater change in prices

I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average xed cost to produce the 7,000 can openers was

$2.43

The WXY Corporation has xed costs of $50. Its total variable costs (TVC) vary with output as shown in the following table. Refer to the table. The average total cost of 4 units of output is:

$40.00

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost

$50

To calculate the price elasticity of demand using the midpoint method, you would use the following approach:

% change in quantity / % change in price

To calculate the price elasticity of supply using the midpoint method, you would use the following approach:

% change in quantity / % change in price

If income elasticity of demand for a good is positive, we say that good is a normal good. You can use the following approach to calculate the income elasticity of demand for a good:

% change in quantity demanded / % change in income

The wage elasticity of labor supply can be calculated using the following approach:

% change in quantity of labor supplied / % change in wage

You were presented with a utility maximizing rule which states: If you always choose the item with the greatest marginal utility per dollar spent, when your budget is exhausted, the utility maximizing choice should occur where the marginal utility per dollar spent is the same for both goods. That rule is expressed as follows:

(The marginal utility associated with good 1 / the price of good 1) = (the marginal utility associated with good 2 / the price of good 2)

Kim has $24 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8, while each yoga class costs $3. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximum point?

1 movie, 5 yoga classes

Bob's budget is $18 per week for entertainment. He split his time between going to the movie or going to the gym. Each movie costs $3, and each session in the gym costs $3. Please nd Bob's maximum utility point using the utility table below.

3 movies; 3 gym workout sessions

For lunch, Maria eats only salads or vegetarian burgers. Her weekly food budget is $36. Each salad costs $6 and each vegetarian burger costs $3. When deciding how much of each good to buy, Maria knows that 2 salads and 4 vegetarian burgers will give her a utility of 8. Maria's utility- maximizing point is:

3 salads, 6 vegetarian burgers

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

3.0

Rick eats only french fries and burgers at his oce cafeteria. His weekly lunch budget is $48. Each burger costs $6 and each order of fries costs $3. When deciding how much of each good to buy, Rick knows that 2 burgers and 4 orders of french fries will give him a utility of 8. At his utility- maximizing point, Rick's utility is:

32

Je attends college and works a part-time job as a cashier. He can work up to 40 hours per week, which pays $8 per hour. The table shows the dierent utility if he chooses dierent hours of leisure and income. Je is currently working 20 hours per week. If she decides to work 30 hours instead, then her utility from leisure would be:

34

Aleah is an electrical engineer. Her wage rate is $40 per hour. She can work up to 40 hours each week. The table below shows her utility from dierent levels of leisure and income. Suppose Aleah decreased her work hours from 30 to 20 hours per week. In that case, the marginal utility gain from having less income and more leisure is (calculate the net gain- marginal utility loss from fewer work hours + marginal utility gain from more leisure hours):

4

For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48. Each salad costs $6 and each smoothie costs $3. When deciding how much of each good to buy, Wendy knows that 2 salads and 4 smoothies will give her a utility of 8. What is Wendy's utility- maximizing point?

4 salads, 8 smoothies

What was Jared's economic profit last year?

4,400

Suppose that Bobo purchases 1 pizza per month when the price is $19 and 3 pizzas per month when the price is $15. What is the price elasticity of Bobo's demand curve?]

4.25

Suppose Jared could have used his talents to run a similar kind of business instead. If he values his entrepreneurial skill at $10,000 annually, find Jared's total implicit costs.

75,600

After working as a head chef for years, Jared gave up his $60,000 salary to open his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space he was leasing had no separate oce, Jared converted his basement apartment into oce space. He had previously rented the apartment to a student for $300/month. The following table summarizes his operations for the past year. What is Jared's accounting profit?

80,000

A company discovers a new technology that allows it to substantially reduce its cost of production. The demand for the product is inelastic. Consumers will in general experience:

A price decrease

The long run is the period of time during which...

All factors are variable.

Which one of the following short-run cost curves would not be affected by an increase in the wage paid to a firm's labor?

Average fixed cost

Examine the following diagram. With this information, what kind of curve could you derive?

Demand Curve

The portion of a long run average cost curve that is downward sloping is called the range of:

Economies of scale.

If demand is ___, then a given % rise in price will cause a smaller % fall in quantity demanded so that total revenue (Price × Quantity) rises.

Inelastic

A production function is a mathematical expression or equation that explains the engineering relationship between:

Inputs and outputs

The factor payment for the use of nancial capital (loans and equity investments) is called...

Interest and dividends.

How a tax burden is divided between consumers and producers is called tax incidence. Consumers bear most of the tax burden when:

Supply is more elastic than demand.

Which of the following is an example of an implicit cost?

The $40,000 in rental income an entrepreneur no longer receives after converting the rental space to their new storefront.

We can describe inputs as either xed or variable. Thinking about a company that assembles cars, which of the following would be an example of a xed input that could not be changed in the short run?

The building where the assembly takes place.

Mathematically, marginal cost is expressed as..

The change in total cost divided by the change in output.

Marginal utility is dened as the increment to total utility that results from the consumption of one more unit of some good or service. The equation for marginal utility is:

The change in total utility / the change in quantity

Kimberly has $1,000 per year to spend between $50 concert tickets and $200 per night getaways. Her utility maximizing combination is 8 concerts and 3 overnight getaways. She recently received a promotion on her job and now she can spend up to $2000 per year on these two items. Her new utility maximizing combination will depend in part on what?

The degree to which concerts and overnight getaways are normal goods or inferior goods.

The input factors of production include Land, Labor, Capital, Technology, and Entrepreneurial ability. Which of the following is an example of Capital?

The machines required to produce cars

The goal of the consumer is to maximize the total utility or satisfaction derived from their purchase choices, given the unique budget constraint. To calculate total utility of a given combination of T-shirts and movies, one would use the following approach:

Use utils as a measure of utility, assigning a specic number to T-shirts and movies, and then add those together.

Suppose a rm is currently producing 10 units. Its xed costs are $100 and its variable costs are $40. At an output level of 10 units, what is the rm's current: Total cost? [A] Average fixed cost?[B] Average variable cost?[C] Average total cost?[D] If the total cost of producing 11 units is $147, what is the marginal cost of the eleventh unit?[E]

[A] 140 [B] 10 [C] 4 [D] 14 [E] 7

Which of the following best describes marginal product?

When the number of bakery sta increases from 2 to 3 bakers, 5 additional loaves are made.

When demand is inelastic:

consumers are not very responsive to changes in price.

Which of the following falls outside of the classification of business expenses that fall into the category of fixed costs?

costs incurred in the act of producing

Which of the following falls outside of the classication of business expenditures that fall into the category of variable costs?

costs of research and development

A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that:

cross-price elasticity of demand for soda is -3

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

divide total costs into two categories: xed costs that can't be changed in the short run and variable costs that can be

According to the denition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will

do so regardless of what type of competition exists in a market.

When __________________ exist, doubling of all inputs will result in more than doubling output, which means __________________________________________.

economies of scale; a larger factory can produce at a lower average cost than a smaller company.

Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.

elastic

The government wants to make medicare benets available to more people, but to achieve this goal, it needs to make cuts in the existing medicare budget. The two areas where they are considering cuts are non- essential elective surgery and 6-12 month mental health care programs. Applying the concept of diminishing marginal utility, the budget cuts should be made for spending on:

elective surgery due to its lower marginal return rate.

If the supply curve for a product is vertical, then the elasticity of supply is

equal to zero.

Economies of scale may arise from all but one of the following. Which one is it?

government economic subsidies protect rms from competition to avoid losses

Say that a tax on alcohol leads to a higher price at the liquor store. Which of the following is NOT likely to occur?

his tax on alcohol only impacts supply and demand trends within the liquor industry.

When economists attempt to predict the spending patterns of U.S. households, they will typically view the _____________________ as a primary determining factor that inuences the individual consumption choices that each will make.

income level of each household

The longer the time period considered, the more the elasticity of supply tends to:

increase

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:

increasing the price of game tickets because demand is inelastic

The key assumption that accompanies the use of numbers for measuring utility is that:

individuals choose based on their preferences

When economists are sketching examples of demand and supply, it is common to sketch a demand or supply curve that is close to vertical, and then to refer to that curve as _________.

inelastic

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she:

is maximizing utility.

The economies-of-scale curve is a long-run average cost curve, because

it allows all factors of production to change.

A 10 percent increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded but no change in the price of macaroni and cheese. From this information, we can assume:

macaroni is an inferior good and price elasticity of supply is infnite.

If cola and iced tea are good substitutes for consumers, then it is likely that:

their cross price elasticities are greater than zero

Garth inherited $25,000. He must decide how much to spend now and how much to save for later. If he saves the money, he can earn 15% interest on the total before he spends it. Using the information about his marginal utility in the table below, Garth should

spend nothing now and $28,750 in the future

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:

total revenue will decrease

If a paper mill shuts down its operations for three months so that it produces nothing, its __________________ will be reduced to zero.

variable costs

Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?

one-third

Marcella operates a small, but very successful art gallery. All but one of the following can be classied as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

physical space for the gallery

Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

the marginal utility per dollar is the same for both goods

In order to determine the average variable cost, the rm's variable costs are divided by _______________________.

the quantity of output

Explain the idea of mental accounting.

Mental accounting is the notion of putting dollars in dierent mental categories where they take dierent values.

What is loss aversion?

The tendency to focus more on the loss than the gain.

What is the goal of behavioral economics?

To integrate the insights of psychology into economics to enrich our understanding of decision-making.

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

Total costs

Which of the following occurs simultaneously with an income effect?

substitution effect

Terry is working as a cashier. She can work up to 40 hours per week, and the wage is $9 each hour. Please see the utility table from leisure and income. What will her total utility from leisure and income be when working 25 hours per week? (40 hours is the total hours she can spend on leisure and work).

140

Suppose that Mimi plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Mimi's demand curve?

1.0

A horizontal demand curve or supply curve would be called:

Perfectly elastic

Which of the following best describes the income effect?

The price of designer jeans has increased, so the buying power of your income has been reduced. You purchase 2 new pairs of new jeans instead of 3 that year.

Mirtha owns an online jewelry store that specializes in earrings. In March, she sells 50 pairs of earrings priced at $15. The cost of materials to create the 50 pairs of earrings was $100. The website she uses to sell her wares costs her $10 a month, and she is also charged 4% on each sale by the company that processes debit/credit card purchases. Which of the following best represents Mirth's total cost?

The sum of the materials ($100), website charge ($10), and 4% payment processing charge (4%)

A perfectly inelastic demand curve or supply curve means...

There is no change in quantity demanded or supplied in response to a change in price

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

rise and the equilibrium quantity to stay the same.