Econ 03H Midterm 2 Prep

Suppose the state of California imposes a two dollar per unit tax on medical marijuana, which increases its price by 30 percent, and as a result, the quantity purchased declines by 15 percent. The absolute value of the price elasticity of demand for cigarettes is equal to a. 0.5, making marijuana an inelastic good. b. 0.5, making marijuana an elastic good c. 2.0, making marijuana an inelastic good d. 2.0, making marijuana an elastic good

a. 0.5, making marijuana an inelastic good.

Refer to Figure 8-14. If the firm produces 15 units of output, its average fixed cost is a. 4. b. 5. c. 6. d. 60.

a. 4.

There are only two individuals in the market for grappling hooks: Batman and Robin. Batman is willing to buy 3 grappling hooks at a price of $10 and 5 grappling hooks at a price of $5 per hook. Robin is willing to buy 4 grappling hooks at a price of $10 and 7 grappling hooks at a price of $5 per hook. According to the market demand curve, what is the quantity of grappling hooks demanded when the price is $10? a. 7 b. 10 c. 12 d. It is impossible to tell from this information

a. 7

Refer to Figure 8-14. The marginal cost of producing the tenth unit is a. 7. b. 13. c. 70. d. 130.

a. 7.

Which of the following is true? a. Economic profits are generally lower than accounting profits. b. Economic profits are generally greater than accounting profits. c. Economic profits are generally equal to accounting profits. d. Economic profits plus accounting profits must equal zero.

a. Economic profits are generally lower than accounting profits.

Bob goes out to dinner three times per week, usually either to the local steak house or a Chinese restaurant in town. If the steak house were to raise its prices, Bob would probably (1) be less inclined to eat at the steak house and more inclined to eat at the Chinese restaurant when he did go out and (2) eat out fewer times per week because at the higher prices he cannot afford to eat out as much. a. Part 1 is an example of the substitution effect, part 2 of the income effect. b. Part 1 is an example of the income effect, part 2 of the substitution effect. c. Part 1 is an example of the law of diminishing marginal utility, part 2 of the substitution effect. d. Part 1 is an example of the proportions hypothesis, part 2 of the income effect.

a. Part 1 is an example of the substitution effect, part 2 of the income effect.

Which of the following is the main difference between price searchers and price takers? a. Price takers produce identical products and have to sell these products at the market price, while price searchers produce differentiated products and can choose the price at which they sell their products b. Price searchers produce identical products and have to sell these products at the market price, while price takers produce differentiated products and can choose the price at which they sell their products c. Price takers face a downward sloping demand curve and can only sell more product when they lower the price of their product, while price searchers face a horizontal demand curve and can sell all they want at the market price d. Price taker industries have higher barriers to entry, while price searcher industries typically do not.

a. Price takers produce identical products and have to sell these products at the market price, while price searchers produce differentiated products and can choose the price at which they sell their products

Refer to Figure 8-14. Diminishing returns to the variable factor of production for this firm set in at a. Q = 6. b. Q = 10. c. Q = 15. d. none of the above.

a. Q = 6.

Coach Ballford: "To increase our revenue from football games, we need to lower ticket prices." University President Smith: "Coach, that would be counterproductive; a reduction in ticket prices would reduce our revenue, not increase it." Which of the following best explains this disagreement? a. The coach thinks that demand is elastic, whereas the university president thinks that demand is inelastic. b. The coach thinks that demand is inelastic, whereas the university president thinks that demand is elastic. c. The coach believes that lower ticket prices will increase attendance, but the university president must not believe attendance will increase when prices are lowered. d. Although both the coach and the president believe demand is of unitary elasticity, they disagree about how much attendance will rise.

a. The coach thinks that demand is elastic, whereas the university president thinks that demand is inelastic.

There are far more substitutes for hamburgers then there are for cigarettes. Which of the following is likely to be true as a result of this fact? a. The price elasticity of demand for cigarettes is lower than the price elasticity of demand for hamburgers. b. The price elasticity of demand for cigarettes is higher than the price elasticity of demand for hamburgers. c. The demand curve for hamburgers will be steeper than the demand curve for cigarettes. d. Both a and c are true.

a. The price elasticity of demand for cigarettes is lower than the price elasticity of demand for hamburgers.

Which of the following best explains the incentives of the residual claimant when operating a company? a. The residual claimant will want to maximize profit by increasing total revenue and reducing total cost b. The residual claimant will want to maximize profit by reducing total revenue and increasing total cost c. The residual claimant will want to minimize profit by reducing total revenue and increasing total cost d. The residual claimant will be entirely unconcerned with profits.

a. The residual claimant will want to maximize profit by increasing total revenue and reducing total cost

If price is greater than average total cost, which of the following is true for the price taker firm in the short-run. a. This firm is earning a positive economic profit b. This firm is earning an economic loss c. This firm is earning the normal profit rate of zero economic profit. d. There will be a tendency for firms to leave the industry until economic profit is equal to zero.

a. This firm is earning a positive economic profit

For a firm in a price-taker market, the firm's demand curve is a. a horizontal line at the market price that is equal to the firm's marginal revenue curve. b. an upward-sloping line that is equal to the firm's marginal cost above AVC. c. a downward-sloping line that lies below the firm's marginal revenue curve. d. undefined because it cannot determine the price it charges for its output.

a. a horizontal line at the market price that is equal to the firm's marginal revenue curve.

"I have been making furniture for 27 years. I have never heard of either marginal cost or marginal revenue. Fancy economic theories mean nothing to me. I just know how to do well in business. Whenever I can sell something for more than it cost me to produce it, I make it, and whenever I can't sell it for enough to cover my cost, I don't. That's how I stay in business and earn income for my family. Common sense and watching the market are good enough for me." For producers like this, economic models a. accurately describe their behavior and allow predictions to be made as to how they will respond to changes in market conditions, even if they don't understand the models. b. indicate nothing about the behavior of such producers. c. will generally only apply if the person has a college education. d. do not apply because the producers do not understand the terminology.

a. accurately describe their behavior and allow predictions to be made as to how they will respond to changes in market conditions, even if they don't understand the models.

The price elasticity of demand for automobiles measures the responsiveness of a. consumer purchases to a change in the price of automobiles. b. consumer purchases to a change in the quality of automobiles. c. supplier production levels to a change in the price of automobiles. d. consumer purchases of automobiles to a change in their income.

a. consumer purchases to a change in the price of automobiles.

If you were the owner of a price-taker firm operating at an output level where the marginal cost of producing another unit was $5, and the market price was $7, then you a. could increase your profit by expanding output. b. could increase your profit by decreasing output. c. are maximizing your profit at your current output level. d. will be able to earn positive economic profits in the long run.

a. could increase your profit by expanding output.

All else equal, if a firm raises its price by 20 percent and the firm's total revenue falls by 20 percent, a. demand must be elastic. b. demand must be inelastic. c. demand must be unit elastic. d. the price elasticity of demand must be equal to 1.

a. demand must be elastic.

Use the diagram below to answer this question. For this demand curve, the price elasticity of demand is a. more elastic at $3 than at $2. b. more elastic at $2 than at $3. c. identical at $2 to that at $3. d. equal to 1.0 over the range from $3 to $2.

a. more elastic at $3 than at $2.

Making drugs, such as cocaine, illegal results in a higher price than would be present if the drugs were legal. All else constant, the higher price results in drug users spending a. more on drugs if the demand for drugs is inelastic. b. more on drugs if the demand for drugs is elastic. c. less on drugs if the demand for drugs is inelastic. d. more on drugs if the demand for drugs is unitary elastic.

a. more on drugs if the demand for drugs is inelastic.

Historically, most economists have referred to markets where firms are price takers as a. perfectly competitive markets. b. monopoly markets. c. open-door markets. d. price-searcher markets.

a. perfectly competitive markets.

Which of the following is a characteristic of the price taker market? a. price takers can sell all of their output at the market price. b. price takers produce differentiated products making them less then perfectly competitive. c. price takers are large firms with enough market power that they can influence the market price by altering their output level. d. price taker industries tend to only have one or two firms that compete with one another, which is why they are sometimes referred to as perfectly competitive.

a. price takers can sell all of their output at the market price.

A firm that must sell its output at a market-determined price is called a a. price-taker firm. b. price-searcher firm. c. price-setter firm. d. price-maker firm.

a. price-taker firm.

The market demand for a good is a. the horizontal sum of all individual demand curves for the good. b. generally upward sloping, unlike individual demand curves. c. usually a vertical line at a quantity of one hundred. d. the average amount purchased by each individual in the market.

a. the horizontal sum of all individual demand curves for the good.

You are the owner of an ice cream shop that earns a profit most of the year except during the cold winter months. During the month of December, your rent and other fixed costs amount to a total of $200. If you remain open, your total variable costs (workers, ice cream cones, etc.) will amount to $300. If you would be able to sell 100 ice cream cones at $4 each during December, then a. to maximize profits, you should remain open in December. b. to maximize profits, you should shut down in December. c. you will be able to avoid making a loss by shutting down in December. d. you should go out of business in the long run if there is any single month in which you do not earn a profit.

a. to maximize profits, you should remain open in December.

If Joe's income increased and as a result he purchased more wine and less fast food, a. wine is a normal good and fast food an inferior good for Joe. b. wine is an inferior good and fast food a normal good for Joe. c. both wine and fast food are inferior goods for Joe. d. both wine and fast food are normal goods for Joe.

a. wine is a normal good and fast food an inferior good for Joe.

A homeowner will be away from her house for six months. The monthly mortgage payment on the house is $300. The utilities, to be paid by the owner, cost $100 per month if the house is occupied; otherwise zero. If the owner wishes to minimize her losses from the house, she should rent the house for as much as the market will bear, as long as monthly rent is greater than which of the following? (Assume wear and tear to be zero regardless of whether the house is occupied.) (Hint: Remember the concept of sunk cost.) a. $0 b. $100 c. $200 d. $400

b. $100

Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14 and his marginal cost $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day? a. $5 b. $7 c. $8 d. $15

b. $7

If the price of steak rises from $6 to $10 per pound, and the quantity purchased falls from 90 to 70 pounds, the price elasticity of demand (in absolute value) is a. 0.2. b. 0.5. c. 1.0. d. 2.0.

b. 0.5.

Refer to Figure 8-14. If the firm produces 10 units of output, its total fixed cost is a. 6. b. 60. c. 70. d. 130.

b. 60.

Which of the following is true in long-run equilibrium in a price taker market? a. All firms are producing where price is greater than average total cost. b. All firms in the industry are making zero economic profit c. All firms are failing and will shortly go out of business since their economic profits are equal to zero. d. All of the above are true

b. All firms in the industry are making zero economic profit

Why is the short-run Average Total Cost curve U-shaped? a. Larger firms will always have lower per-unit costs than smaller firms, regardless of the amount produced and the size of their factory. b. At low levels of output, the plant is under-utilized and average fixed costs will be high, while at high levels of output, the plant is over-utilized and marginal costs will be high as the result of diminishing returns. c. There will be diminishing marginal when output is small and the plant is under-utilized, and high average fixed costs when the output is large and the plant is over-utilized. d. diseconomies of scale exist when output is both too low and too high.

b. At low levels of output, the plant is under-utilized and average fixed costs will be high, while at high levels of output, the plant is over-utilized and marginal costs will be high as the result of diminishing returns.

The exhibit illustrates two possible demand curves for a product, D1 and D2. Which of the following is true regarding these demand curves? a. Demand curve D1 represents a demand curve that is relatively more elastic than demand curve D2. b. Demand curve D1 represents a demand curve that is relatively more inelastic than demand curve D2. c. Demand curve D1 represents a demand curve that shows consumer purchases being more responsive to a change in the price of the good than demand curve D2. d. Both are examples of unitary elastic demand curves.

b. Demand curve D1 represents a demand curve that is relatively more inelastic than demand curve D2.

Which of the following statements is true regarding the price elasticity of supply? a. The price elasticity of supply is always negative. b. The price elasticity of supply is always positive. c. The price elasticity of supply will be greater when suppliers have a shorter time to respond to a price change. d. None of the above statements are true.

b. The price elasticity of supply is always positive.

If the price elasticity of demand for grapes was 2.5, a. the demand for grapes would be considered inelastic. b. an increase in the price of grapes would decrease total consumer spending on grapes. c. consumer purchases are less sensitive to a change in the price of grapes than to a change in the price of bananas, which have a price elasticity of 1.6. d. the income elasticity for grapes must also be 2.5.

b. an increase in the price of grapes would decrease total consumer spending on grapes.

Suppose a white-water rafting company is highly profitable during the summer months, but is unable to cover its total cost during the winter months. If it wants to maximize profits, the company should a. shut down during the winter, even if it is able to cover its variable costs during that period. b. continue operating during the winter months if it is able to cover its variable costs during that period. c. shut down immediately; losses should never be tolerated. d. lower its prices during the summer months and raise its prices during the winter months.

b. continue operating during the winter months if it is able to cover its variable costs during that period.

An upward-sloping portion of a long-run average total cost curve reflects a. economies of scale. b. diseconomies of scale. c. sunk costs. d. constant economies of scale

b. diseconomies of scale.

Ron works for Carmen at Carmen's Pizza Palace. Carmen has many work rules to ensure that her employees are working at their maximum potential, and Ron believes if there were fewer rules and more flexibility, he could do a better job. Carmen probably has the rules because a. Ron, like her other employees, is a residual claimant. b. due to the principal-agent problem, some employees are likely to shirk when the owner is absent. c. she is maximizing sales rather than profits. d. with regard to their jobs, employees seldom know what is best.

b. due to the principal-agent problem, some employees are likely to shirk when the owner is absent.

A 15 percent increase in the price of beef reduces the quantity of beef consumed by 30 percent. Thus, the demand for beef is ____, and total consumer expenditure (or total firm revenue) will ____ as a result of the price increase. (Fill in the blanks.) a. elastic; increase b. elastic; decrease c. inelastic; increase d. inelastic; decrease

b. elastic; decrease

If the market price in a price-taking industry was currently above the average total cost of production for firms in the industry, a. firms in the industry would earn short-run economic profits that would be offset by long-run economic losses. b. new firms would enter the industry, which would drive price down to the average total cost of production in the long run. c. firms in the industry would earn positive economic profits in the long run. d. most firms in the industry would shut down in the long run.

b. new firms would enter the industry, which would drive price down to the average total cost of production in the long run.

Sunk or "historical" costs are costs a. associated with current operational decisions. b. that have already been incurred as the result of past decisions. c. that add to the firm's marginal costs. d. that form the major component of the firm's variable costs.

b. that have already been incurred as the result of past decisions.

Which of the following are true regarding a price taker firm making economic losses? a. the firm should always shut down immediately as staying open will only increase the size of those losses. b. the firm should stay open in the short-run if the price of their product is greater than their average variable costs. c. Their will be a tendency for new firms to jump into the market to take advantage of these failing industries d. Both a and c are true, but b is not true.

b. the firm should stay open in the short-run if the price of their product is greater than their average variable costs.

If the price of gasoline increases, and Yang now buys fewer gallons of gasoline because he can't afford to buy as much gasoline at these high prices, this would best be explained by a. the complement effect. b. the income effect. c. the perfectly elastic demand for gasoline. d. all of the above.

b. the income effect.

Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop but not as much as the first layer. What economic concept best explains this observation? a. the law of diminishing marginal utility b. the law of diminishing returns c. return equalization principle d. the principal-agent problem

b. the law of diminishing returns

Which portion of the marginal cost curve is used to create a firm's short-run supply curve? a. the entire marginal cost curve b. the marginal cost curve above its intersection with the average variable cost curve because below this price, firms will shut down in the short run c. the marginal cost curve above its intersection with the marginal revenue (demand) curve d. the marginal cost curve above its intersection with the average total cost curve because below this price, firms will shut down in the short run

b. the marginal cost curve above its intersection with the average variable cost curve because below this price, firms will shut down in the short run

When the owner of a business invests his or her own money in the business, they give up the interest this money could be earning in the bank. This forgone interest is called a. the marginal cost of diminishing financial services. b. the opportunity cost of equity capital and is an implicit cost of production. c. the opportunity cost of labor services. d. interest expense and is included as a cost in the accounting statements of the business.

b. the opportunity cost of equity capital and is an implicit cost of production.

If Marcello's pizza near campus increases its prices by 10 percent, but revenues from its sales are unchanged, the price elasticity of demand for the services offered by this pizza shop must be a. elastic. b. unitary elastic (equal to 1) c. inelastic. d. equal to 0.5.

b. unitary elastic (equal to 1)

A price-taker market tends toward a state of long-run equilibrium in which firms earn only a normal rate of return (zero economic profits) because a. firms will keep their prices low under fear of government regulation. b. with firms able to enter and leave the industry freely, competition will drive prices down to the level of production costs. c. by definition, production costs always rise to equal the market price. d. mismanagement on the part of owners generally results in the firms not equating marginal revenue and marginal cost.

b. with firms able to enter and leave the industry freely, competition will drive prices down to the level of production costs.

You and your college roommate eat five packages of Ramen noodles each week. After you both graduates, you were both hired at a company that pays you a salary that is five times what you earned while in college. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, a. yours would be negative, making Ramen Noodles an inferior good for you, and your roommate's would be positive, making Ramen Noodles a normal good for her. b. yours would be positive, making Ramen Noodles a normal good for you, and your roommate's would be negative, making Ramen Noodles an inferior good for her. c. yours would be perfectly inelastic and your roommate's would be perfectly elastic. d. yours would be perfectly elastic and your roommate's would be perfectly inelastic.

b. yours would be positive, making Ramen Noodles a normal good for you, and your roommate's would be negative, making Ramen Noodles an inferior good for her.

A price-taker firm is currently producing 50 units of output at an average total cost of $3 per unit. If the market price is $7, then the firm's total economic profit is a. $4. b. $150. c. $200. d. $350.

c. $200.

In the short run, if average variable cost equals $30, average total cost equals $70, and output equals 100, the total fixed cost must be a. $40. b. $3,000. c. $4,000. d. $7,000.

c. $4,000.

A foreign exchange student bought a new car for $20,000 and resold it one year later for $15,000. Insurance, license and registration fees, and operating costs for the year were $2,000. What was his total economic cost of owning and operating the car for the year if the market rate of interest was 10 percent? a. $7,000 b. $9,000 c. $9,200 d. $20,000

c. $9,200

Suppose that the quantity of donuts sold increased from 200 to 400 when the price fell from $5 to $3. Over this price range, the absolute value of the price elasticity of demand for inkjet printers is a. 0.01. b. 0.75. c. 1.33 d. 100

c. 1.33

The schedule of total cost for a firm in a price-taker market is given in the table. If the market price for this product is $50, which of the following output levels should this firm produce if it wants to maximize its profit? Output Total Cost 0 $ 25 1 65 2 95 3 140 4 195 5 255 a. 1 b. 2 c. 3 d. 4

c. 3

As output is expanded, if MC is more than ATC, a. ATC must be at its minimum. b. ATC must be at its maximum. c. ATC must be increasing. d. ATC must be constant.

c. ATC must be increasing.

Which of the following best represents the idea of making a good decision by successfully ignoring sunk costs? a. A poker player knows that she has no chance of winning the hand, but calls another players bet because she feels she has already put so much money in the middle that she has to see the hand through. b. Keith doesn't enjoy being in his current relationship, but feels reluctant to end the relationship since he has already invested so much time and effort into making the relationship work c. Carmen decides to attend her best friend's party instead of going to a concert even though it is too late to refund the tickets because she expects that she will enjoy the party more than the concert d. Jerome, a sophomore in college, feels like he would enjoy working in engineering more than communications, but sticks with his major in engineering since he has already invested a year of school in that major.

c. Carmen decides to attend her best friend's party instead of going to a concert even though it is too late to refund the tickets because she expects that she will enjoy the party more than the concert

Refer to Figure 8-14. This firm minimizes its per-unit total costs of production at an output level of a. Q = 6. b. Q = 10. c. Q = 15. d. none of the above.

c. Q = 15.

Which of the following are true for a price taker market? a. The firm's marginal revenue from selling a unit is always less than the market price for that unit b. The firm's marginal revenue from selling a unit is always more than the market price for that unit c. The firm's marginal revenue from selling a unit is always equal to the market price for that unit d. The firm's marginal revenue from selling a unit can be less than or more than the market price for that unit depending on the firm's average total cost.

c. The firm's marginal revenue from selling a unit is always equal to the market price for that unit

Mary owns her own business and works full time in the store without paying herself a salary. She has $20,000 of her own money invested in the store that she withdrew from her savings account, which earned 10 percent interest. She was offered a job last year making $28,000 per year but turned it down. If Mary's accounting statements show revenues of $100,000 and accounting costs of $60,000, then Mary's a. accounting profit is $20,000 and her economic profit is zero. b. accounting profit is $40,000 and she is making an economic loss of $8,000. c. accounting profit is $40,000 and her economic profit is $10,000. d. accounting and economic profit is $40,000.

c. accounting profit is $40,000 and her economic profit is $10,000.

The average variable cost curve and average total cost curve become closer together as output increases because a. the marginal cost curve intersects the average total cost curve at its minimum. b. average fixed cost remains constant as output rises. c. average fixed cost, which is the difference between them, declines with output. d. output is rising more rapidly than inputs are being increased.

c. average fixed cost, which is the difference between them, declines with output.

When you divide costs that do not change regardless of the level of output by the quantity produced, you have calculated a. average total cost. b. total fixed cost. c. average fixed cost. d. average variable cost.

c. average fixed cost.

When examining the competitive process, economists would argue that a. since business failure is hard on the business owner and its employees, firms making losses should be given subsidies so they can be protected from going out of business. b. competition results in the mismanagement of resources resulting in a lot of waste and deadweight loss. c. competition helps direct resources away from firms making losses who destroy the value of the resources, and funnels resources towards firms making a profit by increasing the value of those resources d. the only way for a firm to make profits is through coercion and exploitation.

c. competition helps direct resources away from firms making losses who destroy the value of the resources, and funnels resources towards firms making a profit by increasing the value of those resources

Which of the following represents a long-run adjustment that could not be accomplished in the short run? a. the hiring of four additional professors by a university b. a cutback on use of a custodial staff on campus during a pandemic c. construction of a new classroom building to accommodate increases in enrollment. d. Acquiring more desktops for students who have to take classes at a movie theater because the university doesn't have the classroom space to seat all of its students

c. construction of a new classroom building to accommodate increases in enrollment.

FYI Sanitation is currently eight months into a year-long lease contract on a garbage truck at a cost that averages $500 per month. Other variable costs (fuel, workers, etc.) for operating the truck amount to $300 per month. If the monthly revenue from operating the truck is $400, and these conditions are expected to continue into the future, to maximize its profit, FYI Sanitation should a. stop operating the truck immediately and not renew the lease for next year. b. continue operating the truck indefinitely. c. continue operating the truck until the lease expires, then not renew the lease for next year. d. stop operating the truck now but renew the lease and begin operating the truck again next year.

c. continue operating the truck until the lease expires, then not renew the lease for next year.

"Because of the unseasonably cold weather, Florida orange growers expect (1) fewer bushels of oranges to be harvested, (2) a higher market price for oranges, and (3) larger total revenues from this year's crop." This statement would most likely be correct if the a. demand for Florida oranges was elastic. b. demand for Florida oranges was unitary elastic. c. demand for Florida oranges was inelastic. d. income elasticity of Florida oranges was negative.

c. demand for Florida oranges was inelastic.

When the price elasticity of demand is greater than one, it means that demand is a. inelastic and the percent change in quantity is greater than the percent change in price. b. inelastic and the percent change in quantity is less than the percent change in price. c. elastic and the percent change in quantity is greater than the percent change in price. d. elastic and the percent change in quantity is less than the percent change in price.

c. elastic and the percent change in quantity is greater than the percent change in price.

If a firm in a price-taker market is earning zero economic profit, it a. will shut down in the long run but not the short run. b. will also be earning zero accounting profit. c. is doing as well as typical firms in other markets. d. will shut down in the short run.

c. is doing as well as typical firms in other markets.

When an economist says a firm is earning zero economic profit, this implies that the firm a. will be forced out of business in the near future unless market conditions change. b. is earning a zero rate of return on its assets. c. is earning as high a rate of return now as could be earned if his resources were employed in other industries. d. has an accounting profit of zero.

c. is earning as high a rate of return now as could be earned if his resources were employed in other industries.

To maximize profits, a firm should always produce the level of output where a. marginal cost equals average total cost. b. average total cost equals price. c. marginal cost equals marginal revenue. d. marginal revenue equals price.

c. marginal cost equals marginal revenue.

The short run is a time period of insufficient length for the firm to change its a. output. b. amount of labor employed. c. plant size and heavy equipment. d. price.

c. plant size and heavy equipment.

If marginal revenue exceeds marginal cost at the current level of output, profit will increase when output is expanded because a. other firms in the industry will shut down as the firm expands output. b. the market price will rise as the firm expands output. c. producing and selling an additional unit will add more to total revenue than it adds to total cost. d. marginal cost will decline as output is expanded.

c. producing and selling an additional unit will add more to total revenue than it adds to total cost.

The long run is a period of a. at least one year. b. sufficient length to allow a firm to expand output by hiring additional workers. c. sufficient length to allow a firm to alter its plant size and capacity and all other factors of production. d. sufficient length to allow a firm to transform economic losses into economic profits.

c. sufficient length to allow a firm to alter its plant size and capacity and all other factors of production.

Which of the following factors is most likely to shift the cost curves of an Iowa corn farmer downward? a. an increase in the price of fertilizer b. an increase in the tax on diesel fuel, which is used by the farmer c. the development of a new, more efficient corn harvester d. the adoption of a regulation requiring farmers to treat their crops with three new pesticides.

c. the development of a new, more efficient corn harvester

In a price-taker market, a. all firms in the market charge different prices depending upon their respective costs of production. b. there are generally a small number of very large firms. c. the firms all produce identical products. d. firms will usually make economic losses in the long run.

c. the firms all produce identical products.

If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of hula hoops purchased, the price elasticity of demand is a. 5 and the demand for hula hoops is elastic. b. 0.2 and the demand for hula hoops is elastic. c. 5 and the demand for hula hoops is inelastic. d. 0.2 and the demand for hula hoops is inelastic.

d. 0.2 and the demand for hula hoops is inelastic.

Refer to Figure 8-14. If the firm produces 10 units of output, its average total cost is a. 6. b. 7. c. 12. d. 13.

d. 13.

Refer to Figure 8-14. If the firm produces 10 units of output, its total cost is a. 7. b. 13. c. 70. d. 130.

d. 130.

If Marisol's income rises by 10 percent, and, as a result, she purchases 40 percent more designer clothing, her income elasticity for designer clothing is a. 0.25, making designer clothing a necessity b. 4, making designer clothing an elastic good c. 4, making designer clothing a necessity d. 4, making designer clothing a luxury

d. 4, making designer clothing a luxury

Which of the following is true about the law of diminishing returns? a. It explains why marginal cost eventually increases as output expands. b. It is a short-run concept, not a long-run concept c. It means that as you add more and more variable inputs to a fixed set of inputs, then output will eventually increase by smaller and smaller amounts. d. All of the above are true

d. All of the above are true

Which of the following is true for a price-taker firm? a. If the marginal revenue of producing a good exceeds the marginal cost of producing the good, then the firm should produce and sell that good. b. If the marginal cost of producing a good exceeds the marginal revenue of producing the good, then the firm should avoid producing and selling that good. c. The firm will maximize profits by producing up to the point where marginal revenue is equal to marginal cost. d. All of the above are true

d. All of the above are true

Which of the following are true when it comes to calculating economic profit? a. Economic profit is calculated as total revenue minus total cost b. If economic profit is negative, it is referred to as a loss c. All firms in a perfectly competitive price-taker industry make zero economic profit in the long-run. d. All of the above are true.

d. All of the above are true.

Which of the following is true about marginal benefit? a. A consumer's marginal benefit is equal to the height of her demand curve. b. Consumers will continue to purchase up until the point where marginal benefit equals price. c. Marginal benefit declines as consumption increases because of the law of diminishing marginal utility. d. All of the above are true.

d. All of the above are true.

Which of the following is true regarding the price elasticity of demand? a. Demand is generally more elastic in the long run than in the short run. b. Along a single demand curve, demand elasticity decreases as you move down the curve (to lower prices). c. A demand curve that is flatter (has a less steep slope) is relatively more elastic than a demand curve that has a steeper slope. d. All of the above are true.

d. All of the above are true.

Which of the following statements is correct? a. In order to maximize profits in the short run, a price taker should always produce at the output level where marginal cost is equal to price. b. In long-run equilibrium, a price taker will produce at an output level where average total cost is at its minimum. c. A price taker will remain open in the short run, even if it is earning an economic loss, so long as price is sufficient to cover average variable cost. d. All of the above are true.

d. All of the above are true.

Which of the following factors would not shift the cost curves of an automobile company upward? a. a regulation requiring all automobiles be equipped with improved safety equipment b. an increase in the price of steel used to make automobiles c. an increase in the property tax on buildings and equipment used by the automobile company d. An employee develops a new method of installing doors on the cars that requires half as many workers as before.

d. An employee develops a new method of installing doors on the cars that requires half as many workers as before.

Which of the following is true? a. When firms in a price-taker market are earning zero economic profit, they will shut down. b. When firms in a price-taker market are earning positive economic profits, new firms will enter the industry causing the market price to fall until the firms in the industry are earning only zero economic profit. c. When firms in a price-taker market are earning economic losses, some firms will exit the industry causing the market price to rise until the remaining firms are earning zero economic profit. d. Both b and c are true.

d. Both b and c are true.

Which of the following is not a fundamental that underlies consumer behavior? a. Goods can be substituted for one another. b. Consumers make decisions purposefully based upon past experience and knowledge. c. The law of diminishing marginal utility applies to all goods. d. Consumers always make choices with perfect information.

d. Consumers always make choices with perfect information.

Which of the following costs is most likely to be an implicit cost of the Oakland Athletics Baseball Organization? a. The property taxes they have to pay on the equipment the baseball franchise owns. b. The salary of the baseball players. c. The travel expenses of the team when it goes to play games on the road. d. The foregone interest the owner of the team would earn if he invested the money used to run the organization, rather than using it to operate a baseball franchise.

d. The foregone interest the owner of the team would earn if he invested the money used to run the organization, rather than using it to operate a baseball franchise.

The law of diminishing returns indicates why a. beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller amounts of additional satisfaction. b. the firm's total fixed costs do not change with output in the short run. c. a firm's long-run average total cost curve is U-shaped. d. a firm's marginal costs will eventually increase as the firm expands output in the short run.

d. a firm's marginal costs will eventually increase as the firm expands output in the short run.

A car wash currently sells 30 car washes a day at a price of $5. Total daily revenue is now $150. If they lower their price to $3, a. total revenue will fall if the number of washes sold only rises to 40. b. total revenue will remain unchanged if the number of washes sold rises to 50. c. total revenue will increase if the number of washes sold rises to 60. d. all of the above are true.

d. all of the above are true.

If consumers suddenly began desiring more apples and fewer oranges, a. the market price of apples would rise, creating short-run economic profits in the apple industry. Current firms will expand output and new firms will enter the industry. b. the market price of oranges would fall, creating short-run economic losses in the orange industry. Current firms will reduce output and some will go out of business in the long run. c. neither a nor b are correct. d. both a and b are correct.

d. both a and b are correct.

The law of diminishing returns states that a. as we continually add variable factors to a fixed amount of other resources, output eventually increases at a decreasing rate. b. as we increase plant size, costs must diminish. c. the additional output generated by the employment of additional units of a variable input eventually decline. d. both a and c are correct.

d. both a and c are correct.

For a price-taker firm, marginal revenue is a. equal to price. b. equal to zero when the market is in long-run equilibrium. c. equal to the change in total revenue divided by the change in output. d. both a and c.

d. both a and c.

"I love fast food burgers, but after eating nothing but fast-food hamburgers on spring break, I was anxious to return home and eat something different." This statement most clearly reflects the law of a. the budget constraint. b. consumer irrationality. c. greater demand elasticity with time. d. diminishing marginal utility.

d. diminishing marginal utility.

When a firm increases its plant size in the long run and its per-unit costs fall, this is called a. diminishing returns and is shown by the downward-sloping portion of the MP curve (or the upward-sloping portion of the MC curve). b. constant returns to scale and is shown by the flat portion of the LRATC curve. c. diseconomies of scale and is shown by the upward-sloping portion of the LRATC curve. d. economies of scale and is shown by the downward-sloping portion of the LRATC curve.

d. economies of scale and is shown by the downward-sloping portion of the LRATC curve.

Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry a. has an income elasticity of two. b. is a normal good. c. is a luxury good. d. is all of the above.

d. is all of the above.

A 10 percent increase in the price of sugar decreases the total revenue collected by Sugar producers by about 5 percent. This means that sugar a. is an inferior good. b. has a price elasticity of demand equal to 0.5 c. is considered to be inelastic d. is considered to be elastic.

d. is considered to be elastic.

The firm's average total costs will be a minimum at the output level where the a. average variable costs will be at a minimum. b. marginal costs are a minimum. c. firm's average fixed costs are at their minimum. d. marginal cost curve crosses the firm's average total cost curve.

d. marginal cost curve crosses the firm's average total cost curve.

An inferior good is distinguished by a a. negative price elasticity of demand. b. positive price elasticity of demand. c. positive income elasticity of demand. d. negative income elasticity of demand.

d. negative income elasticity of demand.

If firms in a price-taker industry were forced to install antipollution devices that increased their production costs, we should expect a. the cost curves for the firms in this industry to shift downward. b. the market price of the product to decrease. c. that the firms in the industry would suffer long-run economic losses. d. that the firms in the industry would earn normal economic profits in the long run, as the higher production costs were passed along to consumers in the form of higher prices.

d. that the firms in the industry would earn normal economic profits in the long run, as the higher production costs were passed along to consumers in the form of higher prices.

"I love to eat ice cream, but after eating three straight bowls of ice cream, I want to eat something else right now." This statement most clearly reflects a. the budget constraint. b. consumer irrationality. c. the second law of demand: Price elasticity increases with time. d. the law of diminishing marginal utility.

d. the law of diminishing marginal utility.