ECON 1203 EXAM 2

When comparing the accounting profit with economic​ profit, it must be true that the accounting profit is ___ economic profit

greater than or equal to

early in 2012, starbucks, a global coffee house company, raised the prices of some of its beverages in certain parts of the country, mostly the Northeast and the southern states. While some thought that this was not a good idea, most analysts agreed that the price increase would not adversely affect its revenues. What would have to be true for the analysts' claim (that Starbucks' revenues would not fall) to hold?

-a perception on the part of customers that few good substitutes exist for starbucks coffee - starbucks beverages will represent a relatively small fraction of people's budget share - a very limited time horizon on the part of those analysts that expected no adverse revenue effects

the price elasticity of demand for good is likely to be less elastic ___

-the lower the budget share spent on the good -the smaller the number of close substitutes for the good -the shorter the available time during which consumers can adjust

elasticity of supply will be greater

-the more inventory the firm has - the more easily the firm can hire workers -the longer the time horizon

goal of the seller: maximize profit

1. How to make the product 2. What is the cost of making the product 3. How much can the seller get for the product in the market

three measures of elasticity

1. price of elasticity 2. cross-price elasticity of demand 3. income elasticity of demand

the buyers' problem

1. what do you like? "biggest bang for our buick" 2. How much does it cost? "Prices are fixed 3. How much money do you have? "There's no saving or borrowing, only buying. We only purchase whole units

sellers in the market produce identical good

an individual seller can't influence the market price due to selling a unique product (e.g if all products are the same, a seller can't charge a higher price for his/her product since there are many other producers selling exactly the same thing?

closeness of substitutes

as the # of available substitutes grows, the price elasticity of demand increase

budget share spent on the good

as you spend more of your budget on a good, the price elasticity of demand increases

When the ATC curve is decreasing, we know that the MC curves is ___ and when the ATC curve is increasing, we know that MC is ___

below the ATC curve; above the ATC curve

in a perfectly competitive marker, a seller ___ choose to raise the price of its good since all sellers in the market produce ____, so raising the price would result in ____

cannot; identical goods; losing all its customers

variable cost

changes as the level of output changes

elasticity differences

closeness of substitutes budget share, spent on the good

if a cross price elasticity negative, then the two goods are

complements

available time to adjust

consumers in general, respond much less to price changes in the short run than in the long run

if a firm is using inputs it must be incurring ___

costs of production

___ is how quantity demanded for one good changes when the price of a substitute or complement good changes

cross-price elasticity

suppose​ Hershey's increases the price of its chocolate syrup by 14 percent. In​ response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of​ Breyer's vanilla ice cream falls by 3 percent. the cross price elasticity of demand between Hershey's syrup and Breyer's vanilla ice cream is ___ implying these two goods are ___

negative; complements

no buyer or seller is big enough to influence the market price

no one can change the market price with his/her behavior (e.g if a seller wants to withhold product in an attempt to drive up market price, will be unable to do so because one seller is a small part of the market)

suppose​ Hershey's increases the price of its chocolate syrup by 14 percent. In​ response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of​ Breyer's vanilla ice cream falls by 3 percent. Suppose that incomes rise by 9 percent given the price change cited above. As a​ result, Hershey's experiences a 5 percent increase in sales volume. Given this​ information, Hershey's syrup is .

normal good

ed= infinite

perfectly elastic

there is free entry and exit in the market

sellers can respond to potential profits in a market by entering or can leave markets that are no longer profitable both of which have implications on market price (e.g if many firms leave a market, the supply curve will shift "that's one of the determinants" and market price will increase)

___ is total cost= variable cost + fixed cost

short-run

ed=1

unit elastic

all firms in a perfectly competitive market are said to be

price takers

cross-price elasticity formula

% of change in quantity demand of g*x (divided by) % of change in price of goo y

fixed cost

do not change as output changes

What is the difference between accounting profit and economic​ profit?

economic profit subtracts both explicit and implicit costs from total revenue while accounting profit only subtracts explicit cost

ed>1

elastic

Under which of the following examples is it likely that the accounting profit is positive and the economic profit is​ negative?

If you open an amusement park in the middle of New York City

given that burgers and fries are complementary goods, if the price of fires decreases the demand for both goods will rise. Is this an accurate statement

It is somewhat inaccurate,as the statement claims increase the demand for burgers

Which of the following equations calculates the profits of a​ firm

Total revenues- Total costs

elasticity

a measure of how sensitive one variable is to changes in another

price elasticity of supply

how responsive producers are to changes in the market price

example of substitutes

iPhone would be a substitute for an IPod & both are music devices; as the prices of an ipod increases, you might just buy an iPhone instead

luxury goods

increase in income causes a bigger % increase in demand; increase more than proportionally as income rises and is a contrast to a "necessity good" E>1

ed<1

inelastic

if the income elasticity of demand for a good is negative, the good is

inferior

variable factor of production

inputs that can change in a certain period of time and that change if the level of output changes

fixed factor of production

inputs that cannot be changed in the short run and that stay the same regardless of how much outputs is produced

During an economic​ slump, what pricing strategy could a​ fast-food firm such as​ McDonald's have to use to maintain its​ sales?

lower prices to counteract an expected drop in sales since its products are normals goods

Tammi is working on a school report on the proposed merger between American Airlines and U.S. Airways. She finds that U.S.​ Airways' annual revenue for 2012 rose by 5.35.3 percent over the previous​ year, while the revenue for American Airlines recorded an increase of almost 2.62.6 percent. Based on​ this, she concludes​ that, in​ 2012, passenger traffic must have increased more for U.S. Airways than for American Airlines American Airlines. Is Tammi​'s conclusion​ correct? Explain your answer.

no, since total revenue is the product of price and quantity. Knowing only that revenue has increased says nothing about the reasons behind the increase

price of elasticity of demand (Ed)

percentage change in quantity demand (divided by ) percentage change in price

ed= 0

perfectly inelastic

long run

period of time where all of the firm's inputs can change (e.g you can buy another oven even build another kitchen)

short run

period of time where some of the firm's inputs cannot be changed (e.g you can't buy another oven)

for two goods that are substitutes, the cross-price elasticity of demand will be

positive

Suppose​ Hershey's increases the price of its chocolate syrup by 14 percent. In​ response, the quantity demanded of Nesquik chocolate syrup rises by 10 percent and the quantity demanded of​ Breyer's vanilla ice cream falls by 3 percent. the cross-price elasticity of demand between Hershey's syrup and Nesquick's syrup is ___ implying these two goods are ___

positive; substitutes

is the most important incentives that economists study

price

total revenue

price x quantity sold

normal goods

quantity demand is directly related to income ; when income rises. consumers buy more of a E>0

inferior

quantity demand is inversely related to income; when income rises. consumers buy less of an E>0

if a cross elasticity positive, then the two goods are

substitutes

revenue

the amount of money the firm brings in from the sale of it products

shut down

the decision to stop producing in the short run occurs if price falls below AVC

producer surplus

the difference between the price the firm wold be willing to accept and the market price.

consumer surplus

the difference between what you are willing to pay and what you have to pay (the market price)

two goods are complement when

the fall in the price of one leads to a right shift in the demand curve for another

income elasticity of demand

the percentage change in quantity demanded of a good due to a percentage change in the consumer's income (formula - % of quantity demand / % change in income)

example of complement

the price of iPods fall, you want more of them but demand of headphones will increases too.

prices allows us to formally define __

the relative costs of goods

accounting profit

total revenue- total cost (explicit only)

profit

total revenue-total costs

economic profit

total revenue-total costs (explicit + implicit)

substitutes

when the rise in the price of one leads to a right shift in the demand curve for other.`

is it possible for accounting profit to be positive and economic profit to be negative?

yes, this could occur if explicit costs were modest and implicit costs were high