ECON 150 Exam 2 Study Guide

Answer the question on the basis of the following total utility data for products L and M. Assume that the prices of L and M are $3 and $4 respectively and that the consumer's income is $18. Refer to the data. How many units of the two products will the rational consumer purchase?

2 of L and 3 of M

The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:

20 percent reduction in price.

The law of diminishing returns indicates that:

as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.

The basic difference between the short run and the long run is that:

at least one resource is fixed in the short run, while all resources are variable in the long run.

The total revenue test for elasticity:

does not apply to supply because price and total revenue always move together.

The price elasticity of demand of a straight-line demand curve is:

elastic in high-price ranges and inelastic in low-price ranges.

Most demand curves are relatively elastic in the upper-left portion because the original price:

from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.

If the price of product X rises, then the resulting decline in the amount purchased will:

increase the marginal utility of the last unit consumed of this good.

The diagram shows the short-run average total cost curves for five different plant sizes of a firm. The shape of each individual curve reflects:

increasing returns, followed by diminishing returns.

A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the:

more inelastic the demand for the product.

Production costs to an economist:

reflect opportunity costs.

Marginal product is:

the increase in total output attributable to the employment of one more worker.

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes:

the law of diminishing returns.

When diseconomies of scale occur:

the long-run average total cost curve rises.

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:

the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.

Normal profit is:

the return to the entrepreneur when economic profits are zero.

Average fixed costs for a given level of output can be determined graphically by:

the vertical distance between ATC and AVC.

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Refer to the data. Diminishing marginal returns become evident with the addition of the:

third worker.

Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30. This firm's:

total cost is $270.

Where total utility is at a maximum, marginal utility is:

zero

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question. Refer to the information. The marginal cost of the third unit of output is:

$15

Refer to the data. The total variable cost of producing 5 units is:

$37

The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium?

$6 and $4

Refer to the data. The average fixed cost of producing 3 units of output is:

$8

Which of the following is correct? (a) If the demand for a product is inelastic, a change in price will cause total revenue to change in the opposite direction. (b) If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction. (c) If the demand for a product is inelastic, a change in price may cause total revenue to change in either the opposite or the same direction. (d) The price elasticity coefficient applies to demand, but not to supply.

(b) If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction.

Which of the following statements is not correct? (a) If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic. (b) In the range of prices in which demand is elastic, total revenue will diminish as price decreases. (c) Total revenue will not change if price varies within a range where the elasticity coefficient is unity. (d) Demand tends to be elastic at high prices and inelastic at low prices.

(b) In the range of prices in which demand is elastic, total revenue will diminish as price decreases.

Which of the following is not correct? (a) Where marginal product is greater than average product, average product is rising. (b) Where total product is at a maximum, average product is also at a maximum. (c) Where marginal product is zero, total product is at a maximum. (d) Marginal product becomes negative before average product becomes negative.

(b) Where total product is at a maximum, average product is also at a maximum.

Which of the following is correct? (a) There is no relationship between MP and MC. (b) When AP is rising MC is falling, and when AP is falling MC is rising. (c) When MP is rising MC is rising, and when MP is falling MC is falling. (d) When MP is rising MC is falling, and when MP is falling MC is rising.

(d) When MP is rising MC is falling, and when MP is falling MC is rising.

Answer the question on the basis of the following two schedules, which show the amounts of additional satisfaction (marginal utility) that a consumer would get from successive quantities of products J and K. Refer to the data. What level of total utility is realized from the equilibrium combination of J and K, if the consumer has a money income of $52 and the prices of J and K are $8 and $4 respectively?

276 utils

Refer to the data. The marginal cost curve would intersect the average variable cost curve at about:

4 units of output.

Refer to the data. The average product (AP) when two units of labor are hired is:

9

Refer to the data. The average total cost of five units of output is: AFC ($10) and AVC ($68)

ATC is $78

Refer to the data. Which of the following is correct? Price: $6 5 4 3 2 1 Quantity Demanded: 1 2 3 4 5 6

Although the slope of the demand curve is constant, price elasticity declines as we move from high to low price ranges.

(Consider This) Which of the following is an example of a sunk cost, as it relates to a firm?

An expenditure on a nonrefundable, nontransferable airline ticket.

Refer to the diagram. At output level Q total fixed cost is:

BCDE.

Which of the following is correct? (a) If demand is elastic, an increase in price will increase total revenue. (b) If demand is elastic, a decrease in price will decrease total revenue. (c) If demand is elastic, a decrease in price will increase total revenue. (d) If demand is inelastic, an increase in price will decrease total revenue.

If demand is elastic, a decrease in price will increase total revenue.

In which of the following instances will total revenue decline?

Price rises and demand is elastic.

In which of the following cases will total revenue increase?

Price rises and demand is inelastic.

In the diagram, total product will be at a maximum at:

Q3 units of labor.

Which of the following cognitive biases refers to people's tendency to attribute their successes to personal ability and effort, and failures to forces outside their control?

Self-serving bias.

Susie buys two goods: rounds of golf and massages. Suppose that the price of a round of golf is $20 and the price of a massage is $30. In a typical week, Susie will play two rounds of golf, getting 20 units of satisfaction from the second round. She normally buys three massages each week, with the third giving her 30 units of satisfaction. If she were to buy a fourth massage in a week, it would give her 20 units of satisfaction. If the price of massages is reduced to $15, which of the following outcomes might we expect to occur?

Susie would buy more massages and fewer rounds of golf, as predicted by the substitution effect.

In the short run:

TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate.

Variable costs are costs that change directly with output.

True

Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of:

W and Y.

Refer to the data. The value for Y is: Units Consumed: 0 1 2 3 4 Total Utility: o W 30 Y 40 Marginal Utility: - 20 X 10 Z

Y is 45

In the long run:

all costs are variable costs.

When the percentage change in price is greater than the resulting percentage change in quantity demanded:

an increase in price will increase total revenue.

Fixed cost is:

any cost that does not change when the firm changes its output.

In the short run the Sure-Screen T-Shirt Company is producing 500 units of output. Its average variable costs are $2.00 and its average fixed costs are $.50. The firm's total costs:

are $1,250.

The law of diminishing marginal utility states that:

beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer.

Marginal cost is the:

change in total cost that results from producing one more unit of output.

Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from:

confirmation bias.

Average fixed cost:

declines continually as output increases.

If the demand for farm products is price inelastic, a good harvest will cause farm revenues to:

decrease

If the demand for product X is inelastic, a 4 percent increase in the price of X will:

decrease the quantity of X demanded by less than 4 percent.

Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded:

decreased by 7 percent.

The law of diminishing marginal utility explains why:

demand curves slope downward.

To economists, the main difference between the short run and the long run is that:

in the long run all resources are variable, while in the short run at least one resource is fixed.

Fixed costs are associated with:

in the short run only.

If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:

increase the amount demanded by more than 10 percent.

The minimum efficient scale of a firm:

is the smallest level of output at which long-run average total cost is minimized.

If the income elasticity of demand for lard is −3.00, this means that:

lard is an inferior good.

If in the short run a firm's total product is increasing, then its:

marginal product could be either increasing or decreasing.

To maximize utility, a consumer should allocate money income so that the:

marginal utility obtained from the last dollar spent on each product is the same.

We would expect the cross elasticity of demand between dress shirts and ties to be:

negative, indicating complementary goods.

The diagram shows two product demand curves. On the basis of this diagram, we can say that:

over range P1P2 price elasticity of demand is greater for D1 than for D2.

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the:

overconfidence effect.

According to the "endowment effect:"

people assign higher values to things they own than things they don't.

If quantity demanded is completely unresponsive to price changes, demand is:

perfectly inelastic.

When total product is increasing at a decreasing rate, marginal product is:

positive and decreasing.

Assume that a 4 percent increase in income across the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:

positive and therefore X is a normal good.

We would expect the cross elasticity of demand between Pepsi and Coke to be

positive, indicating substitute goods.

According to behavioral economists, someone suffering from myopia is most likely to:

spend too much on present consumption and not save enough for the future.

According to prospect theory, people tend to favor default options. This is known as the:

status quo bias.

Total utility may be determined by:

summing the marginal utilities of each unit consumed.