Econ Midterm

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If a 16 percent increase in the price of Cheerios causes a 15 percent reduction in the number of boxes of cereal​ demanded, the price elasticity of demand for Cheerios is

-.94 The demand for cheerios is inelastic

Assume world oil supply is 78 million barrels per day at a price of ​$47 per barrel. Suppose that if the price per barrel of oil increases to ​$59 per​ day, then 86 million barrels of oil will be supplied. Using the midpoint​ formula, what is the price elasticity of supply for​ oil?

.45 In this price​ range, the world supply of oil is ---inelastic---

Indicate which of the following could cause a movement from point A to C. ​(Check all that​ apply.)

A rise in buyer incomes. AND A decline in vegetarianism.

Suppose the figure to the right represents a local cattle market. What would be the effect on this market of the local government regulating a price ceiling of ​$1.00 per​ pound?

The market would have a ---shortage--- of ---20---thousand pounds.

A country will always be an exporter of a good where it has

a ---comparative advantage--- in production.

A price ceiling

does not increase the amount of the product that consumers buy because it creates a shortage.

Consider the following​ statement: ​"An increase in supply decreases the equilibrium price. The decrease in price increases​ demand." The statement is

false: decreases in price affect the quantity​ demanded, not demand.

If a consumer buys a good we know that her willingness to​ pay:

is either greater than or equal to its price.

Comparative advantage

is the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Absolute advantage

is the ability of an​ individual, a​ firm, or a country to produce more of a good or service than competitors when using the same amount of resources.

The difference between a change in supply and a change in the quantity supplied is that the latter is

produced by a change in the product's own price while the former is caused by a variety of variables other than the product's price

Compare the demand for water with the demand for wine. The demand for wine is likely

relatively more elastic because wine is a luxury.

KFC lowers the price of a bucket of fried chicken

shift the demand for McDonald's big mac hamburgers to the left

The supply curve for a firm in a perfectly competitive market in the short run is

that​ firm's marginal cost curve for prices at or above average variable cost.

Marginal benefit is

the additional benefit from consuming one more unit.

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer surplus is

the difference between the lowest price a firm would be willing to accept and the price it actually receives.

How does it differ from the consumer surplus in the markets you have studied up to this​ point? Unlike in most other​ examples, in this​ case,

the highest price a consumer is willing to pay is infinite.

Suppose instead that the demand curve shifts to the right. ​ Then, relative to the initial market​ equilibrium,

the new equilibrium price would be higher and the new equilibrium quantity would be higher.

What is the formula for the price elasticity of​ demand? The formula for the price elasticity of demand is

the percentage change in quantity demanded divided by the percentage change in price

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel. Which of the following potentially contributes to​ oil-price instability? Oil prices are relatively unstable because

the supply of oil is inelastic.

Which of the following would cause a shift in the demand curve from point A to point​ B?

A decrease in income​ (inferior good). B. An increase in income​ (normal good). C. An increase in the price of a substitute good. D. ALL THE ABOVE-- this one

The market for corn in country A is highly competitive. At the current market price of​ $5/bushel there is a shortage of​ 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these​ reports, the neighboring country B had witnessed a similar situation recently. At the same​ price, the shortage in country B was also​ 100,000 bushels and eventually the equilibrium price in B went up to​ $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices.​ This, combined with the fact that consumers in the two countries also have similar tastes and​ preferences, led the media to conclude that the price of corn in country A would soon be as high as​ $10/bushel. If the new equilibrium price turns out to be below​ $10/bushel, which of the following inferences can be​ drawn?

A. The demand curve for corn must be flatter in country A than in country B.

Identify whether each of the following statements describes a change in supply or a change in the quantity supplied.

A. To take advantage of high prices for snow shovels during a very snowy​ winter, Alexander​ Shovels, Inc., decides to increase output. --- A change in quantity supplied-- B. In the six months following Hurricane​ Katrina, production of oil in the Gulf of Mexico declined by 25 percent. ---A change in supply---

What is the difference between the average cost of production​ (ATC) and marginal cost of production​ (MC)?

ATC= TC/Q; MC= ChangeTC/ ChangeQ

Suppose France and Spain produce only cloth and wine. Assume that each country uses only labor to produce each​ good, and that the cloth and wine made in France and Spain are exactly alike. The table below shows how much each country can produce of each good with one hour of labor. Output per Hour of Labor FranceFrance 24 cloth 14 wine SpainSpain 3 cloth 9 Wine

According to the​ table, the opportunity cost to France of producing one more unit of cloth is ---.58---units of wine ​and the opportunity cost to Spain of producing one more unit of cloth is 3 units of wine. ​Thus, we can conclude that: France has a comparative advantage in producing cloth and Spain has a comparative advantage in producing wine.

How does consumer surplus change as the equilibrium price of a good rises or​ falls?

As the price of a good​ rises, consumer surplus ---decreases---​, and as the price of a good​ falls, consumer surplus ---increases---

How does producer surplus change as the equilibrium price of a good rises or​ falls?

As the price of a good​ rises, producer surplus ---increases--- and as the price of a good​ falls, producer surplus ---decreases---

In​ 1916, the Ford Motor Company sold​ 500,000 Model T Fords at a price of​ $440. Henry Ford believed that he could increase sales of the Model T by​ 1,000 cars for every dollar he cut the price. Use this information to calculate the price elasticity of demand LOADING... for Model T Fords. Use the midpoint formula in your calculation.

Assuming the price decreases by​ $1 and the quantity increases by 1000​ cars, the price elasticity of demand for Model T Fords is −.88 ​

Consider the markets for BP​ supreme-grade gasoline, all BP grades of​ gasoline, and all gasoline. For which of these three markets will demand be most​ elastic? Demand will be most elastic for

BP​ supreme-grade gasoline, then for all BP grades of​ gasoline, and then for all gasoline.

Telesca​ Inc., a manufacturer of​ telescopes, currently​ produces10,000 units per week. The​ firm's average cost of production has been declining so far. Labor is the only variable input used in production. The operations research team at this firm reports that the marginal cost of producing​ 10,000 telescopes is lower than both the average total cost and the average variable cost of production. The team believes that average cost will decrease further if production is increased beyond​ 10,000 units. When the firm manufactures a total of​ 12,000 telescopes each​ week, its average cost equals its marginal cost of production. Which of the following conclusions can most reasonably be drawn from this​ information?

Both the average variable cost and the average total cost would increase if the firm increases production beyond​ 12,000 telescopes.

The figure to the right illustrates the market for a breast​ cancer-fighting drug, without which breast cancer patients cannot survive. What is the consumer surplus in this​ market?

Consumer surplus is equal to ---infinity---

From the list​ below, select the variable that will cause the demand curve to​ shift:

Consumer Income

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31

If​ so, then beer and wine are ---substitutes--- .

When lettuce prices​ doubled, from about ​$1.45 per head to about ​$2.90​, the reaction of one consumer was quoted in a newspaper​ article: ​"I will not buy​ [lettuce] when​ it's ​$2.902.90 a​ head," she​ said, adding that other green vegetables can fill in for lettuce.​ "If bread were​ $5 a loaf​ we'd still have to buy it. But lettuce is not that important in our​ family."

For this​ consumer's household, which product has the higher price elasticity of demand bread or​ lettuce? lettuce For this​ consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or​ negative: positive

Tim mows neighborhood lawns for extra money. Suppose that he would be willing to mow one lawn for ​$1010​, a second lawn for ​$17​, and a third lawn for ​$23. Also suppose that three neighbors are interested in having their lawns mowed. Mrs. Jones would be willing to pay ​$30 to have her lawn​ mowed, Mr. Wilson would be willing to pay ​$30, and Ms. Smith would be willing to pay ​$23.

If Tim offers to mow lawns for ​$2323 ​each, what will be his producer​ surplus? ​$19. Considering Mrs.​ Jones, Mr.​ Wilson, and Ms. Smith​ together, what will be their consumer​ surplus? ​$14.

Briefly explain whether you agree with the following​ argument: ​"Unfortunately, Bolivia does not have a comparative advantage LOADING... with respect to the United States in the production of any good or​ service."

If the U.S. trades at all with​ Bolivia, then the argument above is false. There would be no trade unless both countries were made better​ off, and this would imply Bolivia has the comparative advantage in the production of at least one good or service.

Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15.

If the price of spiritsspirits increases by 10​ percent, then the quantity of beer demanded will increase by 1.5percent. In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be minus−0.09. If​ so, then beer is ---an inferior good---

​Next, suppose the demand for a mystery novel by John GrishamJohn Grisham is infinitely elastic. In this​ example, assume the initial price of the novel is ​$27.00 and the quantity demanded is 51 thousand copies per year.

If the price of the mystery novel increases by ​$1.00​, then the quantity demanded will be 0 copies per year.

Suppose the demand for a Czech novel translated into English is perfectly inelastic. Assume the initial price of the translated novel is ​26.00 and the quantity demanded is 645 copies per year.

If the price of the translated novel increases by ​$2.00​, then the quantity demanded will be 645 copies per year.

The ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as ---comparative advantage--- Referring to your answer​ above, what makes it such a powerful​ insight?

It explains why if​ individuals, firms, and countries specialize and trade they will be better off.

Why is the demand curve referred to as a marginal benefit​ curve?

It shows the maximum consumers are willing to pay for each unit of a​ product, which is a measure of their benefit from that unit.

A price ceiling is a legally determined ______ price that sellers may charge

Maximum

A price floor is a legally determined ______ price that sellers may receive.

Minimum

If the price of hot dogs falls hot dogs falls while the demand for hot dog buns rises hot dog buns rises​, is the cross-price elasticity of demand between the pair of products likely to be positive or​ negative?

Negative, Therefore, the​ cross-price elasticity of demand between ​"substitutes​" is most likely ---positive--- and the​ cross-price elasticities of demand between ​"complements​" is most likely ---negative---

A company that provides​ home-care for the elderly is able to provide monthly services for 5 patients at a total cost of ​$2,500 and monthly services for 6 patients at a cost of ​$2,800. What is the marginal cost of providing monthly services for a 6th ​patient?

The marginal cost is ​$300

Why​ isn't elasticity just measured by the slope of the demand​ curve?

The measurement of slope is sensitive to the units chosen for quantity and price

Using the numbers in the​ table, determine which country has a comparative advantage in producing each product. Output per Hour of Work Smartwatches Fitness Bracelets Switzerland 8 Smart watches 14 Fitness Bracelets Canada 5 Smart Watches 7 Fitness Bracelets Which of the following statements is​ true?

The opportunity cost for CanadaCanada to produce one Smartwatch is 1.40 Fitness Bracelet. ---Canada---should produce Smartwatches and ---Switzerland--- should produce Fitness Bracelets.

The following table shows the hourly output per worker measured as quarts of olive oil and pounds of pasta in Greece and​ Italy: Output per Hour of Work Olive Oil Pasta Greece Olive Oil 22 Pasta 11 Italy Olive Oil 33 Pasta 66

The opportunity cost of producing one more quart of olive oil in Greece is . 5 pounds of pasta. ​ The opportunity cost of producing one more quart of olive oil in Italy is 2 pounds of pasta. The opportunity cost of producing one more pound of pasta in Greece is 2 quarts of olive oil. ​ The opportunity cost of producing one more pound of pasta in Italy is .5 quarts of olive oil. ​

Consider the market for a new DVD​ movie, where the price is initially ​$2222 and 1616 copies are sold per day at a​ superstore, as indicated in the figure to the right. The superstore is considering lowering the price to ​$1818. What is the price elasticity of demand between these two prices ​(use the Midpoint Formula​)?

The price elasticity of demand is negative −2

Consider the market for a breakfast cereal. The​ cereal's price is initially ​$3.50 and 65 thousand boxes are demanded per week. The company that produces the cereal is considering raising the price to ​$4.00. At that​ price, consumers would demand 60 thousand boxes of cereal per week. What is the price elasticity of demand between these prices using the midpoint formula​?

The price elasticity of demand using the midpoint formula is −0.60

When XYZ firm entered the market for good A two years​ back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current​ $6 per unit to​ $7 per unit. Timothy​ Walters, the marketing​ head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current​ 1,200 units to 900 units. His colleague and the head of the sales​ department, Jake​ Mayers, feels that the quantity demanded would only decline by 250 units. According to​ Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share. Which of the​ following, if​ true, would imply that the firm is operating in the inelastic portion of the demand​ curve?

The quantity demanded declines by 10 percent in response to the​ $1 price increase.

Briefly explain whether you agree with the following​ statement: ​"If consumer surplus in a market​ increases, producer surplus must​ decrease."

The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss.

Briefly explain whether you agree with the following​ statement: ​"If at the current quantity marginal benefit is greater than marginal cost, there will be deadweight loss in the market. ​ However, there is no deadweight loss when marginal cost is greater than marginal​ benefit."

The statement is incorrect. If marginal cost is greater than marginal benefit​ (just as when marginal benefit is greater than marginal​ cost), there will be deadweight loss.

A student makes the following​ argument: ​"When a market is in​ equilibrium, there is no consumer surplus LOADING... . We know this because in​ equilibrium, the market price is equal to the price consumers are willing to pay for the​ good." Briefly explain whether you agree with the​ student's argument.

The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.

Consider the market for a natural​ resource, where the price is initially ​$12,000 per ton and 6,000 thousand tons are supplied. Suppose the price of the resource falls to ​$10,000 per​ ton, at which price the market supplies 4,000 thousand tons. What is the price elasticity of supply between these​ prices?

Using the midpoint​ formula, the price elasticity of supply is 2.20 As​ such, supply is ---elastic---

Suppose Nationwide increases the insurance premium they charge for their auto policies by 16 percent. In​ response, the demand for State Farm auto policies in a small town increases from 3,000 to 3,750. What is the​ cross-price elasticity of demand for State Farm auto policies in this​ town?

Using the midpoint​ formula, the​ cross-price elasticity of demand for State Farm auto policies is 1.389 In this​ instance, auto insurance from Nationwide and auto insurance from State Farm are ---substitutes---

Suppose SusanSusan is currently producing 100,000 pizzas per month at a total cost of ​$20,000.00.

What is her average total cost of​ production? .20 Now suppose SusanSusan increases production to 100,001 pizzas​, and the total cost of production increases to ​$20,000.08. What is her marginal cost of producing the 100,001 pizza​? ​ $.08 Since the marginal cost of production is less than the average total cost of​ production, the average total cost of production must be ---falling---

Suppose the total cost of producing 5,000 tennis balls is ​$50,000​, and the fixed cost is ​$20,000.

What is the variable​ cost? ​$30,000 When output is 5,000​, what is the average variable​ cost? ​$6.00. When output is 5,000​, what is the average fixed​ cost? ​$4.00 Assuming that the cost curves have the usual​ shape, the dollar difference between average total costs and average variable costs ---decreases--- as output increases.

Is it possible for average total cost to be decreasing over a range of output where marginal cost is​ increasing? Briefly explain.

Yes. If marginal cost is less than average total​ cost, then average total cost will be decreasing.

Imagine that the curves shown in the accompanying figure represent two demand curves for traditional wings​ (basket of​ six) at Buffalo Wild Wings. The movement from point A to B on D1 is caused by

a decreasea decrease in the price of baskets of traditional wings

​McDonald's distributes ​$1.00 off coupons. This will cause

a movement along the demand curve for​ McDonald's Big Mac hamburgers.

What are the key determinants of the price elasticity of demand for a​ product? The key determinants of the price elasticity of demand for a product​ are:

availability of close​ substitutes, passage of​ time, necessities versus​ luxuries, definition of the​ market, and share of the good in the​ consumer's budget. Which determinant is the most​ important? The availability of close substitutes is the most important determinant.

As the level of output​ increases, what happens to the difference between the value of average total cost and average variable​ cost?

decreases because average fixed cost decreases as output increases.

The price of Burger​ King's Whopper hamburger increases. This will cause

demand for McDonald's Big mac hamburgers to increase

The U.S. economy enters a period of decline in incomes. This will cause

demand for​ McDonald's Big Mac hamburgers to shift to the right if they are inferior goods.

The publisher of a magazine gives his staff the information in the table below. He tells​ them ​"Our costs are currently​ $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to​ $3.00 per issue. This will result in our revenue LOADING... being exactly equal to our​ cost." Current price ​$2.00 per issue Current sales ​150,000 copies per month Current total costs ​$450,000 per month In order for the​ publisher's analysis to be​ correct,

demand is perfectly inelastic.

Explain why it is true that for a firm in a perfectly competitive market that P​ = MR​ = AR. In a perfectly competitive​ market, P​ = MR​ = AR because

firms can sell as much output as they want at the market price.

Suppose the price of a substitutesubstitute to LCD televisions risesrises. What effect will this have on the market equilibrium for LCD​ TVs? The equilibrium price of LCD TVs will

increase and the equilibrium quantity will increase.

The wrist watch industry in a country is not very competitive. There are limited brands available and the existing firms use their market power to keep prices high.​ Envy, one of the leading brands in the​ market, is planning to increase the price from​ $1,000 to​ $1,100 per watch. The firm is expecting the quantity demanded to fall by only 7 percent.​ However, after the price is increased to​ $1,100, quantity demanded actually declined by 12 percent.​ Sonia, a student of​ economics, knows that the average income level in this country has increased over the last year. When actual sales of Envy watches turn out to be lower than​ anticipated, she concludes that the income elasticity of demand for Envy watches is negative. Her conclusion is flawed because

she is confusing between price elasticity of demand and income elasticity of demand


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