ECON Test 3

Which of following is a key assumption of a perfectly competitive market?

Each seller has a very small share of the market.

Why do firms tend to experience decreasing returns to scale at high levels of output?

Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output.

Which of following is an example of a homogeneous product?

Gasoline and Copper

The demand for books is: Qd = 120 - P The supply of books is: Qs = 5P 19) Refer to Scenario 1. If P = $25, which of the following is true?

There is a surplus equal to 30.

Which always increase(s) as output increases?

Total Cost and Variable Cost

Which of the following claims is true at each point along a price-consumption curve?

Utility is maximized, and all income is spent.

Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

When there are few firms in the market and the demand curve faced by each firm is relatively inelastic.

Coffee and cream:

are complements.

In a supply-and-demand graph, producer surplus can be pictured as the

area between the equilibrium price line and the supply curve to the left of equilibrium output.

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

barrier to entry

In a short-run production process, the marginal cost is rising and the average total cost is falling as output is increased. Thus, marginal cost is

below average total cost.

The trade-offs facing consumers include:

both A and B how to allocate income across goods and serves. B. how to allocate income between consumption and savings.

Which of the following features are relevant for determining the extent of a market?

both A and C Its geographical boundaries. The range of products to be included in it.

When the income-consumption curve has a positive slope throughout its entire length, we can conclude that

both goods are normal.

An examination of the production isoquants in the diagram below reveals that:

capital and labor will be used in fixed proportions.

A vertical demand curve is

completely inelastic.

The area below the demand curve and above the price line measures

consumer surplus.

The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called

consumer surplus.

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should

reduce output until marginal revenue equals marginal cost.

Monopoly power results from the ability to

set price above marginal cost.

Assume that steak and potatoes are complements. When the price of steak goes up, the demand curve for potatoes:

shifts to the left.

Good A is a normal good. The demand curve for good A:

slopes downward.

The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect.

substitution

The link between the productivity of labor and the standard of living is

that over the long run, consumers as a whole can increase their rate of consumption only by increasing labor productivity.

The curve in the diagram below is called: (curve that curves up with no other lines near)

the Engel curve.

The marginal product of an input is

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

The Lerner index measures

the amount of monopoly power a firm chooses to exercises when maximizing profits.

When labor usage is at 12 units, output is 36 units. From this we may infer that

the average product of labor is 3

Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect:

the demand curve for steel to shift to the right.

Producer surplus in a perfectly competitive industry is

the difference between revenue and variable cost.

The more elastic the demand facing a firm,

the lower the value of the Lerner index

According to the law of diminishing returns

the marginal product of an input will eventually decline.

If the isoquants are straight lines, then

the marginal rate of technical substitution of inputs is constant.

Refer to the following figure. Suppose that a consumer is originally at point R. Then the price of good X decreases. Which of the following represents the income effect of the price decrease?

the movement from point T to point S

The difference between the economic and accounting costs of a firm are

the opportunity costs of the factors of production that the firm owns.

The substitution effect of a price change for product X is the change in consumption of X associated with a change in

the price of X, with the level of utility held constant.

The curve in the diagram below is called (curve that goes through the other lines)

the price-consumption curve.

A supply curve reveals:

the quantity of output that producers are willing to produce and sell at each possible market price.

The demand curve facing a perfectly competitive firm is

the same as its average revenue curve and its marginal revenue curve.

The law of diminishing returns applies to

the short run only.

Marginal revenue, graphically, is

the slope of the total revenue curve at a given point.

At the optimum combination of two inputs,

the slopes of the isoquant and isocost curves are equal. costs are minimized for the production of a given output. the marginal rate of technical substitution equals the ratio of input prices.

When an industry's raw material costs increase, other things remaining the same,

the supply curve shifts to the left.

Which of the following costs always declines as output increases?

Average fixed cost

Consider the following table: Q-0 T-50 Q-1 T-60 Q-2 T-75 Q-3 T-100 What is the marginal cost of producing the second unit of output?

$ 15

Consider the following table: Q-0 T-50 Q-1 T-60 Q-2 T-75 Q-3 T-100 What is the average fixed cost of producing 2 units output?

$ 25

Consider the following table: Q-0 T-50 Q-1 T-60 Q-2 T-75 Q-3 T-100 What is the average total cost of producing 3 units output?

$ 33.33

The aggregate demand for good X is Q = 20 - P. If the price rises from P = $4 to P = $5, what is the change in consumer surplus?

$15.50

The demand curve for tickets to the George Winston concert (with special guest star, Kenny G) is given as follows: Q = 200 - 0.1P At a price of $30, what is the consumer surplus from concert tickets?

$194,045

Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can conclude that the firm's profit maximizing price is approximately

$20

Consider the following table: Q-0 T-50 Q-1 T-60 Q-2 T-75 Q-3 T-100 What is the variable cost of producing 2 units output??

$25

Suppose the market in the following figure is currently in equilibrium. If the government establishes a price of $50, what will be the deadweight loss for the economy?

$300

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately:

$40

Refer to the following figure. If the market is in equilibrium, total producer surplus is

$400.

Consider the following table: Q-0 T-50 Q-1 T-60 Q-2 T-75 Q-3 T-100 What is the fixed cost of production?

$50

Refer to the following figure. If the market is in equilibrium, total consumer surplus is

$800

Which of the following represents the price elasticity of demand?

(TriangleQ/TriangleP)(P/Q)

Refer to the following figure. In moving from the competitive level of output and price to the monopoly level of output and price, the deadweight loss is the area:

(Wrong)none of the above GFH

Suppose the market in the following figure is currently in equilibrium. If the government establishes a price of $50, what will be the change in the consumer surplus?

(wrong)Consumer surplus will decrease by $400

Question 7 Market may fail and Government intervention may be desired when

(wrong)there are costs or benefits that are external to the market.

The price elasticity of gasoline supply in the U.S. is 0.4. If the price of gasoline rises by 8%, what is the expected change in the quantity of gasoline supplied in the U.S.?

+3.2%

The demand for packs of Pokemon cards is given by the equation QD = 500,000 - 45,000P. At $5.00 per pack, what is the price elasticity of demand?

-0.818

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be

-4/5.

What is the value of the Lerner index under perfect competition?

0

Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve, and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 How much profit will she make?

1,296

The demand for books is: Qd = 120 - P The supply of books is: Qs = 5P 17) Refer to Scenario 1. What is the equilibrium quantity of books sold?

100

Suppose the market in the following figure is currently in equilibrium. If the government establishes a price of $50, how many widgets will be sold?

20

The demand for books is: Qd = 120 - P The supply of books is: Qs = 5P 16) Refer to Scenario 1. What is the equilibrium price of books?

20

Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve, and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 The price of her product will be ________.

22

The next 3 questions are based on the same information. Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve, and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 How much output will Barbara produce?

72

Consider the following table representing information on production of an output using one variable input (Labor): Q-0 T-0 Q-1 T-100 Q-2 T-190 Q-3 T-270 What is the marginal product of 2nd labor (i.e. when L=2)?

90

Consider the following table representing information on production of an output using one variable input (Labor): Q-0 T-0 Q-1 T-100 Q-2 T-190 Q-3 T-270 What is the average product of labor when L=2?

95

Microeconomics is the branch of economics that deals with which of the following topics?

A and C

Which of the following is a positive statement?

A fundamental assumption of the economic theory of consumer behavior is that consumers always prefer having more of any good to having less of it.

Which of the following will cause the price of beer to rise?

A shift to the right in the demand curve for beer B. A shift to the left in the supply curve of beer

The trade-offs facing workers include all of the following EXCEPT:

All of the above are trade-offs facing workers. decision to work or remain outside the workforce. B. decision to work or seek additional education. C. decision to work for a large corporation or a small firm. D. decision to allocate their time between work and leisure.

Which of the following would shift the demand curve for new textbooks to the right?

An increase in the number of students attending college

Which would not increase the productivity of labor?

An increase in the size of the labor force

How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1?

BCDE

Which of the following inputs are variable in the long run?

labor. capital and equipment. plant size.

The price of beef and quantity of beef traded are P and Q, respectively. Given this information, consumer surplus is the area:

CBP

Use the following two statements in answering this question: (I) All Giffen goods are inferior goods. (II) All inferior goods are Giffen goods.

I is true, and II is false.

Use the following two statements to answer this question: I) For a monopolist, at every output level, average revenue is equal to price. II) For a monopolist, at every output level, marginal revenue is equal to price.

I is true, and II is false.

Use the following two statements to answer this question: I) Production functions describe what is technically feasible when the firm operates efficiently. II) The production function shows the least cost method of producing a given level of output.

I is true, and II is false.

Which of the following is true regarding income along a price-consumption curve?

Income is constant.

Which of the following is true concerning the substitution effect of a decrease in price?

It always will lead to an increase in consumption.

Which of the following is true regarding utility along a price-consumption curve?

It changes from point to point.

Which of the following is true concerning the income effect of a decrease in price?

It will lead to an increase in consumption only for a normal good.

A firm's production function is given as: Q = 5LK, such that MPL=5K and MPK = 5L where Q = output, L = labor measured in person hours, and K = capital measured in machine hours. Labor cost, including fringe benefits, is $20 per hour, while the firm uses $80 per hour as an implicit machine rental charge per hour. Given the information above, determine Murray's optimal capital/labor ratio.

K = 1/4L

In a constant-cost industry, price always equals

LRMC and minimum LRAC.

Which of the following is NOT an expression for the cost minimizing combination of inputs?

MRTS = MPL /MPK

What describes the graphical relationship between average product and marginal product?

Marginal product cuts average product from above, at the maximum point of average product.

If current output is less than the profit-maximizing output, which must be true?

Marginal revenue is greater than marginal cost.

Which of the following is NOT true regarding monopoly?

Monopolist can charge as high a price as it likes.

Does it make sense to consider the returns to scale of a production function in the short run?

No, we cannot change all of the production inputs in the short run.

What is the maximum value of the Lerner index?

One

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as

P=MC

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?

Prices are relatively low.

For the monopolist shown below, the profit maximizing level of output is:

Q1

The demand for books is: Qd = 120 - P The supply of books is: Qs = 5P 18) Refer to Scenario 1. If P = $15, which of the following is true?

There is a shortage equal to 30.

Which of the following relationships is NOT valid?

Rising marginal cost implies that average total cost is also rising.

Which of the following is NOT associated with a high degree of monopoly power?

Significant price competition among firms in the market

Which of the following is true of cost curves?

The MC curve goes through the minimum of both the AVC curve and the ATC curve.

As a group, U.S. consumers view hamburger as a normal good at low income levels and as an inferior good at high income levels. Based on this information, which of the following statements is NOT true?

The aggregate demand curve for hamburger in the U.S. is upward sloping at low prices.

An increasing-cost industry is so named because of the positive slope of which curve?

The industry's long-run supply curve

Suppose that a firm can produce its output at either of two plants. If profits are maximized, which of the following statements is true?

The marginal cost at the first plant must equal marginal revenue. The marginal cost at the second plant must equal marginal revenue. The marginal cost at the two plants must be equal.

Which of the following markets has the most restrictive geographic boundary?

The market for housing

A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale?

The short-run average cost curve reveals nothing regarding returns to scale.

Increasing returns to scale in production means

less than twice as much of all inputs are required to double output.

A firm's expansion path is

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices. none of the above

In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of

a fixed cost.

Imposition of an output tax on all firms in a competitive industry will result in

a leftward shift in the market supply curve.

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called

a production function.

The short run is

a time period in which at least one input is fixed.

In the long run, which of the following is considered a variable cost?

all of the above

Which of the following is a normative statement?

all of the above The taxes paid by the poor should be reduced in order to improve the income distribution in the U.S. B. State governments should not subsidize corporations by training welfare recipients. C. Presidential candidates should not be given funds from the federal government to run campaigns. D. The sea otter should not be allowed to spread into Southern California coastal waters, because it will reduce the value of fisheries.

Firms face trade-offs in production, including decisions related to:

all of the above which products to produce. B. how much of a particular product to produce. C. the best way to produce a given amount of output.

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

continue to operate in both the short run and long run.

If input prices are constant, a firm with increasing returns to scale can expect

costs to go up less than double as output doubles.

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

could reduce the cost of producing its current output level by employing more labor and less capital.

Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output will tend to

decline.

Refer to the following figure. The situation pictured is one of (Q1=50 Q2=100. L 10, 20, 30. K 1, 2, 3)

decreasing returns to scale, because doubling inputs results in less than double the amount of output.

In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences

decreasing returns to scale.

A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use.

labor, capital

In long-run competitive equilibrium, a firm that owns factors of production will have an

economic profit = $0 and accounting profit > $0.

There are two techniques of egg production: free range (where hens roam around the farm) or factory (where hens are fed and watered in wire cages). The free range technique has a much more elastic supply curve than the factory technique. When the demand for eggs falls:

egg production using the factory technique falls less than with the free range technique.

Which of the following describes the Giffen good case? When the price of the good

falls, the income effect is in the opposite direction to the substitution effect, and consumption falls.

A firm's producer surplus equals its economic profit when

fixed costs are zero.

In order to maximize profits, the firm should stop producing after it makes the

fourth unit

In a competitive market, the actions of any single buyer or seller will

have a negligible impact on the market price

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

higher; smaller

The perfectly competitive firm's marginal revenue curve is

horizontal

The long-run supply curve in a constant-cost industry is linear and

horizontal.

The income-consumption curve

illustrates the utility-maximizing combinations of goods associated with every income level.

An isocost line reveals the

input combinations that can be purchased with a given outlay of funds.

An isoquant

is a curve that shows all the combinations of inputs that yield the same total output.

When the average product is decreasing, marginal product

is less than average product.

The supply curve for a competitive firm is

its MC curve above the minimum point of the AVC curve

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

less, less

The ________ elastic a firm's demand curve, the greater its ________.

less; monopoly power

The slope of the total product curve is the

marginal product.

The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the

marginal rate of technical substitution.

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost

In the long run, new firms can enter an industry and so the supply elasticity tends to be

more elastic than in the short run.

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

more, less

For most consumer goods, the price elasticity of demand is

negative regardless of the direction of the price change.

The cross-price elasticity between a pair of complementary goods will be

negative.

With respect to monopolies, deadweight loss refers to the

net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy.

Deadweight loss refers to

net losses in total surplus.

When an isocost line is just tangent to an isoquant, we know that

output is being produced at minimum cost.

Fixed costs are fixed with respect to changes in

output.

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

When supply and demand both increase, equilibrium

price may increase, decrease, or remain unchanged.

An individual demand curve can be derived from the ________ curve.

price-consumption

When the current price is above the market-clearing level we would expect:

quantity supplied to exceed quantity demanded.

When firms have an incentive to exit a competitive market, their exit will

raise the profits of the firms that remain in the market.

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the

rate at which the firm can replace capital with labor without changing the output rate.

At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that:

there are economies of scale.

The law of diminishing returns assumes that

there is at least one fixed input.

When the TR and TC curves have the same slope,

they are the furthest from each other.

If the supply of a product increases, then we would expect equilibrium price

to decrease and equilibrium quantity to increase.

Marginal product crosses the horizontal axis (is equal to zero) at the point where

total product is maximized

Higher input prices result in

upward shifts of MC and reductions in output.

For an inferior good, the income and substitution effects

work against each other.

Writing total output as Q, change in output as ΔQ, total labor employment as L, and change in labor employment as ΔL, the marginal product of labor can be written algebraically as

ΔQ / ΔL.