Economics Final

Which of the following is NOT true of a perfectly competitive firm?

It seeks to maximize revenue.

What might cause a decrease in current supply of a product?

New information that leads sellers to believe that the product's price will rise in the future

Which of the following statements about explicit costs is true?

They appear on the firm's balance sheet.

Which of the following would not be studied in microeconomics?

Whether the federal budget should be balanced.

In a market with barriers to entry:

economic profit will not fall to zero in the long run.

When the price of a good rises, marginal utility per dollar spent on that good ______, leading consumers to purchase ______ of that good.

falls; less

When the demand for a good is inelastic, that good is likely to have

few close substitutes

In general, individuals and nations should specialize in producing goods ______ other individuals or nations.

for which they have a lower opportunity cost compared to

The market equilibrium quantity:

is sometimes the socially optimal quantity.

The buyer's reservation price for a particular good or service is the

largest price the buyer would be willing to pay for it.

A market equilibrium:

leaves no unexploited opportunities for individuals.

The price elasticity of supply for the Hope Diamond is zero because there is only one. Therefore, the supply curve for the Hope Diamond is

perfectly inelastic.

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it's clear that this firm:

should not shut down if its total variable cost is less than $750.

If cross-price elasticity of demand between two goods is positive, the two goods are:

substitutes.

Economic rent is:

the difference between the payment made to the owner of a factor of production and the owner's reservation price.

Which of the following factors will lead to a decrease in the current supply of a good?

A belief that the price of a good or service will go up in the future

Which of the following will cause an increase market supply?

A technological innovation that lowers the marginal cost of producing the good.

At her current level of consumption, Jess gets half as much marginal utility from an additional bagel as from an additional muffin. If the price of muffin is $2 each, then Jess is maximizing her utility if the price of a bagel is:

$1

You have two options for how to spend the afternoon. You can either go see a movie with your roommate or work as a tutor for the Math Department. From experience, you know that going to see a movie gives you $20 worth of enjoyment, and with your student discount, a movie ticket only costs $12. If you spend the afternoon working as a math tutor, you will get paid $45. On a typical day, you wouldn't be willing to spend the afternoon working as a math tutor for less than $35. What is your opportunity cost of seeing a movie this afternoon?

$22

What is Kamryn's opportunity cost of going to the movies?

$33

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:

$35

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. For Christine to earn a normal profit as a consultant, her accounting profit would have to be ______.

$40,000

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfare is $600, but you have a frequent-flyer coupon worth $500 that you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1,400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfare is $450. What is the opportunity cost of using the coupon for the Miami trip?

$450

For the fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat 100 meals, your marginal cost of the 100th meal is:

0

Suppose an increase in the price of hamburger from $3 to $4 leads to an increase in quantity supplied from 100 units to 150 units. At the original price, the price elasticity of supply for hamburgers is ______ so supply is ______.

3/2; elastic

Assume both the demand for beef and the supply of beef decrease. Which of the following outcomes is certain to occur?

The equilibrium quantity of beef will fall.

A decrease in both the equilibrium price and the equilibrium quantity of rice is best explained by

a decrease in the demand for rice.

Chris has a one-hour break between classes every Wednesday. Chris can either stay at the library and study or go to the gym and work out. The decision Chris must make is:

an economic problem because Chris has only one hour, and engaging in one activity means giving up the other.

According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result often will be:

an efficient allocation of resources.

Suppose that the technology used to manufacture laptops has improved. The likely result would be:

an increase in supply of laptops.

Consider a graph of a production possibilities curve. If a producer is operating at an inefficient point, then that producer:

can produce more of one good without producing less of the other good.

In an industry with free entry and exit, positive economic profit:

cannot be sustained indefinitely.

In general, individuals and nations should specialize in producing those goods for which they have a(n):

comparative advantage.

If the absolute value of the price elasticity of demand for cell phone service is 3, then if the price of cell phone service increases by 1 percent, quantity demanded would:

decrease by 3 percent

The allocative function of price is to:

direct resources away from markets that are overcrowded and toward markets that are underserved.

One reason the demand curve slopes ______ is that as prices fall ______.

downward; more people find that the price is now less than their reservation price.

At the beginning of the fall semester, college towns experience large increases in their populations, causing a(n):

increase in the demand for apartments.

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient.

If the San Diego Opera decreases the price of their opera tickets and their total revenue falls, then this suggests that, at the original price, the demand for tickets to the San Diego Opera was:

inelastic.

Suppose that the short-run price elasticity of demand for electricity is 0.03, and the long-run price elasticity of demand is 1.2. One would classify the short-run elasticity as being ___________ and the long-run elasticity as being ____________.

inelastic; elastic

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. You got ______ utility from eating the fourth pie than from eating the second pie.

less

The No-Cash-on-the-Table Principle states that there are

never unexploited opportunities available to individuals in equilibrium.

If the demand for a good decreases as income decreases, then the good is a(n):

normal good

One reason there is political opposition to international trade is that:

not everyone benefits from trade.

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ______ in the short run, and will ______ in the long run.

not shut down; exit the industry

A price ceiling that is set below the equilibrium price will cause:

producer surplus to fall.

Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this year, Casey did not plant any vegetables and went to work at a bank instead. If Casey's decision to change careers did not affect the price of vegetables at the farmers market, then this suggests that:

the market for vegetables is perfectly competitive.

If consumers respond to a 10% price reduction by buying twice as much of a particular good, we would conclude that:

the price elasticity of demand at the original price was greater than one.

The Principle of Increasing Opportunity Costs states that:

when increasing production, resources with the lowest opportunity costs should be used first.

A price ceiling that is set above the equilibrium price:

will have no effect on the market.

Relative to her next best alternative, what is Kamryn's economic surplus from going to the movies?

$-3

A perfectly elastic demand curve has a slope of ______ while a perfectly inelastic demand curve has a slope of ______.

0, infinity

Assume point A on a linear production possibilities curve represents the combination of 12 coffees and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis. The opportunity cost of a cup of coffee is:

1/3 of a cappuccino

Which of the following statements is true?

Accounting profit is greater than or equal to economic profit.

If Al has an absolute advantage over Beth in preparing meals, then:

Al can prepare more meals in a given time period than Beth.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product.

Which of the following statements best expresses why economic efficiency should be society's first goal?

Efficiency maximizes total economic surplus and thereby allows other goals to be more easily achieved.

Which of the following would not be studied in macroeconomics?

How a sharp increase in gasoline prices is likely to affect SUV sales.

Kamryn is deciding between three potential activities on Saturday evening: 1) Staying at home and watching her favorite television show, an activity that she values at $18 and that entails no out-of-pocket costs. 2) Going to the movies with her sister to see the latest blockbuster action film, an activity she values at $30 and that entails $15 in out-of-pocket costs. 3) Going out to dinner with her best friend, an activity she values at $40 and that entails $23 in out-of-pocket costs. a) Which activity should Kamryn choose?

Staying at home and watching her favorite show

Suppose quantity demanded is given by Qd = 100 - P, and quantity supplied is given by Qs = 20 + 3P. In this case, equilibrium price, P*, and equilibrium quantity, Q*, are as follows:

P*= 20, Q*= 80

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his economic surplus by attending:

State College

The championship game will be held next weekend in your college's 40,000-seat stadium. The supply of tickets to the game:

is perfectly inelastic.

During times of high unemployment, colleges often observe an increase in enrollment even if tuition remains unchanged. Why?

The opportunity cost of attending college is lower when unemployment is high.

Which of the following best explains why you are more likely to see a poor person than a wealthy person picking up aluminum cans to sell?

The opportunity cost of picking up cans is higher for wealthy people than for poor people.

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm's owners.

If crude oil is a variable factor of production for a firm, then an increase in the price of crude oil will lead to:

a decrease in the firm's supply.

The long run is best defined as:

a period of time sufficiently long that all factors of production are variable.

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed.

Choosing to study for an exam until the extra benefit (e.g., improved score) equals the extra cost (e.g., the value of foregone activities) is:

an application of the Cost-Benefit Principle

According to the law of diminishing marginal utility:

as you consume less of something, your marginal utility from consuming that good will increase

Satellite TV is a close substitute for cable TV. In the 1990's, small satellite TV units were developed that made it less costly for individual consumers to subscribe to satellite TV service. This caused the price elasticity of demand for cable TV service to:

become more elastic.

The price elasticity of demand is typically expressed as a positive number because:

it's convenient to use absolute values.

The marginal cost of an activity is the:

change in the total cost of the activity that results from carrying out an additional unit of the activity.

If the demand for gadgets increases as a result of a decrease in the price of widgets, the widgets and gadgets are:

complimentary goods

The responsiveness of the quantity demanded of one good to a change in the price of a different good is measured by the:

cross-price elasticity of demand.

If a firm shuts down in the short run, then its:

economic loss will equal its fixed costs.

Suppose the price P on a given demand curve results in a price elasticity of demand equal to 1. Any price higher than P will lie on the ______ part of the demand curve, and any price lower than P will lie on the ______ part of the demand curve.

elastic; inelastic

The Scarcity Principle applies to:

everyone

Suppose that when the price of oranges is $3 per pound, the quantity demanded is 4.7 tons per day and the quantity supplied is 3.9 tons. In this case:

excess demand will lead the price of oranges to rise.

If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should:

expand output to earn greater profits or smaller losses.

An increase in the price a firm receives for its output will lead the firm to:

expand output.

To produce 150 units of output, a firm must use 3 employees per day. To produce 300 units of output, the firm must use 8 employees per day. Apparently, the firm is:

experiencing diminishing returns.

One difference between the long run and the short run in a perfectly competitive industry is that:

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.

It takes many years to train to become an orthopedic surgeon. This suggests that, in the short run, a sudden increase in the demand for orthopedic surgeons will:

have little effect on the number of trained orthopedic surgeons.

The fundamental reason firms outsource is that:

hiring low-wage workers overseas reduces firms' costs.

A price-taker faces a demand curve that is:

horizontal at the market price.

Barriers to entry are forces that:

limit new firms from joining an industry.

A study of the impact of various government policies on economic growth would be considered:

macroeconomics.

The rational spending rule is derived from the consumer's desire to:

maximize utility.

Explicit costs

measure the payments made to the firm's factors of production.

For two goods, coffee and scones, suppose that MU(coffee)/P(coffee) = 4 and MU(scones)/P(scones) = 3. To maximize your total utility from these two goods, you should purchase:

more coffee and fewer scones

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that:

positive economic profit is only possible in the short run.

Suppose rice is a normal good. If consumers' incomes fall, and a new technology is introduced that lowers the marginal cost of producing rice, then the equilibrium:

price of rice will fall, but we cannot say for sure what will happen to the equilibrium quantity.

A graph that illustrates the maximum amount of one good that can be produced for every possible level of production of the other good is called a:

production possibilities curve.

Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should:

purchase less than 20 units of good X and more than 25 units of good Y.

The price elasticity of demand for a good measures the responsiveness of:

quantity demanded to a 1 percent change in price of that good.

The dollar price of a good relative to the average dollar price of all other goods is the good's:

real price.

Oil and oil products remain the main fuel for cars, planes, ships, and power plants. The amount of oil still in the earth is finite. Given this information, the supply of gasoline is:

relatively inelastic.

All else equal, the jobs that are the least likely to be outsourced are those that:

require face-to-face communication.

Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 is her:

reservation price.

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

resources; satisfaction

Assume that the production technology required to produce goods X and Y is very similar. If a firm that is producing good X notices that the market price of good Y is rising, it will:

shift into producing good Y.

A seller's reservation price is generally equal to:

the seller's opportunity cost of producing an additional unit.

When a market is in equilibrium:

there is neither excess demand nor excess supply.

Superstar professional athletes can sustain their economic rents because:

they have unique talents that they can sell to the highest bidder.

The sum of producer surplus and consumer surplus is:

total surplus.

The term marginal utility denotes the amount by which ______ changes when consumption changes by ______ unit(s).

total utility; 1

Points that lie outside the production possibilities curve are ______, and points that lie inside the production possibilities curve are ______.

unattainable; attainable

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs.

Suppose Juliana owns a small business making handbags. Each month she makes 18 handbags, which she sells for $100 each. The materials used to make each handbag cost $50. In addition, Juliana uses a spare room in her house to make the handbags and store her supplies. If she were not using the spare room for her business, she would use it as a guest room, an option that Juliana would value at $250 per month. If Juliana weren't making handbags, she would work at Trader Joe's earning $800 per month. What is Juliana's economic profit each month?

−$150

Suppose it takes Dan 5 minutes to make a sandwich and 15 minutes to make a smoothie, and it takes Tracy 6 minutes to make a sandwich and 12 minutes to make a smoothie. Which of the following statements is correct?

Dan should specialize in sandwiches, and Tracy should specialize in smoothies.