ECP3703 Midterm

What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%.

$11.57 [ Net present value is calculated by discounting the future cash flows from the period they were received and subtracting the initial investment from the sum of those cash flows. In this case, (50/1.1)+(80/1.12)=111.57. $111.57-$100 initial investment gives a NPV of $11.57]

Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes do not affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future?

$170,000 [ the new licensing requirements lead to a reduction in supply, which will lead to a higher equilibrium price]

An individual in the US wants to buy office equipment from England that costs 2,800 pounds. If the exchange rate is $1.92/pound, how much will it cost him in dollar terms?

$5,376 [ If 1 pound = $1.92, then to purchase 2800 pounds worth of goods, you would need 2800*1.92 = $5,736]

At the individual firm level, which of the following types of firms faces a downward-sloping demand curve?

A monopoly firm but not a perfectly competitive firm [ monopoly firms face a downward-sloping demand curve]

What might you reasonably expect of an industry in which firms tend to have economies of scale?

A small number of firms [ a few firms with large volume could be expected to capture the economies of scale]

Why might performance compensation caps be bad?

Compensation caps can discourage employees from being productive after the cap.

A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?

The company needs to increase production [ When MR>MC, you need to sell more. In this case MR=$22 is greater than MC=$18, therefore they should increase production]

If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur?

The equilibrium price would fall, and the equilibrium quantity could rise or fall. [increase in supply and decrease in demand both lead to lower price, net quantity change is unknown because the increase in supply would lead to higher quantity while the decrease in demand would lead to lower quantity]

Following an increase in Mexican interest rates relative to U.S. interest rates, which caused Mexican investors to borrow abroad to invest abroad, which of the following would occur?

The exchange rate would not be affected, and neither would Mexican prices. [ the exchange rate is only affected when the borrowed funds are then resold and used to purchase foreign currency. If they continue to invest abroad, then exchange rate and foreign prices would not be affected]

Which of the following is critical for a firm adopting a long-term cost-reduction strategy?

The methods of achieving cost reductions are difficult to imitate. [for the advantage to be sustainable, it must be difficult for rivals to imitate]

Why might a supermarket advertise low prices on certain high profile items and sell them at a loss?

The store will sell other groceries to the same customers, often at a markup.

Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in its new version of the gaming system. Microsoft is taking advantage of

economies of scope [ the cost to produce the two products together is less than the sum of the costs of producing them separately]

Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will _________ and the quantity will _________.

fall, rise [demand will increase because of the article while supply will also increase because of lower costs, if the supply shift (leading to lower prices) is greater than the change in demand (leading to higher prices), the net effect should be a fall in price while both shifts lead to a rise in quantity]

A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the economic profit for the month equals:

$240,000 [When calculating economic profit, opportunity costs are considered. Total Revenue is is $450,000 (1000 item/day*$15/item*30days), Explicit costs are given at $150,000 and the opportunity cost of labor is $60,000 ($250.hr*8hrs/day*30days). Therefore, economic profit is $450,000-$150,000-$60,000 = $240,000]

A perfectly competitive firm's profit maximizing price is $15. At MC=MR, the output is 100 units. At this level of production, average total costs are $12. The firm's profits are

$300 in the short-run and zero in the long run [ (15-12)*100. Long run profit is always driven to zero.]

A business owner makes 1000 items a day. Each day he or she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm's accounting profit for the month equals:

$300,000 [Revenue equals 1000 items per day * $15/item*30days = $450,000. Explicit costs are given as $150,000. Therefore, accounting profit = $450,000-$150,000 = $300,000]

A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire twelve workers, a wage rate of $7 per hour is sufficient. What is the marginal cost of the 13th worker?

$33. [ The total cost of having twelve workers is $84 (12workers*$7hr) while the addition of the thirteenth worker brings the total cost up to $117 (13 workers*$9/hr). Therefore, the marginal cost of the 13th worker is $33 ($117-$84)]

A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the sellers bottom line price is (rounded to the nearest thousand):

$527,000 (At a price of $527,000, the seller will receive $485,760 ($528,000*0.92) which is above his bottom line (For the exact value, look at $485,000/0.92 = $527,173.93. As the seller requires a number at or above this value, $528,000 is the best response)]

Suppose there are nine sellers and nine buyers in a competitive market, each willing to buy or sell one unit of a good, with values {$10, $9, $8, $7, $6, $5, $4, $3, $2}. Assuming no transactions costs, what is the equilibrium price in this market?

$6 [at a price of $6, five suppliers are willing to sell and five buyers are willing to buy]

A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate:

$6,000 worth of buyer surplus and $4,000 of seller surplus [Buyer surplus is calculated by looking at the difference between the buyer value and the final price ($30,000-$24,000=$6,000), while the seller surplus is calculated by looking at the difference between the final price and the seller's value ($24,000-$20,000=$4,000)]

You expect to sell 500 cell phones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per month, what is the break-even price?

$60 [Breakeven Q= FC/(P-MC). This means (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) - MC. This gives us P= (5000/500)+50 = 10+50 = $60]

Mr. D's Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is

$7. [ Total fixed costs are $5/lab ($50,000Total Fixed Cost/10,000 units), and average variable cost is given as $2/slab. Therefore average total cost (Fixed + Variable) per unit equal $5+$2=$7]

Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?

100, 150, 240 [ the cost of producing both products together (240) is less than the sum of the cost of producing them separately (250)]

You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a board. If you can sell dart boards for $100 each, what is your breakeven quantity?

17,500 [ Breakeven Q = FC/(P-MC). In this case, fixed costs are $350,000 ($100,000 equipment + $250,000 updates), the Price is given as $100 and the Marginal cost is the $80 cost per additional board. Putting these in the formula, we see that 350,000/(100-80) = 17,500]

Sarah's Machinery Company is deciding to dump their current technology A for a new technology B with small fixed costs but big marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100. At what quantity is Sarah Machinery indifferent between two technologies?

5 [ Total costs can be calculated as C=FC+VC(Q). Technology A has total costs of C=500+50(Q), while Technology B has C=250+100(Q). Sarah is indifferent at the quantity at which these two costs are the same. Therefore, setting these equations equal to each other gives us 500+50(Q) = 250 +100(Q), which allows us to solve for Q = 5]

A firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand in the US is -3, how should you adjust your price if you want to sell all of your output?

5% lower. [ %ΔQ= e(%ΔP). Therefore, an 15% increase in Q = -3(%ΔP), hence %ΔP = -5%]

A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The marginal cost per dozen is $8. The cookies are becoming more popular with customers and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be maintained to ensure that the price increase is profitable?

66.6% [ as the margin has increased from 8 (16-8) to 12(20-8), the bakery must maintain 66.6% (8/12) of its customers in order to get the same level of profitability]

Which of the following will increase the break-even quantity?

A decrease in the price level [ Breakeven is calculated as Q= F/(P-MC). Therefore, a decrease in the price level will decrease the denominator, which will increase the Breakeven quantity]

When demand for a product falls, which of the following events would you NOT necessarily expect to occur?

A decrease in the supply of the product. [ while a decrease in demand will be associated with a decrease in the quantity supplied at equilibrium, it will not cause a shift in the supply curve]

The fixed-cost fallacy occurs when

A firm considers irrelevant costs [The sunk or fixed cost fallacy occurs when you make decisions using irrelevant costs or benefits. In other words, you consider costs and benefits that do not vary with the consequences of your decision] A firm considers overhead or depreciation costs to make short-run decisions [Overhead and depreciation are example of irrelevant or suck costs that are not impacted by the outcome of a short term decision]

If buyers expect future price increase, they will ___________ their purchases to avoid it. Similarly, sellers will __________ selling to take advantage of it.

Accelerate, delay [ buyers, anticipating the price increase, will accelerate their purchasing, while sellers will delay it, hoping to receive a higher price for the same good in the future]

All the following are examples of variable costs, except

Accounting fees [ accounting fees are paid regardless of total output. They do not vary with the amount that is produced]

Why might it be bad for hotels to not charge higher prices when rooms are in higher demand?

Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to customers. Rooms may be rationed Without the profit from these high demand times, hotels would have less of an incentive to build/expand, making the long run scarcity problem even worse.

Once marginal cost rises above average cost,

Average costs will increase [ the cost to produce an additional unit of output will be greater than the previous unit of output, which will increase average costs]

Which of the products below is closest to operating in a perfectly competitive industry?

Cotton [ agricultural commodities are close to perfectly competitive industries]

The biggest advantage of capitalism is:

Creates wealth by letting a person follow his or her own self-interest

Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market?

Demand would fall, and Budweiser would reduce price. [ when two goods are complements, an increase in the price of one results in a decrease in the demand for the other. To account for this decrease in demand, Budweiser would ultimately lower its prices as well]

The intersection between demand of US dollar and the supply of US dollar is known as

Exchange rate [ the exchange rate reflects the price point at which demand for and supply of the dollar intersect]

Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following are true?

FC = $300 [We know that Total cost = FC + VC(Quantity). This means 1500 = FC+VC(40) and 1800=FC+VC(50). Using this information, we can solve for FC. For example, using the first equation we see VC(40)=1500-FC, hence VC=(1500-FC)/40. Plugging this value for VC into 1800=FC+VC(50) will give you 1800=FC+50((1500-FC)/40), which lets us find FC=300]

Which of the following is NOT a factor that contributes to higher rivalry in an industry?

Fast industry growth. [ high growth reduces rivalry because firms are less worried about fighting over existing sources of demand given that demand is growing]

Which of the following is NOT true if a firm shuts down and produces zero output in the short run?

Fixed costs will be less than zero. [ this is not true, fixed costs cannot be less than zero]

Jim recently graduated from college. His income increased tremendously from earning $5000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that

Houses are normal goods for Jim [ for normal goods, demand increases as income increases]

Taxes:

Impede the movement of assets to higher valued uses. [This is the result of anything that deters a wealth creating transaction] Reduce incentives to work. [By not allowing people to capture the full value of their labor and production, taxes reduce the incentive to work] Decrease the number of wealth creating transactions. [If a tax is larger than the total surplus created by a transaction, the transaction will not take place]

9. Holding other things constant, a decrease in the inflation rate in US compared to the Canadian economy may cause the demand for (US) dollar to _____________ and the supply for dollar to __________.

Increase, decrease [ a decrease in the U.S. inflation rate relative to Canada means that the purchasing power of the US dollar has increased relative to the Canadian currency]

A company faces the following costs at the respective production level in addition to its fixed costs of $50,000: Quantity-Marginal Cost-Sale Price-Marginal Return 1 - $10,000 - $20,000 - $10,000 2 - $11,000 - $20,000 - $9,000 3 - $12,000 - $20,000 - $8,000 4 - $13,000 - $20,000 - $7,000 5 - $14,000 - $20,000 - $6,000 How would you describe the returns to scale for this company?

Increasing [ average total costs are falling with output]

When economists speak of "marginal", they mean

Incremental [ marginal refers to additional cost or benefit created from producing each additional unit]

A price ceiling:

Is the equivalent of an implicit tax on producers and an implicit subsidy to consumers. [Price ceilings prevent producers from selling at a higher price to consumers who would be willing to pay more, while consumers have the opportunity to purchase something they may not have been able to otherwise]

What is a possible consequence of a performance compensation reward scheme?

It creates productive incentives, and it creates harmful incentives.

What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month?

It may sell the remaining cars at huge discounts to hit the quota.

Why might welfare for low income households reduce the propensity to work?

It reduces the incentive to work.

Why might a "bonus cap" for executives be a bad policy for the company?

It would encourage laziness after the executives reached the cap.

Which of the following goods have a negative income elasticity of demand?

Items from Dollar stores [ Dollar store items are typically considered inferior goods, hence their demand will decrease as the income of the user increases]

Which of the following is NOT an example of an entry barrier?

Low capital requirements for entry [ if capital requirements are low, it will be less costly (easier) to enter]

Managers undertake an investment only if

Marginal benefits are greater than marginal costs [ managers should undertake an investment when the marginal benefits are greater than the marginal costs]

If a firm's average cost is rising then

Marginal cost is greater than average cost [ when the marginal cost is above the average, then the average will rise with output]

What are some of the solutions for a hold-up problem?

Mergers [Mergers will help a hold-up problem by aligning the incentives of the two organizations into one] Contracts [When hold-up is anticipated, contracts can protect the potential victim] Exchange of 'hostages' [The use of 'hostages' helps ensure both parties make appropriate relationship specific investments, and provides either collateral or a means of escaping a hold up situation] (All the above)

An example of price floor is:

Minimum wages [by outlawing wages below a certain price, minimum wages are an example of a price floor]

What is the main difference between a competitive firm and a monopoly firm?

Monopoly firms can generally earn positive profits over a longer period of time. [ this profit is a reward for doing something unique, innovative, or creative—something that gives the firm less elastic demand.]

If a firm is earning negative economic profits, it implies

More information is needed to conclude about accounting profits [it is impossible to determine the relationship between economic and accounting profit without information on the economic costs involved]

After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggest the sales representative may be right?

Most of the costs of drug development are sunk, not fixed. [ in this case, he may be correct. The costs of drug development have already been incurred, cannot be recovered, and will not change with the outcome of the sale]

Which of the following types of firms are guaranteed to make positive economic profit?

Neither a perfectly competitive firm nor a monopoly [ no firm is guaranteed to make positive economic profit]

Efficiency implies opportunity,

Never [by definition, wealth is generated from inefficiencies in the market, which allow for assets to be moved from lower to high valued uses]

Suppose a new employer is also re-locating to Lampard City and will be attracting many new people who will want to buy new houses. Assume that the change in licensing requirements mentioned above occurs at the same time. What do you think will happen to the equilibrium quantity of new homes bought and sold in Lampard City?

Not enough information [ the decrease in supply from the prior question will be associated with a lower quantity while the increase in demand mentioned here will be associated with higher quantity. Without knowing the magnitude of the shifts, it's not possible to know the net effect (there is not enough information).]

A firm in a perfectly competitive market (a price taker) faces what type of demand curve?

Perfectly elastic [ the demand curve for the output of a perfectly competitive firm is perfectly elastic (flat)]

Following a peso appreciation relative to the dollar, which of the following results is expected to occur?

Prices in the United States would rise, and prices in Mexico would fall.

Government regulation :

Provides incentives to conduct business in an illegal black market

Which of the following is classified as a sunk cost?

Research costs to determine the implementation of a technology [ research is often an example of a sunk cost as it is incurred before production and sale and cannot be recovered regardless of what happens with the final product]

Opportunity costs arise due to

Resource scarcity [without scarce resources (time, labor, money, etc), the pursuit of another alternative does not require one to give up anything in return.

Which one of the following is true?

Salt has a more inelastic demand than meat [ This is true, not only is salt less expensive than meat (as price increases, price becomes more elastic), but salt also has many complements (it is a staple in most households with every meal), which would indicate a less elastic demand than meat]

Which of the following is the reason for the existence of consumer surplus?

Some consumers are willing to pay more than the market price. [ consumer surplus exists when the Value to the consumer is greater than the final (or market) price. It is when consumers pay market price for a good they place a higher value on that a consumer surplus is created]

An individual's value for a good or service is the:

The amount of money he or she is willing to pay for it.

The price of peanuts increases. At the same time, we see the price for jelly rise. How does this affect the market for peanut butter?

The demand curve will shift to the left, the supply curve will shift to the left [ the price of peanuts leads to higher peanut butter production costs meaning supply will shift left, a rise in the price of jelly, a complement to peanut butter, will cause peanut butter demand to shift left]

Following an increase in Mexican interest rates relative to U.S. interest rates, which caused Mexican consumers to borrow abroad to consume domestically, which of the following is expected to occur?

The dollar would depreciate relative to the peso, and Mexican prices would increase. [ Mexican borrowers increase borrowing in dollar in response to a lower U.S. interest rate. They then would sell these dollars for pesos in order to consume goods domestically. This drives up the supply of dollars in the system, which will depreciate the value of the dollar relative to the peso]

A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1500 per week. If the price of each unit is $12,

The firm should not hire the worker since MR < MC [ The MR of hiring the worker is $1200 (100 additional units*$12/unit), while his MC is his salary of $1500, indicating the company will lose $300/week by hiring the additional worker]

After graduating from college, Jim had three choices, listed in order of preference: (1) Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes

The income he could have earned at the car dealership [ opportunity cost reflects the value of the best foregone alternative, in this case the car dealership salary]

A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare

The incremental benefit expected from the second factory to the cost of the second factory [ the manager will decide to add another factory when the incremental benefits of that factory are greater than its incremental costs]

How does domestic inflation in China affect the Big Mac Index?

The price of a Chinese Big Mac would decrease relative to the U.S. price. [ domestic inflation in China means that the purchasing power of their domestic currency decreases, which will reduce the price of the Big Mac relative to the U.S. Price]

A security system company's total production costs depend on the number of systems produced according to the following equation: Total Costs = $20,000,000 + $4000*quantity produced. Given these data, which of the following is a false statement?

There are diseconomies of scale [ if average costs increased with output, there would be diseconomies. That is not the case here]

What would happen to revenues if a firm in a perfectly competitive industry raised prices?

They would fall to zero [ a competitive firm can only sell at the industry price. If the firm raises price, it would sell nothing]

A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown?

Total variable cost is $17,000, total fixed cost is $2,250, total cost is $19,250 [ both the $12,000 of labor costs (20 workers*40hrs/week*$15/hr) and the $5000 raw materials cost ($10/unit*500 units) are considered variable expenses. Factory rent is considered a fixed cost]

If the government imposes a price floor at $9 (i.e., price must be $9 or higher) in the above market, how many goods will be traded?

Two [ at a price of $9, eight suppliers are willing to sell but only two buyers are willing to buy]

Following a peso appreciation relative to the dollar, which of the following results is expected to occur?

U.S. consumers would be hurt, and Mexican producers would be hurt. [ in the case of an appreciation of the peso, US (foreign) consumers would be hurt and Mexican (domestic) firms would also be hurt]

If the Chinese currency devalues compared to the US dollar, then

US producers will be hurt, Chinese consumers will be hurt [ in the case of a devaluation of the Chinese currency US (foreign) producers will be hurt, and Chinese (domestic) consumers will also be hurt]

Which of the following is NOT one of the three problem solving principles laid out in Chapter 1?

Under whose jurisdiction is the problem?

Wealth creating transactions are more likely to occur:

With private property rights [private property rights facilitate voluntary transactions] With contract enforcement [contract enforcement helps facilitate voluntary transactions] With black markets

In the long-run, which of the following outcomes is most likely for a firm?

Zero economic profits but positive accounting profits [ in the long-run economic profit is driven to zero]

An industry is defined as

a group of firms producing products that are close substitutes.

When a resource or capability is valuable, rare, hard to imitate, and non-substitutable firms may gain

a sustainable competitive advantage.

Economic Value Added helps firms to avoid the hidden-cost fallacy

by taking all capital costs into account including the cost of equity [ By taking all of the capital costs into account such as the cost of equity, firms can better gauge their economic profit and the opportunity costs associated with some of their current assets]

If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its products should

decrease [ decreased elasticity means buyers would be less price sensitive. If the product is more differentiated, buyers should be less price sensitive.]

According to the law of diminishing marginal returns, marginal returns:

diminish eventually. [ The law of diminishing marginal returns states that as you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines.]

It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of product A and B, this exhibits signs of

diseconomies of scope [ the cost to produce the two products together (175) is more than the sum of the costs of producing them separately(160)]

Average costs curves initially fall

due to declining average fixed costs [ as output increases and fixed costs are distributed over more units, average fixed costs per unit fall]

The problem-solving principles analyze firm problems

from the organization's point of view.

Attractive industries have all the following, except

high supplier power [ high supplier power would allow suppliers to capture more of the industry value]

Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost=$8.00 and average fixed cost =$4.00. This firm is

incurring a loss per unit of $2.00, but should continue to operate in the short run. [ In the short run, only variable costs are avoidable and should be considered in a shutdown decision. As the current price ($10) is still higher than the variable costs ($8), the company should continue to operate in the short run until the fixed costs become avoidable]

The U.S. Government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog

is equal to the market value of the land. [ the cost of a decision includes the cost of the best foregone option. In this case, this is the amount the government could sell the land for if they did not use if for prairie dog introduction]

A sudden decrease in the market demand in a competitive industry leads to

losses in the short-run and average profits in the long-run

Jim has estimated elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would:

lower tax revenue in the short run but raise tax revenue in the long run. [ demand is inelastic in the short run, which means that initially the decrease in taxes will not alter people's demand or consumption for gas, which will result in a decrease in the potential tax revenue as there is the same level of consumption at a lower price. However, in the long tax revenue will increase as the demand for gasoline becomes elastic, and the consumption of gasoline rises]

Changes in prices of a good causes

movement along the demand curve movement along the supply curve

The concept that describes firms possessing different bundles of resources is

resource heterogeneity

If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long-run

some firms will enter the industry and price will fall [ firms will be attracted to the higher-than-average revenues. As more firms enter the industry, supply will increase and price will fall.]

An economist estimated the cross-price elasticity for peanut butter and jelly to be +1.5. Based on this information, we know the goods are

substitutes. [ Positive cross price elasticity means that Good A (Peanut Butter) is a substitute for Good B (Jelly)]

Buyers have higher power when

switching costs are low. [ low switching costs put buyers in a better negotiating position because it is easier to buy a rival's product]

When a resource or capability is valuable and rare, a firm may gain a

temporary competitive advantage. [valuable and rare resources lead to a temporary competitive advantage]

Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if

the marginal benefit of the sixth banana exceeds its price. [ Christine will only purchase the banana when the marginal benefit she receives is greater than the marginal cost (or price) of the additional banana]

The higher the interest rates

the more value individuals place on current dollars [ a higher interest rate means dollars today will have more value in the future because of the compounding effect of interest. In other words, the future value of the current dollars is higher]

Holding other factors constant, a decrease in the tax for producing coffee causes

the supply curve to shift to the right, causing the prices of coffee to fall [ a decrease in tax lowers coffee production costs, leading to an increase (shift right) in supply which means price will fall]

As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because:

there are scale economies. [ declining average total costs are indicative of economies of scale]

The rational-actor paradigm assumes the people do NOT -

use rules of thumb.