exams 1 and 2 review

Technological improvement:

- can hide the presence of diminishing returns - can be shown as a shift in the total product curve - allows more output to be produced with the same combination of inputs (ALL OF THE ABOVE)

which of the following are necessary conditions for long-run equilibrium under perfect competition?

- no firm has an incentive to enter the market - no firm has an incentive to exit the market - each firm earns zero economic profit - each firm is maximizing profit (ALL OF THE ABOVE)

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 (ALL OF THE ABOVE)

which of the following is a normative statement?

- the taxes paid by the poor should be reduced in order to improve the income distribution in the U.S. - State governments ought not subsidize corporations by training welfare recipients - presidential candidates should not be given funds from the federal government to run campaigns - the sea otter should not be allowed to spread into Southern California coastal waters, because it will reduce the value of fisheries (ALL OF THE ABOVE)

which of the following is a positive statement?

- when the price of a good goes up, consumers buy less of it - when the price of a good goes up, firms produce more of it - when the federal government sells bonds, interest rates rise and private investment is reduced (ALL OF THE ABOVE)

suppose that the price of labor (Pl) is $10 and the price of capital (Pk) is $20. what is the equation of the isocost line corresponding to a total cost of $100?

100=10L + 20K

Which of the following could not possibly be included in the same market as Coke?

Bread (compared to Pepsi, Gatorade, and milk)

"decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing

FALSE

An isoquant that is twice the distance from the origin represents twice the level of output

FALSE

The average cost curve and the average variable cost curve reach their minima at the same level of output

FALSE

diminishing returns to all factors of production implies decreasing returns to scale

FALSE

economies of scare cause increasing returns to scale

FALSE

fred consumes only food and clothing. fred's Engle curve traces out the utility maximizing combination of food and clothing associated with each and every income level

FALSE

whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve

FALSE

Price increase on HOUSING:

Large income effect, small substitution effect the amount of income spent on housing is relatively large for most consumers if the price of housing rises, real income is reduces substantially, leading to a large income effect however, there are no really close substitutes for housing, so the substitution effect is small

In a constant-cost industry, price always equals

Long run marginal cost and minimum long run average cost

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

MRTS= MPlabor/MPkapital

Price increase on SALT:

Small income effect, small substitution effect: the amount of income that is spent on salt is very small, so the income effect is small because there are few substitutes for salt, consumers will not readily substitute away from it, and the substitution effect is therefore small

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

Substitution Effect

A firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then short - run average total costs cannot rise as output rises

TRUE

If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant , too

TRUE

Isoquants cannot cross one another

TRUE

a price-consumption curve is derived by varying the price of asparagus. if the price-consumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping

TRUE

if a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor is always equal to the average product of labor as labor employment expands

TRUE

increasing returns to scale cause economies of scale

TRUE

Carolyn knows average total cost and average variable cost for a given level of output. which of the following costs can she determine given this information?

Total cost, average fixed cost, fixed cost, variable cost (ALL OF THE ABOVE)

in a constant-cost industry, an increase in demand will be followed by

an increase in supply that will bring price down to the level it was before the demand shift

assume that average product for six workers is fifteen. if the marginal product of the seventh worker is eighteen,

average product is falling

suppose the demand for gourmet coffee can be represented by a linear demand curve. at the prevailing market price the income elasticity of demand for gourmet coffee is 2. when income rises the demand curve for gourmet coffee:

becomes less elastic at every price

a vertical demand curve is

completely inelastic

which of these measures the responsiveness of the quantity of one good demanded to an increase in the price of another good?

cross-price elasticity

two firms, each producing different goods, can achieve a greater output than one firm producing both goods with the same inputs. we can conclude that the production process involves

diseconomies of scope

although the U.S. airline industry has only a relatively small number of sellers, the market is nevertheless highly competitive. the reason is that

due to fierce competition, no firm has significant control over prices

Boeing Corporation and Airbus Industries are the only two producers of long-range commercial aircraft. this market is not perfectly competitive because

each company can significantly affect prices

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

economic profit of $0 and an accounting profit greater than $0

cost-output elasticity is used to measure

economies of scale

the average cost curve and the marginal cost curve reach their minima at the same level of output

false

The perfectly competitive firm's marginal revenue curve is

horizontal

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

horizontal

A straight-line isoquant

implies that capital and labor are perfect substitutes in production

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

income is constant

an L-shaped isoquant

indicates that capital and labor cannot be substituted for each other in production (think computers and people that work at computers, one person can only use one computer)

A Giffen Good:

is the special subset of inferior goods in which the income effect dominates the substitution effect

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

it changes from point to point

the supply curve for a competitive firm is

its marginal cost curve above r the minimum point of the average variable cost curve

Generally, economies of scope are present when

joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations)

Price increase on food:

large income effect, virtually no substitution effect as with housing, the amount of income spent on food is relatively large for most consumers, so the income effect is large although consumers can substitute out of particular foods, they cannot substitute out of food in general, so the substitution effect is essentially zero

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

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

marginal revenue equals marginal cost

an individual demand curve can be derived from the _____________ curve

price-consumption

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

prices are relatively low

which of the following relationships is NOT valid?

rising marginal cost implies that average total cost is also rising

Price increase on THEATER TICKETS:

small income effect, large substitution effect: the amount of income spent on theater tickets is relatively small, so the income effect is small the substitution effect is large because there are many good substitutes such as movies, TV shows, bowling, dancing and other forms of entertainment

with its current levels of input in usem a firms MRTS is 3, (when capital is on the vertical axis and labor is on the horizontal axis) this implies:

the marginal product of labor is 3 times the marginal product of capital

along any downward sloping straight-line demand curve

the price elasticity varies, but the slope is constant

if a competitive firm has a u-shaped marginal cost curve, then

the profit maximizing output is found where marginal cost equals marginal revenue and marginal cost is increasing

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

there are economies of scale

Which statement demonstrates an understanding of the importance of sunk costs for decision making?

to break into the market for soap, our firm needs to spend $10 million on creating an image that is unique to our new product. when deciding whether to develop the new soap, we need to take this marketing cost into account

Even though people need water to survive, the price of water is less than the price of diamond because water is in greater supply than diamonds

true

suppose that the demand for corn is highly price inelastic. if every corn farmer's harvesting technologies become more efficient, the total revenue received by all corn farmers would fall

true

in 1985, Alice paid $20,000 for an option to purchase ten acres of land. by paying the $20,000, she bought the right to buy the land for $100,000 in 1992. when she acquired the option in 1985, the land was worth $120,000. in 1992, it is worth $110,000. should alice exercise the option and pay $100,000 for the land?

yes