Fundamentals of Business Economics Test 2

Under what condition will a monopoly firm incur losses?

ATC > P

Total costs equal total variable costs when:

There are no fixed costs

Which of the following scenarios illustrate the average-marginal rule in a noncost setting? Check all that apply. -Your cumulative GPA is 3.5. This semester you get perfect grades in all classes (4.0 GPA), and your cumulative GPA rises as a result. -You find $20 on the ground. As a result, the total amount of cash you have in your wallet increases. -A professional basketball player averages 20 points per game. In the next game, she scores 30 points, and her average points per game rises as a result. -Steve consumes a fifth cookie. The fifth cookie has a positive marginal utility, and his total utility goes up as a result.

Your cumulative GPA is 3.5. This semester you get perfect grades in all classes (4.0 GPA), and your cumulative GPA rises as a result. A professional basketball player averages 20 points per game. In the next game, she scores 30 points, and her average points per game rises as a result.

A firm that is making normal profit is covering ________ explicit and implicit costs and is earning _______ economic profits.

both explicit and implicit costs; zero

Complete the following sentences to give a numerical example that illustrates total utility rising as marginal utility declines. Maria gets $2 of utility from eating one donut and gets _____ of utility from eating a second donut in the same period. Her total utility rises from $2 to _____ as she eats the second donut, although her marginal utility falls.

$1; $3

The term price taker can apply to buyers as well as sellers. A price-taking buyer is one who cannot influence price by changing the amount he or she buys. In which of the following scenarios would you most likely be a price taker? Check all that apply. -A can of soda costs $1 at the store. -A used car costs $10,000, but you can negotiate with the car salesperson. -A smartphone costs $200 regardless of the service plan you purchase with it. 0A house costs $500,000, but the price is subject to bidding and negotiation.

A can of soda costs $1 at the store. A smartphone costs $200 regardless of the service plan you purchase with it.

"Martin likes hamburgers more than Joe does," says Jill. Jill is making:

An interpersonal utility comparison

Suppose that there are two cities that are similar in all ways except that the weather is much better in one city, Good-Weather City (GWC), than it is in the other city, Bad-Weather City (BWC). Assume further that the price of a house (PHPH) is currently the same in both cities. If MUGWCPH>MUBWCPHMUGWCPH>MUBWCPH, then people will be inclined to move from ________ to ________ , which will push the price of housing in Good-Weather City ________, and the price of housing in Bad-Weather City will _____ .

Bad-Weather City; Good-Weather City; upward; fall

A billionaire producer, Ms. Bigbucks, is earning zero economic profit but is still wealthy. This must mean that she has generated enough total revenue to exactly cover:

Both explicit and implicit costs

Tomas buys a hamburger that doesn't taste very good. He can't return the hamburger and get his money back. Tomas decides to eat the hamburger even though it doesn't taste very good because he doesn't want to "lose the money" he paid for the hamburger. Which of the following statements are true about this situation? Check all that apply. -By deciding to eat the hamburger, Tomas is committing the sunk cost fallacy. -Tomas cannot get back the money he paid for the hamburger, and so eating the hamburger doesn't really prevent him from losing the money he paid for the hamburger. -Tomas may end up making himself worse off by eating the hamburger than by not eating the hamburger.

By deciding to eat the hamburger, Tomas is committing the sunk cost fallacy. Tomas cannot get back the money he paid for the hamburger, and so eating the hamburger doesn't really prevent him from losing the money he paid for the hamburger. Tomas may end up making himself worse off by eating the hamburger than by not eating the hamburger.

True or False: Because the monopolist is a single seller of a product with no close substitutes, it can obtain any price for its good that it wants

False

True or False: The perfectly competitive firm's entire marginal cost curve is its short-run supply curve.

False

True or False: There is deadweight loss if a firm produces the quantity of output at which price equals marginal cost.

False

The endowment effect:

Is the notion that people seem to place a higher value on something simply because they own it

Zero economic profit is not as bad as it sounds because when the firm earns zero economic profit:

It earns enough revenue to cover both its explicit and implicit costs

In the short run, a perfectly competitive firm will maximize profits (minimize losses) by producing the level of quantity at which ___________. The firm will only operate at the lowest per-unit cost of the firm is __________ and P=MR=MC=___________.

MR=MC; breaking even; Minimum ATC

Firm A, one firm in a perfectly competitive industry, faces higher costs of production. As a result, will consumers end up paying higher prices?

No, because in a perfectly competitive industry, the more efficient firms with lower costs will drive firm A out of the market.

Many plumbers charge the same price if they come to your house to fix a kitchen sink. Is this enough to prove that plumbers are colluding to keep prices high?

No. It is possible that plumbing is close to a perfectly competitive industry, and the current price us the equilibrium price resulting from competition.

In the short run, a perfectly competitive firm should continue to produce as long as it can cover its variable costs. Which of the following conditions describes this rule?

P > AVC

The demand curve is the same as the marginal revenue curve for a perfectly competitive firm because:

Price is equal to marginal revenue

Do firms in a perfectly competitive market exhibit productive efficiency?

Productive efficiency, when P=Minimum ATCP=Minimum ATC, is guaranteed in the long run. It is possible that a firm will produce its output at a unit cost higher than the lowest unit cost possible in the short run.

Why is rent seeking individually rational but socially wasteful?

Rent-seeking activity reflects the actions of individuals who spend resources trying to influence public policy in the hope of redistributing income to themselves from others; it is simply a transfer activity, not a production activity.

Profit serves as an incentive for individuals to produce, prompting or encouraging certain behavior. Profit also serves as a signal by identifying where:

Resources can be most productively employed in producing goods and services that consumers want

Complete the sentence to describe the difference between the law of diminishing marginal returns and diseconomies of scale. ___________________ applies to the short run, when at least one input is fixed, whereas ________________ when all inputs are variable and is therefore a long-run concept.

The law of diminishing marginal returns; diseconomies of scale occur

Individuals who buy second homes usually spend less for them than they do for their first homes. Which economic law explains this result?

The law of diminishing marginal utility

Which of the following describes the law of diminishing marginal utility? -The law of diminishing marginal utility is consistent with the law of supply. -The number of utils given by producing the first unit of a good is greater than the number of utils given by producing the second, and so on. -The marginal utility gained by consuming equal successive units of a good declines as the amount consumed increases. -The law of diminishing marginal utility implies that total utility cannot increase as marginal utility decreases.

The marginal utility gained by consuming equal successive units of a good declines as the amount consumed increases.

Which of the following statements is true? -Market coordination and managerial coordination both exist, and in the long run, there is no difference between the two. -The manager guides individuals away from the production of one good and toward the production of another so that suppliers and demanders achieve mutual satisfaction in equilibrium. -The visible hand of the market guides individuals in a market setting, whereas the invisible hand of the manager guides individuals in a firm. -The market guides and coordinates individuals' actions in an impersonal way through the forces of supply and demand. Managerial coordination is more personal; someone tells someone else what to do.

The market guides and coordinates individuals' actions in an impersonal way through the forces of supply and demand. Managerial coordination is more personal; someone tells someone else what to do.

Explain why the MRMR curve lies below the demand curve for a single-price monopolist. -The monopolist faces a horizontal demand curve, so price stays constant as more units are sold. Marginal revenue is then below the price charged for the product. -The monopolist faces a downward-sloping demand curve, so price must be raised in order to sell more units of its product. Marginal revenue is then below the price charged for the product. -The monopolist faces a vertical demand curve, so price stays constant as more units are sold. Marginal revenue is then below the price charged for the product. -The monopolist faces a downward-sloping demand curve, so price must be lowered in order to sell more units of its product. Marginal revenue is then below the price charged for the product.

The monopolist faces a downward-sloping demand curve, so price must be lowered in order to sell more units of its product. Marginal revenue is then below the price charged for the product.

The perfectly competitive firm exhibits resource allocative efficiency, but the single-price monopolist does not. What is the reason for the difference?

The monopolist firm faces a downward-sloping demand curve, and the perfectly competitive firm faces a horizontal demand curve.

People often argue that large firms in an industry have cost advantages over small firms in the same industry. For example, they might assert that a big oil company must have a cost advantage over a small oil company. For this to be true, what condition must exist?

There are economies of scale, and the large firm is operating at an output level at which economies of scale exist.

In general, coupons are more common and easier to find for small-ticket items than for big-ticket items. Which of the following explains why?

This is because of price discrimination. Potential purchasers of small-ticket items vary more in their willingness to spend time trying to save money. Coupons help sellers determine which customers have a high willingness to spend time to save money and which customers do not.

The average fixed cost curve continually declines (as output rises) because:

Total fixed cost is constant as output rises

The government says that firm X must pay $1,000 in taxes simply because it is in the business of producing a good. Which of the firm's cost curves will be affected by this lump-sum tax? Check all that apply.

Total fixed cost; average total cost; average fixed cost; total cost

Why does the diamond-water paradox support the theory that prices reflect marginal utility, not total utility?

Total utility of water is high because water is useful. The total utility of diamonds is comparatively low because diamonds are not as useful as water. The marginal utility of water is low because water is so plentiful that people consume it at low marginal utility. The marginal utility of diamonds is high because diamonds are so scarce that people consume them at high marginal utility. Price reflects low marginal utility.

True or False: If a person consumes fewer units of a good, the marginal utility of the good increases as total utility decreases (as long as the marginal utility of units of the good no longer consumed is not negative).

True

True or False: It is possible to consume so much of a good that it turns into a bad, and the marginal utility becomes negative.

True

In economics, framing is the manner in which a problem is presented. Can framing influence the choices individuals make?

Yes. Even when there is no difference between options or the choices a person makes, how the options or choices are framed matters to the outcome; framing matters to how people choose.

Is there a logical link between the law of demand and the assumption that individuals seek to maximize utility?

Yes. Utility maximization is consistent with the law of demand. Consumers will buy more of a good only if the price of the good reflects their diminishing marginal utility.

Government monopolies __________ legally protected from competition, whereas market monopolies _________ legally protected. A __________ monopoly is formed by public franchises, patents, or licenses, while a _________ monopoly is formed by economies of scale or exclusive ownership of a resource.

are; are not; government; market

Average total cost is equal to the sum of average variable cost and average fixed cost. As output increases, average fixed cost __________ ; therefore, as output increases, ________________ makes up a larger portion of average total cost. It follows that the average total cost curve and average variable cost curve would _____________ each other as output increases.

decreases; average variable cost; get closer to

An economist would expect even conscientious workers to shirk more when the cost of shirking _______ because economists assume that everyone ______________ .

falls; maximizes utility

Complete the following statement to describe why studying for an economics exam is subject to the law of diminishing marginal returns. At any given point in time, the ________ input is time remaining until the exam. The _________ inputs are time spent studying, access to study materials, attention, and retention.

fixed; variable

You read in a business magazine that computer firms are reaping high profits. With the theory of perfect competition in mind, what do you expect to happen over time? Complete the following sentences to describe the long-run adjustment. The number of computer firms in the market will _________ . The number of computers in the market will _________. Computer prices will ______. The profits of computer firms will __________.

increase; increase; fall; fall

As long as the marginal benefit of producing each successive unit is greater than the marginal cost, a firm will increase its total profits by _________ its production. So, even after marginal cost begins to rise (as diminishing returns set in), producers are likely to ___________ producing until the marginal cost equals the marginal benefit from selling the good.

increasing; continue

Assume the marginal utility of good A is 4 utils, and its price is $2, while the marginal utility of good B is 6 utils, and its price is $1. Complete the following sentences to describe how the consumer should maximize her utility. The individual consumer _______ maximizing (total) utility if she spends a total of $3 buying one unit of each good. She should purchase _______ units of _______ and fewer units of ________ to increase her total utility.

is not; more; good B; good A

A perfectly competitive firm will _________ produce output and charge a _________ (per unit) price than a single-price monopoly firm.

more; lower

A firm maximizes both profits and total revenue at the same time only under the condition that it has __________ variable costs (so marginal costs are zero). If this were not the case with the variable costs, then there would be a difference between maximizing revenue (MR=0MR=0) and maximizing profits (MR=MCMR=MC). Economists assume that firms try to maximize ____________.

no; profits, not revenue

Suppose all firms in a perfectly competitive market structure are in long-run equilibrium. Then demand for the firms' product increases. Complete the following sentence to describe the short-run adjustment. Initially, in the short run, price and economic profits will _______ .

rise

Soon afterward, the government decides to tax most (but not all) of the economic profits, arguing that the firms in the industry did not earn the profits. Rather, the profits were simply the result of an increase in demand. Complete the following sentences to describe the effect of the tax on the long-run adjustment. New firms ___________ have as great an incentive to enter the industry as they would without the tax. Consequently, the industry supply curve ___________ shift by as much as it would without the tax, and the new price ___________ be as low as it would have been without the tax.

will not; will not; will not

The perfectly competitive firm does not increase its quantity of output without limit even though it can sell all it wants at the going price. Regardless of the limitless demand, the perfectly competitive firm _______ take its own cost curves into account. Therefore, it will only sell up to the quantity where __________ because to go beyond that point would cause the firm's profits to __________ .

will; P=MC; decrease