MECN 6200 Midterm 1
Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then
his consumer surplus increases
Which of the following is correct? a. Consumer surplus refers to a situation in which there are more buyers than sellers in a market. b. Producer surplus refers to a situation in which there are more sellers than buyers in a market. c. Total surplus is measured as the area below the demand curve and above the supply curve, up to the equilibrium quantity. d. All of the above are correct.
total surplus is measured as the area below the demand curve and above the supply curve, up to the equilibrium quantity
Total surplus is equal to
value to buyers - cost to sellers.
Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to the scientific method, which of the following is the economist's next step?
Collect and analyze data.
Suppose that a $4 per unit tax is imposed on the sellers of DVDs. The effect of the tax will be to
shift the supply curve up by exactly $4 and the price paid by buyers will rise by less than $4.
Which of the following statements is not correct? a. A seller would be eager to sell her product at a price higher than her cost. b. A seller would refuse to sell her product at a price lower than her cost. c. A seller would be indifferent about selling her product at a price equal to her cost. d. Since sellers cannot set the price for their product, they must be willing to sell their product at any price.
since sellers cannot set the price for their product, they must be willing to sell their product at any price
When market conditions in a competitive industry are such that firms cannot cover their total production costs, then
some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs.
Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift
supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially-sweetened beverages.
Jane decides to spend four hours working overtime rather than going to a family gathering. She earns $12.50 per hour for overtime work. Her opportunity cost of working is
the enjoyment she would have received had she gone to the family gathering
The marginal seller is the seller who
would leave the market first if the price were any lower.
Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny's cumulative GPA will fall even further next semester if he performs worse than (i) his cumulative GPA. (ii) he ever performed before. (iii) he did last semester.
(i) and (ii)
A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market.
(ii) and (iii)
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii) Free markets allocate the demand for goods to the sellers who can produce them at the least cost.
(ii) only
When a university bookstore prices chemistry textbooks at $200 each, it generally sells 120 books per month. If it lowers the price to $160, sales increase to 160 books per month. Given this information, we know that the price elasticity of demand for chemistry books is about
1.29, and a decrease in price from $200 to $160 results in an increase in total revenue.
Which of the following statements is correct? a. If marginal cost is rising, then average total cost is rising. b. If marginal cost is rising, then average variable cost is rising. c. If average variable cost is rising, then marginal cost is minimized. d. If average total cost is rising, then marginal cost is greater than average total cost.
if average total cost is rising, then marginal cost is greater than average total cost
Suppose the price elasticity of supply for soccer balls is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for soccer balls causes the price of soccer balls to increase by 20%, then the quantity supplied of soccer balls will increase by about
6% in the short run and 24% in the long run.
Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is
64$
Which of the following statements best reflects a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has an incentive to charge less than the market price to earn higher revenue. c. The firm can sell only a limited amount of output at the market price before the market price will fall. d. Price-taking firms maximize profits by charging a price above marginal cost.
if the firm were to charge more than the going price, it would sell none of its goods
According to the circular-flow diagram, if Suzy is a worker who delivers flowers for Happy Day Flower Company, she participates
in the markets for factors of production exchanging labor for income.
When there is a technological advance in the pork industry, consumer surplus in that market will
increase
Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?
Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. Which of the following market outcomes is efficient?
Firm A produces a monitor that David buys.
One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?
He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city
Suppose that when the price of a 16 oz. to-go cup of gourmet coffee is $4.25, students purchase 750 cups per day. If the price decreases to $3.75 per cup, which of the following is the most likely outcome?
Students would purchase more than 750 cups per day.
Elena loves orange juice. She reads in the newspaper that 20 percent of the Florida orange crop was destroyed by a late spring frost. Economists predict that the price of oranges will rise by 50 percent by the end of the year. As a result, Elena's demand for orange juice
increases today
Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?
The number of firms selling laptop computers decreases.
Which of the following events would cause a movement upward and to the left along the demand curve for olives?
The price of olives rises.
A recent news report lamented the plight of corn farmers in Wisconsin due to a severe drought. Which of the following best describes the effect on corn farmers in Minnesota, where sufficient rainfall occurred?
Their revenue increases because price increases and demand is inelastic.
Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?
Trade can make everyone better off
Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding?
Traditional land line phones become more expensive.
If sellers respond to very small changes in price by adjusting their quantity supplied by extremely large amounts, the price elasticity of supply approaches
infinity, and the supply curve is horizontal
Consumer surplus is a. a concept that helps us make normative statements about the desirability of market outcomes. b. represented on a graph by the area below the demand curve and above the price. c. a good measure of economic welfare if buyers' preferences are the primary concern. d. All of the above are correct.
all of the above
Suppose that demand is inelastic within a certain price range. For that price range,
an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
Suppose that the equilibrium price in the market for tomatoes is $3 per pound. If a law reduced the maximum legal price for tomatoes to $2 per pound,
any possible increase in consumer surplus would be smaller than the loss of producer surplus.
When a firm is experiencing diseconomies of scale, long-run
average total cost is less than long-run marginal cost.
A university's football stadium is never more than half-full during football games. This indicates
market price is above equilibrium price
A firm in a competitive market currently produces and sells 500 doorknobs for a price of $10 per doorknob. Which of the following events would decrease the firm's average revenue?
market price of doorknobs falls below $10
Suppose there are six bait and tackle shops that sell worms in a lakeside resort town in Minnesota. If we add the respective quantities that each shop would produce and sell at each of the six bait and tackle shops when the price of worms is $2 per bucket, $2.50 per bucket, and $3 per bucket, and so forth, we have found the
market supply curve
If the government allowed a free market for transplant organs such as kidneys to exist, critics argue that such a market would
benefit the rich and not the poor
Harry's Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better understanding of his costs by categorizing them as fixed or variable. Which of the following costs are most likely to be considered fixed costs? a. the cost of mustard b. the cost of hotdog buns c. wages paid to workers who sell hot dogs d. the cost of bookkeeping services
bookkeeping services
Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,
both Janine and Henry experience an increase in consumer surplus.
A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect
both the value of a good to society and the cost of making it.
When the "invisible hand" guides economic activity, prices of products reflect
both the values that society places on those products and the costs to society of producing those products
A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
maximizes the combined welfare of buyers and sellers.
When profit-maximizing firms in competitive markets are earning profits,
new firms will enter the market
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.
Suppose a firm in each of the two markets listed below were to increase its price by 15 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not?
cotton and soybeans
Which of the following statements about the price elasticity of demand is correct? a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases. b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes. c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y. d. All of the above are correct.
d. all of the above
The price received by sellers in a market will decrease if the government a. increases a binding price floor in that market. b. increases a binding price ceiling in that market. c. decreases a tax on the good sold in that market. d. None of the above is correct.
none of the above
Which of the following statements best characterizes a basic difference between market economies and centrally planned economies? a. Society relies more upon prices to allocate resources when the economy is centrally-planned than when it is market-based. b. The self-interest of households is reflected more fully in the outcome of a centrally-planned economy than in the outcome of a market economy. c. Government plays a larger role in the economic affairs of a market economy than in the economic affairs of a centrally planned economy. d. None of the above are correct.
d. none of the above
A tax on the buyers of cereal will increase the price of cereal paid by buyers,
decrease the effective price of cereal received by sellers, and decrease the equilibrium quantity of cereal.
Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that
people face tradeoffs
Suppose that when the price of wheat is $2 per bushel, farmers can sell 10 million bushels. When the price of wheat is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? The demand for wheat is
price inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then
the marginal buyer's willingness to pay for the 100th unit of the good is $25.
Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a low quantity of lemonade she has few workers and her equipment is not being fully utilized. Because she can easily put her idle resources to use,
the marginal cost of one more glass of lemonade is smaller than if output were high.
As a result of a successful attempt by government to cut the economic pie into more equal slices
the pie gets smaller, and there will be less pie overall.
Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing
the quantity at which market price is equal to Mr. McDonald's marginal cost of production
One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,
the size of the factory is fixed.
Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of
the time horizon in determining the price elasticity of demand.
In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits
economies of scale because average total cost is falling as output rises.