micro exam 2
If the price of a product falls by 15% and the quantity supplied falls by 25%, the elasticity of supply is:
1.67.
marginal utility
is the additional satisfaction received from consuming one more unit of a good.
Total utility
is the satisfaction a person receives from consuming a quantity of a good, while
An increase in competition within an industry would likely:
make the good produced in that industry more elastic
The change in total costs arising from the production of additional output is:
marginal cost.
Most income taxes are:
progressive.
Most economists assume that firms behave _____ and that their objective is _____.
rationally; profit maximization
A tax in which the percentage of income tax rises as income falls is known as a:
regressive
Which of these is NOT a determinant of elasticity?
sales tax rate placed on an item
Total revenue
Price x Quantity
marginal utility analysis
A theoretical framework underlying consumer decision making. This approach assumes that satisfaction can be measured and that consumers maximize satisfaction when the marginal utilities per dollar are equal for all products and services.
sole proprietorship
A type of business structure composed of a single owner who supervises and manages the business and is subject to unlimited liability.
altruism
Actions undertaken merely out of goodwill or generosity.
framing bias
Describes when individuals are steered into making one decision over another or are convinced they are receiving a higher value for a product than what was paid for it.
substitutes
Goods consumers substitute for one another depending on their relative prices, such as coffee and tea. Substitutes have a positive cross elasticity of demand.
Using a budget line, if Jeff's budget increases while prices stay the same
Jeff's budget line will shift outwards parallel
sunk cost fallacy
Occurs when people make decisions based on how much was already spent, rather than how the decision might affect their current well-being.
production
The process of turning inputs into outputs.
luxury goods
goods that have income elasticities greater than 1. When consumer income grows, demand for luxury goods rises more than the rise in income
Elasticity is likely to be highest for goods that:
have many substitutes and are not necessary for basic living
Kira, who turns 5 this week, receives a 20% raise in her allowance. Because of her higher income, she now buys 10% more gummy bears. Kira's income elasticity of demand for gummy bears is:
0.5 and gummy bears are a normal good
Which of the following is a possible measurement of inelastic demand?
0.7
Sue receives a promotion and a 20% raise. As a result, if she increases her restaurant spending by 15%, her income elasticity is _____ and restaurants are a _____ good.
0.75; normal
corporation
A business structure that has most of the legal rights of individuals, and in addition, can issue stock to raise capital. Stockholders' liability is limited to the value of their stock
sunk cost
A cost that has been paid and cannot be recovered; therefore, it should not enter into decision making affecting the present or future.
lump-sum tax
A fixed amount of tax regardless of income. It is a type of regressive tax.
utility
A hypothetical measure of consumer satisfaction.
budget line
A line that graphically illustrates the possible combinations of two goods that can be purchased with a given income, given the prices of both goods.
income elasticity of demand
A measure of how responsive quantity demanded is to changes in consumer income.
cross elasticity of demand
A measure of how responsive the quantity demanded of one good is to changes in the price of another good.
price elasticity of demand
A measure of the responsiveness of quantity demanded to a change in price, equal to the percentage change in quantity demanded divided by the percentage change in price.
price elasticity of supply
A measure of the responsiveness of quantity supplied to changes in price. Elastic supply has elasticity greater than 1, whereas inelastic supply has elasticity less than 1. Time is the most important determinant of the elasticity of supply.
increasing marginal returns
A new worker hired adds more to total output than the previous worker hired, so that both average and marginal products are rising.
constant returns to scale
A range of output where average total costs are relatively constant. The expansion of fast-food restaurant franchises and movie theaters, which are essentially replications of existing franchises and theaters, reflects this.
diseconomies of scale
A range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently.
regressive tax
A tax that falls in percentage of income as income increases.
flat tax
A tax that is a constant proportion of one's income.
diminishing marginal returns
An additional worker adds to total output, but at a diminishing rate.
firm
An economic institution that transforms resources (factors of production) into outputs.
Which event would cause the budget line to shift outward?
An increase in income.
economies of scale
As a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques.
law of diminishing marginal utility
As we consume more of a given product, the added satisfaction we get from consuming an additional unit declines.
_____ is found by dividing total output by the number of workers employed to produce that output.
Average product
If the variable cost for five shoes is $50 and the variable cost of six shoes is $80, which statement is true?
Average variable cost for the fifth shoe is $10.
Alex finds a new job as an economist at a factory that makes two types of chips: computer and potato. Alex calculates the cross elasticity of demand between computer and potato chips to be a very small negative number. This means:
Computer and potato chips are weak complements
fixed costs
Costs that do not change as a firm's output expands or contracts, often called overhead. These include items such as lease payments, administrative expenses, property taxes, and insurance premiums.
variable costs
Costs that vary with output fluctuations, including expenses such as labor and material costs.
Ed > 1:
Elastic Demand (many substitutes, high-priced goods, longer time horizon, luxury goods)
profit
Equal to the difference between total revenue and total cost.
average total cost
Equal to total cost divided by output (TC/Q). Average total cost is also equal to AFC + AVC.
average fixed cost
Equal to total fixed cost divided by output (FC/Q).
average variable cost
Equal to total variable cost divided by output (VC/Q).
complements
Goods that are typically consumed together, such as coffee and sugar. Complements have a negative cross elasticity of demand.
inferior goods
Goods that have income elasticities that are negative. When consumer income grows, demand for inferior goods falls.
normal goods
Goods that have positive income elasticities less than 1. When consumer income grows, demand for normal goods rises, but less than the rise in income.
Suppose the marginal utility for the last pencil you buy is 36 and each costs $1, whereas the marginal utility of the last pad of paper you buy is 300 and costs $2. Are you maximizing utility?
No. You need to buy more paper and fewer pencils.
average product
Output per worker, found by dividing total output by the number of workers employed to produce that output (Q/L).
total revenue
Price 3 quantity demanded (sold). If demand is elastic and price rises, quantity demanded falls off significantly and total revenue declines, and vice versa. If demand is inelastic and price rises, quantity demanded does not decline much and total revenue rises, and vice versa.
unitary elastic supply
Price elasticity of supply is equal to 1. The percentage change in quantity supplied is equal to the percentage change in price.
elastic supply
Price elasticity of supply is greater than 1. The percentage change in quantity supplied is greater than the percentage change in price.
Inelastic supply
Price elasticity of supply is less than 1. The percentage change in quantity supplied is less than the percentage change in price.
economic profit
Profit in excess of normal profits. These are profits in excess of both explicit and implicit costs.
incidence of taxation
Refers to who bears the economic burden of a tax. The economic entity bearing the burden of a particular tax will depend on the price elasticities of demand and supply.
partnership
Similar to a sole proprietorship, but involves more than one owner who share the management of the business. Partnerships are also subject to unlimited liability.
______ are more numerous, but ______ sell more goods and services.
Sole proprietorships; corporations
_____ are costs that have already been incurred and cannot be recovered.
Sunk costs
marginal utility
The additional satisfaction received from consuming one more unit of a given product or service.
marginal product
The change in output that results from a change in labor (ΔQ/ΔL).
marginal cost
The change in total costs arising from the production of additional units of output (ΔTC/ΔQ). Because fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production (ΔVC/ΔQ).
accounting profit
The difference between total revenue and explicit costs. These are the profits that are taxed by the government.
implicit costs
The opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business.
elastic demand
The percentage change in quantity demanded is greater than the percentage change in price. This results in the absolute value of the price elasticity of demand to be greater than 1. Goods with elastic demands are very responsive to changes in price.
unitary elastic demand
The percentage change in quantity demanded is just equal to the percentage change in price. This results in the absolute value of the price elasticity of demand to be equal to 1.
inelastic demand
The percentage change in quantity demanded is less than the percentage change in price. This results in the absolute value of the price elasticity of demand to be less than 1. Goods with inelastic demands are not very responsive to changes in price.
normal profits
The return on capital necessary to keep investors satisfied and keep capital in the business over the long run.
behavioral economics
The study of how human psychology enters into economic behavior as a way to explain why individuals sometimes act in predictable ways counter to economic models.
total cost
The sum of all costs to run a business. To an economist, this includes out-of-pocket expenses and opportunity costs.
economic costs
The sum of explicit (out-of-pocket) and implicit (opportunity) costs.
long run
The time period long enough for firms to alter their plant capacities and for the number of firms in the industry to change. Existing firms can expand or build new plants, or firms can enter or exit the industry.
market period
The time period so short that the output and the number of firms are fixed. Agricultural products at harvest time face market periods. Products that unexpectedly become instant hits face market periods (there is a lag between when the firm realizes it has a hit on its hands and when inventory can be replaced).
short run
The time period when plant capacity and the number of firms in the industry cannot change. Firms can employ more people, have existing employees work overtime, or hire part-time employees to produce more, but this is done in an existing plant.
total utility
The total satisfaction that a person receives from consuming a given amount of goods and services.
Jim Delaney sold his pizza firm to an investor who then sold stock to the public. Jim now earns a salary of $5,000 a month and all the profits are distributed to the stockholders. This firm is an example of a:
corporation.
If the price elasticity for bowling is 1.5 and the manager of the bowling alley decides to raise the price of a game by 5%. By what percentage will quantity demand change?
decline by 7.5%
Marginal utility:
declines with each additional unit consumed.
Tax burdens are higher on consumers when:
demand is inelastic and supply is elastic.
A local business earned total revenue of $100,000 against economic costs of $85,000, with the difference going to investors. If investors put in $200,000 and expect a 5% return on their investment, this business is:
earning a positive economic profit.
Which is an advantage of owning a sole proprietorship?
easiness of start up
The reason economists use the midpoint method to compute elasticity is that:
economists want the elasticity to be the same whether the price is increasing or decreasing.
If a product's price rises by 6% and its quantity demanded falls by 8%, then we can say that demand for this product is:
elastic
Products with many close substitutes tend to have _____ demand, and products considered to be luxury goods tend to have _____ demand.
elastic; elastic
All of these are included in implicit costs, EXCEPT:
expenditures for raw materials.
Economic costs are the sum of _____ and _____.
explicit costs; implicit costs
Suppose the price elasticity of demand is 3.0 and the price elasticity of supply is 0.08. The burden of an excise tax:
falls primarily on producers.
Total costs are a combination of:
fixed costs plus variable costs.
Sharkey's Surfboards are all priced one cent lower than the next round dollar, for example, $89.99, $129.99, and $114.99. Sharkey believes that his customers are affected by:
framing bias
Mary started out in a consumer equilibrium. Later Mary discovers that her marginal utility per dollar spent on root beer is more than the marginal utility per dollar spent on gasoline. She knows then that the price of:
gasoline must have increased or the price of root beer must have decreased.
The greater the percentage of the budget spent on a good, the:
higher is the elasticity of demand.
Utility measures:
how much satisfaction is gained from the consumption of a good or service.
The calculation for economic profit is total revenue minus:
implicit and explicit costs.
As one moves along the budget line:
income and prices are held constant, but quantities change.
The budget line will shift parallel to the left if:
income decreases
As a person consumes more of a particular good or service, the total level of utility derived from that consumption will:
increase at a decreasing rate.
If the price elasticity of supply is 0.7, then a 20% increase in price will ______ the quantity supplied by _______ %.
increase; 14
Suppose that a 10% discount on the price of Tempur-Pedic mattresses results in quantity demanded to increase by 5%. Based on this information, demand for Tempur-Pedic is:
inelastic
When the price of hamburgers increased from $1.50 to $2.75, the quantity demanded decreased from 375 units sold to 250 units sold. Using the midpoint method, hamburgers are said to be:
inelastic.
Suppose your income falls from $35,000 to $33,000 and that your quantity demanded of a good increases from 40 units to 55 units. The good is said to be a(n):
inferior good
Utility
is a hypothetical measure of satisfaction.`
A normal rate of return on capital:
is a return just sufficient to keep investors satisfied.
If hot dogs and relish are complements, their cross elasticity of demand is:
less than 0.
The _____ is a period of time long enough for firms to alter their plant capacities and for the number of firms in the industry to change.
long run
If a firm has $10,000 in variable costs and no fixed costs, then the time period is referred to as the:
long run.
As an individual consumes slices of pizza, the _____ is the amount of satisfaction that he receives from each additional piece of pizza.
marginal utility
Suppose the MU/P for bottled water is greater than the MU/P for bags of chips. To maximize total utility, the consumer should buy:
more bottled water and fewer bags of chips
The slope of the budget line is:
negative, since to purchase more of one good means giving up some of the other good.
Which one of the following factors would reduce the elasticity of demand for a particular product?
no close substitutes
If the income elasticity of demand for tea is 0.50, tea is a:
normal good
Overvaluing the present relative to the future:
occurs when future decisions appear too distant to be concerned about in the present, leading to irrational decisions.
Overconfidence:
occurs when strong feelings of one's abilities lead to irrational decisions.
utility-maximizing rule
otal utility is maximized where the marginal utility per dollar is equal for all products, or MUa/Pa = MUb/Pb = . . . = MUn/Pn.
Xiao has a budget of $150 to spend on T-shirts and jeans. The jeans she likes cost $56, and T-shirts cost $10. The combination of three T-shirts and three pairs of jeans would fall:
outside the budget line.
Base method:
percentage Change in P = Change in P/old P
If the demand for Quilted Northern bath tissue is elastic, then the:
percentage change in quantity demanded is greater than the percentage change in price.
Knowing a product's price elasticity allows economists to:
predict the amount by which quantity demanded will change in response to a change in price.
Proposals to increase an excise tax usually focus on:
products with price inelastic demand.
The owners of a corporation are:
shareholders
Ownership in corporations is issued in the form of:
shares of stock.
When income decreases, the budget line:
shifts inward.
If the cross elasticity of demand for good A with respect to good B is 2.3, then good A is a(n):
substitute for good B.
progressive tax
tax that rises in percentage of income as income increases.
The law of diminishing marginal utility states:
that as a consumer consumes more of a given product, the added utility from consuming an additional unit declines
The budget line shows the set of all possible combinations:
that can be purchased, given the consumer's income and the price of the goods
A consumer is in equilibrium when:
the addition to total utility per dollar is the same for every commodity.
Which curve is NOT bowl-shaped?
the average fixed cost curve
Marginal product is:
the change in total output, given a change in labor input.
The utility maximization rule says that:
the marginal utility per dollar spent is the same for all goods
Assume you allocate your time between attending classes (which take 2 hours) and working out (which take 1 hour). To maximize your total utility, you will choose a bundle where:
the marginal utility per hour from each activity is equal
All of these are explicit costs, EXCEPT:
the salary an entrepreneur could have earned in a corporate job.
Rose bought a mattress for her guest bedroom for $100, on sale. The mattress is nonreturnable. Although everyone who has slept on the mattress said it was very uncomfortable, Rose will not get rid of it because she spent $100 on it. What psychological factor associated with behavioral economics explains Rose's behavior?
the sunk cost fallacy
Suppose the price of a taco is $1 and the price of a soft drink is $2. If Mehmet has $5, then he can buy:
three tacos and one soft drink.
The primary determinant of the elasticity of supply is:
time.
One practical reason that economists use percentages to measure elasticity is:
to be able to compare characteristics of unrelated products.
Sole proprietors and partnerships share the characteristic of:
unlimited liability.
economies of scope
y producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs.
A normal profit is equal to:
zero economic profit.
A negative cross-elasticity of demand means that the goods in question are _____ while a negative income elasticity means that the good in question is a(n) _____.
complements; inferior good
An increase in one product price but not the other:
changes the slope of the budget line
Midpoint method:
% Change in P = Change in P/[(old P + new P)/2]
If Aspen Ski Resort offers a 25% discount on ski lift tickets, and the quantity of ski rentals increases by 20%, the cross elasticity of demand is:
-0.8 and the two goods are complements
Using the midpoint method, what is the price elasticity of demand for a product whose price increased from $2 to $4 and whose quantity demanded decreased from 10 units to 5 units?
1.0
If a 20% off sale on Diesel jeans increases sales of Diesel jeans by 30%, what is the elasticity of demand for Diesel jeans?
1.5
If the price elasticity of demand is 10, then for every 1% increase in price, there is a:
10% decrease in quantity demanded.
Staci's Sign Shoppe makes signs for businesses. Staci is currently producing 210 signs per week with three employees. She hires an additional worker and total output per week rises to 328 signs. The marginal product of the last worker is _____ signs.
118
Jeremy's level of satisfaction from consuming the first cookie was 25 utils. The second cookie increased the level of satisfaction by 20 utils. Jeremy's total level of satisfaction after three cookies was 60. Thus, the marginal utility for the third cookie is:
15
Economists for McDonalds estimate that the price elasticity of demand for their french fries is 0.8. So, if McDonalds raises the price of its french fries by 20 percent, the quantity demanded will decrease by ____ percent.
16
Suppose the government wants to reduce teenage smoking by 50%. If the teenage elasticity of demand for a pack of cigarettes is 2, by what percentage would the government have to increase the price of a pack of cigarettes to achieve their goal?
25%
At 500 units of output, total cost is $50,000 and variable cost is $5,000. What does fixed cost equal at 500 units?
45000
Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by:
50%.
Joe has $50 to spend on pizza and movies. If movies are $5 each and a pizza is $10, assuming he spends all his money, he can buy:
6 movies and 2 pizzas
Scruffie the cat has a budget of $30. A cat toy costs $2 and a can of tuna costs $1. Which of the following combinations of goods is NOT on her budget line?
8 cat toys and 16 cans of tuna
long-run average total cost
In the long run, firms can adjust their plant sizes so that LRATC is the lowest unit cost at which any particular output can be produced in the long run.
Ed < 1:
Inelastic Demand (few substitutes, low-priced goods, shorter time horizon, necessities)
Using the utility maximization rule, Jenn's marginal utility of the last candy bar consumed is 8 and her marginal utility of the last smoothie consumed is 20. If candy bars cost $2 and smoothies cost $4, which of the following is true?
Jenn must consume more smoothies and less candy bars to maximize utility
sunk costs
Those costs that have been incurred and cannot be recovered.
explicit costs
Those expenses paid directly to another economic entity, including wages, lease payments, taxes, and utilities.
Tracey, who owns the most popular cupcake shop in town, discovers that if she raises the price of her cupcakes by 50 cents, she ends up with almost the same number of customers. This means:
Total revenue would rise because her cupcakes are inelastic
Ed = 1
Unitary Elastic Demand (a change in price results in an equal percentage change in quantity demanded)
Astrid currently consumes only milk and honey. She drinks four quarts of milk priced at $3 per quart and gets 30 utils for the last quart. She consumes thirteen jars of honey at a price of $0.75 per jar and gets 7.5 utils for the last jar. Is Astrid maximizing her utility?
Yes.
Bayram had the opportunity to choose between two investments. The first investment was described as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment, because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, however, which implies that Bayram is subject to:
a framing bias.
An action undertaken out of goodwill or generosity is:
altruism.
If the cross-price elasticity between DVD movie rentals and pay-per-view movies is 0.8, while the cross-price elasticity between Pay-Per-View movies and movie theatre tickets is 1.2, an increase in the price of Pay-Per-View movies by 20% will result in:
an increase in demand for movie theatre tickets by 24%
If the cross-price elasticity between boomerangs and frisbees is 1.5, then frisbees:
and boomerangs are substitutes
If you do not spend your entire budget in a given month, your consumption will appear:
as a point below your budget line
In the short run:
at least one cost is fixed.
The study of how human psychology enters into economic behavior as a way to explain why individuals sometimes act in predictable ways counter to economic models is known as:
behavioral economics.
The _____ graphically illustrates the possible combinations of two goods a consumer can purchase with a given income, given the prices of both products.
budget line