Micro Exam 2
sunk cost
a cost that has already been paid and cannot be recovered
explicit cost
a cost that involved spending money
explicit cost
a cost that involves spending money
Long run average cost curve
a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
long run supply curve
a curve that shows the relationship in the long run between market price and the quantity supplied
In a perfectly competitive industry with constant costs, the long run supply curve will be
horizontal
the demand curve for a perfectly competitive firms' output is a
horizontal line
perfectly elastic supply
horizontal line. The q supplied is indefinitely responsive to price and the price elasticity of supply equal infinity
Any industry in which the typical firms' average costs do not change as the industry expands production will have a
horizontal long run supply curve. These industries are called constant cost industries
A firm's production function is best described as
illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs
The short run average cost can never be less than the long run average cost because:
in the long run, all inputs are adjusted including the ones that are fixed in the short run
The ATC and MC curves drawn to he right have their expected shapes because
-as the ATC curve falls, the MC curve lies below it and when the ATC curve rises, the MC curve lies above it. -the MC curve is passing through the minimum point of the ATC curve. -the ATC curve is U shaped
What does this mean? E(d) = -1.2
-for a one percent increase in price, quantity demanded will decrease by 1.2% -for a one percent decrease in price, quantity demanded will increase by 1.2% -Note that these are percent changes and not unit changes
What does it mean if the slope of a demand curve is -2?
-for a one unit change in Q, P changes by 2 units. -for a one unit change in P, Qd changes by 1/2 unit.
When positive technological change occurs
-the same output can be produces with fewer inputs -more output can be produced from the same outputs
Suppose that the price elasticity of demand for a novel is infinitely elastic. IN this example, assume that the initial price of the novel is $21 and the quality demanded is 27 thousand copies per year. If the price of this novel increases by $2 then the quantity demanded will be ... copies per year
0
When a quantity demanded is completely unresponsive to price , what is the value of price elasticity of demand?
0
When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand?
0
A 10 percent increase in the price of cigarettes reduces consumption by 3-5 percent. The rages of price elasticity of demand for cigarettes ranges from ... to ...
0.3-0.5
Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
1. Ford could have profitably sold his cars at a lower price than competitors 2. Ford would have been able to produce his cars at lower long run average cost than competitors
How else can you calculate the price elasticity of demand?
1. Price elasticity of demand can be calculated using final values for price and quantity 2. Price elasticity of demand can be calculated using initial values for price and quantity
For which of the following reasons may firms experience economies of scale?
1. both managers and workers may become more specialized and hence more productive as output expands. 2.larger firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate 3.Firm's production may increase with a smaller proportional increase in at least one input
allocative efficiency
1. the price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold 2.perfectly competitive firms produce up tot he point where the price of the good equals the marginal cost of producing the last unit 3. Therefore, firms produce up to the point where the last unit provides marginal benefit to consumers equal to the marginal cost of producing it
Any industry has three key characteristics
1. the umber of firms in the industry 2. The similarity of the good or service produced by the firms in the industry 3.The ease with witch new firm can enter the industry
IF tthe current equilibrium price in the earring market is $1.80 what price will Frances charge?
1.80
Agree or disagree? "Technological change refers only tot he introduction of new products, so it is not relevant to the operations of most firms/
1.The statement is incorrect. Technology includes firm operations such as the training of its new workers and the efficiency of its equipment.
Key determinants of the price of demand are:
1.the availability of close substitutes to the good 2. the passage of time 3.whether the good is a luxury or a necessity 4.the definition of the market 5. the share of the good in the consumer's budget
For a given decrease in demand
more firms exit a constant cost industry than an increasing cost industry .
Suppose the price elasticity of demand for a novel is perfectly inelastic. Assume that the initial price of the translated novel is $29 and the quantity demanded is 939 copies per year. If the price of the novel increases by $1 then the quantity demanded will be ... copies per year.
939
Total cost (TC) formula
= FC + VC (fixed costs + variable costs)
Profit
=(P x Q)- TC Profit/ Q = (P x Q) / Q - TC/Q Profit/ Q = P- ATC Profit= (P-ATC) x Q
Graphically the marginal cost curve is
A U shape initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
technological change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs
When are firms price takers?
A firm is likely to be a price taker when it sells a product that is exactly the same as every other firm.
What is a price taker?
A firm that is unable to affect the market price. 1. buyer or seller that is unable to affect the market price 2. a buyer of seller that takes the market price as given
What is the relationship between a perfectly competitive firms' marginal cost curve and its supply curve?
A firms marginal cost curve is equal to its supply curve for prices above variable cost
average total cost (ATC)
AFC + AVC
What is Moody's top bond rating?
Aaa
Which is correct?
Accounting profit is typically higher than economic profit
Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them. A student objects to this statement by making the following argument. " I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers.
After reminding the class that we are assuming a competitive market, your professor would most likely give the following reply. While it is true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output.
Assuming that Paolo buys identical ovens and that otherwise the two pizza restaurants are exactly the same and have exactly the same revenue, which of the following is true?
Alfredo has a higher accounting profit, but their economic profits are the same.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is s nonmonetary cost.
what are implicit costs?
An implicit cost is a nonmonetary opportunity cost
Can we conclude from this info that Apple is making a profit of about $619 per iPhone?
Apple's profit is likely less than $619 per iPhone because Apple also has fixed costs of production
In what sense is tax smaller when the amount of business is larger?
As production increases, fixed costs can be allocated over a greater amount of output, decreasing the average cost of the tax
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost?
As the level of ouput increases, the difference between the value of average total cost and average variable cost decreases because average fixed cost decreases as output increases
Which of the following best explains why firms dont maximize revenue rather than profits?
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized.
What is the difference between short run and the long run ?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
Although most books were published as scrolls in the first century AD by the third century most were published as codices. Considering only the factors mentioned in this problem, explain why this change may have taken place.
By the third century, enough books, were being published such that the average cost of producing books as a codex was lower than the average cost of producing a book as a scroll
inside directors
CEO or CFO these people my serve on the board of directors
How are efficiencies realized when combining two firms?
Cutting the overlap between the two firms and leveraging fixed costs across greater quantities
What is the possible negative of having long standing board members?
Directors develop too cozy of a relationship with management which impairs their oversight function
When are firms likely to enter and industry? When are they likely to exit?
Economic profits attract firms to enter an industry,and economic losses cause firms to exit an industry .
For most products, the supply curve becomes increasingly inelastic the longer the period of time over which it is measured T/F
FALSE
The demand for a luxury is less elastic than the demand curve for a necessity T/F
FALSE
The more time that passes, the more inealstic the demand for a product becomes T/F
FALSE
average fixed cost (AFC)
FC/Q
For most products, the supply curve becomes increasing inelastic the longer the period of time over which it is measured T/F
False
When curves intersect, the curve with the larger slope in absolute value ( the steeper demand curve) is more elastic T/F
False
NASDAQ Composite Index
Includes the stock prices o more than 4000 firms whose shares are traded in the NASDAQ stock market
A student argues: " to maximize profit a firm should produce the quantity where the difference between marginal revenue is the greatest. Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
Firms have difficulty coordinating production
Pencil case: Which of the following is nto likely to happen in the pencil market?
Firms will charge a price above marginal cost in the long run.
Suppose there are substantial economies of scale related to oil production from fracking. What is the likely outcome?
Firms will combine through mergers and acquisitions to become larger
What are the three conditions for a market to be perfectly competitive?
For a market to be perfectly competitive, there must be many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market
How can we best think of the relationship among gasoline, subcompact cars, and SUVs? Briefly discuss which can be tough of as substitutes and which can be thought of as complements
Gasoline and subcompact care are SUBSTITUTES, and gasoline and SUVs are complements
Manager 1: the only way we can increase the revenue we receive from sellig our calculators is by cutting the price. manager 2: Cutting the price of a product never increases the amount of revenue you receive. If we want to increase revenue, we have to increase price. Do you agree with manager 2?
I disagree. Cutting the price will increase the revenue if the demand is price elastic.
SUppose the demand for a product decreases. What will be the effect on the market equilibrium price and quantity if supply is infinitely elastic?
If supply is infinitely elastic, then the equilibrium price will not change and the equilibrium quantity will decrease.
Suppose the demand for a product increases. what will be the effect on the market equilibrium price and quantity if supply is infinitely elastic?
If supply is infinitely elastic, then the equilibrium price will not change and the equilibrium quantity will increase
Explain why it is true that for a firm in a perfectly competitive market that P=MR=AR
In a perfectly competitive market P=MR=AR because firms can sell as much output as they want at the market price
Would a firm earning zero economic profit continue to produce, even in the long run?
In the long run competitive equilibrium, a firm earning zero economic profit will continue to produce because such profit corresponds with positive accounting profit
Does the market system result in allocative efficiency?
In the long run, perfect competition results in allocative efficiency because firms produce where price equals marginal cost
What is the difference between total cost and variable cost in the long run?
In the long run, the total cost of production equals the variable cost of production
What is the difference between a firm's shutdown point in the short run and its exit point in the long run ?
In the short run, a firm's shutdown pint is the minimum point on the average variable cost curve, while in the long run, a firm's exit pint is the minimum point on the average total cost curve.
Is the following statement correct or incorrect? "the products for which demand is the greatest will also be the products that are most profitable to produce"
Incorrect, because in the long run firms will enter the market driving economic profits to zero.
Adam Smith idea of the gains to firm from the division of labor makes a lot of sense when the good being manufacture is something complex like automobiles or computers, but it doesn't apply in the manufacturing of less complex goods or in other sectors of the economy such as retail sales.
Incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks
How can a firm maximize its profits?
Increase revenues and cut costs
A decrease in the price of a firm's stock would tell managers which of the following?
Investors expect the firm to have lower profits in the future
Ethan developed his first game while still working as a programmer for Sun. After his first game was a success, he quit Sun to from his own company, with himself as the only employee. how did Ethan's quitting Sun to work full time for himself affect the cost for him of developing games?
It increased his cost of development because he gave up the opportunity to earn income from Sun.
Is it possible for technological change to be negative?
It is possible for technological change to be negative. AN example is when a firm hires less skilled workers
Is Jill correct when she says the following: I am currently producing 10000 pizzas per month at a total cost of 70000. If I produce 10,001 pizzas my total cost will rise to 70050. Therefore my marginal cost of producing pizzas must be increasing.
Jill's average total cost of production is increasing so her marginal cost of producing pizzas must be increasing.
Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act)
Legislation passed during 2010 that was intended to reform regulation of the financial system
MC ( marginal cost ) formula
MC = change in TC / change in Q (TC= total cost ; Q= quantity)
a firm maximizes profit when producing
MR = MC where P=MR profit is calculated as TR-TC TR = P X Q
Which of the follwing statements is true when the difference between TR and TC is at its maximum positive value?
MR=MC and slope of TR = slope of TC
The federal gvt. starts to levy a $20 per passenger carbon emission tax on all commercial air travel.
Marginal cost would INCREASE, average variable cost would INCREASE average fixed cost would REMAIN UNCHANGED, and average total cost would INCREASE
Southwest signs a new contract with the Transport Workers Union that requires the airline to increase wages for its flight attendants.
Marginal cost would INCREASE, average variable cost would INCREASE, average fixed cost would REMAIN UNCHANGED, and average total cost would INCREASE
What is minimum efficient scale?
Minimum efficient scale is the level of output at which the long run average cost of production no longer decreases with output
Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo received his pizza ovens as a gift while Paolo had to pay for his?
NO, Alfredo's cost s equal to Paulo's cost because the opportunity cost of the ovens is the same as what Paulo must pay
NASDAQ
National Association of Securities Dealers Automated Quotations
Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged?
No. An increase in the marginal product of labor will increase the average product of labor.
"In a perfectly competitive market, int he long run consumers benefit from reductions in costs, but firms don't" Dont firms also benefit from cost reductions because they are able to earn greater profits?
No. Because short run profits encourage entry, firms earn zero economic profit in the long run.
If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape?
No. The average total cost curve will be continually increasing.
How does perfect competition lead to allocative and productive efficiency?
Perfect competition lead to allocative and productive efficiency because prices reflect consumer preferences and because firms are motivated by profit
How does perfect competition lead to allocative and productive efficiency?
Perfect competition leads to allocative and productive efficiency because -prices reflect consumer preferences -firms are motivated by profit
How should firms in perfectly competitive markets decide how much to produce?
Perfectly competitive firms should produce the quantity where the difference between total revenue and total cost is as large as possible.
why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast cereal>
Post Raisin Bran cereal is defined more narrowly.
What is means by productive efficiency?
Productive efficiency is when a good or service is produced at lowers possible costs
Briefly discuss the difference between the productive efficiency and allocative efficiency/
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
if demand is inelastic
a decreas in price reduces revenue becuase the increase in q demended is proportinally smaller than the decrease in price
average total cost (ATC)
TC/Q (total cost / level of output )
The more substitutes available for a product, the greater the price elasticity of demand T/F
TRUE
What does the short urn production function hold constant?
The amount of capital
The 7-Eleven chain of convenience stores in Japan reorganized its system for supplying its stores with food. This led to a sharp reduction in the number of trucks the company had to use, while increasing the amount of fresh food on store shelves. Someone discussing 7-Eleven's new system argues " this is not an example of technological change because it did not require the use of new machinery of equipment. Agree?
The argument is incorrect, because technology includes the speed of existing machinery and equipment and the efficiency of existing machinery and equipment
Agree or disagree? Adam Smiths idea of the grains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers but it doesn't apply in the manufacturing of less complex goods or in other sectors of the economy such as retail.
The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.
Which determinant is most important?
The availability of close substitutes
The price of organic apples falls and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic?
The demand for organic apples is elastic.
Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts to market price of $7.00
If the firm's marginal cost are $5 at every level of output, what shape will the firm's average total cost have ?
The firm's average total cost curve will be horizontal.
Suppose a firms average total cost curve is decreasing with output. What can be said of its marginal cost curve?
The firms' marginal cost curve must be below the average total cost curve.
The magnitude of the slope f the demand or supply curve tells us how the price changes for a one unit change in quantity .
The inverse of the magnitude tells us how the quantity changes for a one unit change in price.
limited liability
The legal provision that shield owners of a corporation from losing more than they have invested in the firm
How is the market supply curve derived from the supply curves of individual firms?
The market supply curve is derived by horizontally adding the individual firms' supply curves
What is the advantage of the midpoint method?
The midpoint formula will give the same value whether moving from the higher price to the lower price of from the lower price to the higher price
What is the main determinant of the price elasticity of supply?
The passage of time
Consider a decrease in demand for lawyers
The supply of lawyers will be inelastic in the short run as the lawyers have not had time to find another profession, but in the long run less people will go to law school as the supply becomes more elastic.
What happens when the quantity demanded is very responsive to changes in price?
The percentage change in quantity demanded will be greater than the percentage change in price/
Cross price elasticity of demand
The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
Compare the price elasticity of demand of water with he price elasticity of demand for wine.
The price elasticity of demand for water is likely relatively more inelastic because water is necessity
law of diminishing returns
The principle that, at some point, adding more of a variable input such as labor to the same amount of a fixed input such as capital will cause the marginal product of the variable input to decline
What is the production function?
The production function is the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
The profit maximizing level of output is where the difference between total revenue and total cost is the greatest.
The profit maximizing level of output is also where marginal revenue equals marginal cost MR=MC
A student makes the following remark: "The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfetly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits.
The remark is incorrect because the student has confused accounting profit and economic profit. Firms in a perfectly competitive market earn accounting profit but no economic profit.
Why isn't elasticity just measured by the slop of the demand curve?
The slop can change dramatically, depending on the units chosen for quantity and price.
The separation of ownership from control in large corporations and the principal agent problem means that top managers can work short days, take long vacations and otherwise slack off.
The statement may be true if the directors of the corporation have not set up appropriate incentive for their agents.
Why are firms willing to accept losses in the short urn but not in the long run?
There are fixed costs in the short run but not in the long run
How can companies sell the same book for a lower price than the government and still cover their expenses?
These companies decrease their average cost of production by increasing production from low levels.
Agree or disagree? Ford expected to be able to produce cars at a lower average cost at his River Rouge plant. However, because of diminishing return, his costs were actually higher.
This statement is incorrect. Ford was not able to produce cars at lower average cost due to diseconomies of scale.
Is jill correct when she says the following? I am currently producing 20000 pizzas per month at a total cost of 40000. If I produce 20001 pizzas my total cost will rise to 40001. Therefore, my marginal cost of producing pizzas must be increasing.
Though Jill's average total cost of production is decreasing, her marginal cost of producing pizzas could be increasing or decreasing.
The more substitutes available for a product, the greater the price elasticity of demand T/F
True
the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves are all
U shaped, and the marginal cost curve intersect both the average variable cost curve and the average totals cost curve at their minimum points
The story describes a new gold rush. Why hadn't all the gold already been discovered?
Until recently the mining technology was such that gold mining was difficult and expensive.
average variable cost (AVC)
VC/Q
what are diseconomies of scale?
When a firm's long run average costs increase with output.
Why does the exit of firms from an industry increase the economic profits of the existing firms?
When firms exit from an industry total industry supply decreases which increases industry price and economic profit of the existing firms.
price taker
a buyer or seller that is unable to affect the market price
Why does the entry of firms into an industry decrease the economic profits of the existing firms?
When new firms enter into an industry total supply in the industry increases leading to a reduction in price and economic profit of the existing firms
Are perfectly competitive markets productively efficient in the long run?
Yes, because because firms produce at the lowest average possible.
Are perfectly competitive markets allocatively efficient in the long run?
Yes, because firms produce where the marginal benefit to consumers equals the marginal cost of production
Do private equity firms improve corporate governance?
Yes, private equity firms replace poorly performing mangers with shareholder friendly managers.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing?
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
Yes. If the income elasticity of demand is greater than 1, then the good is luxury. IF the income elasticity of demand is positive but less than 1 hen the good is a necessity
Is it possible to tell from the income elasticity of demand whether a good is a luxury or a necessity?
Yes. if the income elasticity of demand is greater than 1, then the good is luxury. If the income elasticity of demand is positive bu tless than 1, then the good is a necessity
if demand is elastic
a decrease in price increases revenue because the increase in quantity demanded is proportionally greater than the decrease in price.
If demand is perfectly elastic what is the effect of an increase in price?
a decrease in quantity demanded to zero
If demand is perfectly elastic, then what is the effect of an increase in price?
a decrease in quantity demanded to zero
All of the following are true except
a firm maximizes profit when total cost equals total revenue
partnerships
a firm owned jointly by two or more persons and not organized into a corporation /owners are distinct from the business and personal money may be taken away
accounting profit
a firm's net income, measured as revenue minus operating expenses and taxes paid
economic profit
a firm's revenues minus all its cost, implicit and explicit
Which of the following is an example of positive technological change?
a firm's workers go through a training program
economic profit
a firms revenues minus all its implicit and explicit costs
indirect finance
a flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms ( and other borrowers)
direct finance
a flow of funds from savers to through financial markets, such as the New York Stock Exchange
If the price of a firm's bonds decreases, this indicates
a higher cost of new external funds
IN a perfectly competitive market the long run supply curve is
a horizontal line
corporation
a legal from of business that provides owners with protection from losing more than their investment should the business fail
if the income elasticity of SUVs is greater than 1, what is the good considered?
a luxury
perfectly competitive market
a market that meets the conditions of 1)many buyers and sellers, 2)all firms selling identical products and 3) no barriers to new firms entering the market
income elasticity of demand
a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income
implicit cost
a nonmonetary opportunity cost
The price elasticity of supply always has
a positive value
A buyer or seller that is unable to affect the market price is called
a price taker
principal agent problem
a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him
separation of ownership from control
a situation in a corporation in which the top management , rather than the shareholders, controls day to day operations
allocative efficiency
a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up tot he point where the last unit provides a marginal benefit to consumers equal tot he marginal cost of producing it.
Markets depend on accurate accounting and disclosure practices because
accurate information allows financial intermediaries to correctly assess the risk of lending, and properly determine the terms of lending
The law of diminishing returns states that
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
ceteris paribus
all else remaining equal
Which of the following terms best describes the state of the economy in which production reflects consumer preferences?
allocative efficiency
In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers,
allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.
IN a recession sales of a good with
an income elasticity of demand greater than one will decline the most and sales of a good with an income elasticity of demand less than zero will increase the most
In a recession, sales of a good with :
an income elasticity of demand greater than one will decline the most and sales of a good with an income elasticity of demand less than zero will increase the most
if demand is unit elastic
an increase in price does not affect revenue becuase the decrease in q demanded is proportionally the same as the increase in price
if demand is inelastic
an increase in price increases revenue because the decrease in Q demanded is proportionally smaller than the increase in price
An increase in the price of a substitute for iPad will lead to ... in the quantity of i pads demanded, so the cross price elasticity of demand will be ....
an increase; positive
The price elasticities in this range ( -0.3- -0.5)
are inelastic because they are less than one ( in absolute value )
As production levels increase, the Nook would become more profitable because
average cost per unit will fall
All of the following measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?
average fixed cost
Marginal cost equals average total cost when
average total cost is at its lowest point.
Why are consumers so powerful in a market system?
because it is consumer's demand that influences the market price and dictates what producers will supply in the market
Long run equilibrium in perfect competition results in
both allocative efficiency and productive efficiency
stock and bond markets are made up by
buyers and sellers of stocks and bonds
How is the price elasticity of demand measured?
by dividing the percentage change in the quantity demanded of a product by the percentage change in the products price
The establishment of limited liability for the owners of corporations
causes the businesses to produce more and over time the country's production possibilities frontier shifts to the right
marginal product of labor
change in Q / change in L
MC
change in total cost /change in output = delta TC /Delta Q
If amazon raises its prices by 10 percent, and as a result the quantity of books demanded on barnesandnoble.com increase by 35 percent, what do consumers consider the two to be?
close substitutes
If the cross price elasticity of demand is negative then the products are
complements, but if it is positive, then the products are substitutes
It is possible for profits to increase even if revenue decreases if
costs decrease more than revenue decreases
variable costs
costs that change as output changes
fixed costs
costs that remain constant as output changes
interest rate on a bond formula
coupon/face value
Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs .... as output increases.
decreases
Economies of scale happen when the firm's long run average total cost ... as output increases
decreases
marginal product initially increases due to division of labor and then ... due to the law of diminishing returns
decreases
When marginal cost is less than average total cost, average total cost must be
decreasing
industries with downward sloping long run supply curves are called
decreasing cost industries
If E(d) > 1
demand is elastic (responsive)
elastic demand
demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is GREATER than 1 in absolute value
If E(d) <1
demand is inelastic
if E(d)= 1
demand is unit elastic (not very responsive)
unit elastic demand
demand is unit elastic when the percentage change in quantity demanded is EQUAL to the percentage change in price, so the price elasticity is equal to 1 in absolute value
In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price
determined by the minimum point on the typical firm's average total cost curve
The IPO is an example of .... finance
direct
Yield (dividend yield)
dividend/closing price of the stock
For a firm in a perfectly competitive market, price is
equal to both average revenue and marginal revenue
A firm's stock may be overvalued despite the firm having solid growth prospects because of
exaggerated growth prospects, or an emotional buying spike
Which of the following are sometimes called accounting costs
explicit cost
a firm's
explicit cost is its monetary cost whereas its implicit cost is its nonmonetary opportunity cost.
For most products, the supply curve becomes increasingly the longer the period of time over which it is measured. T/F
false
The demand curve for a luxury is less elastic than the demand curve for a necessity t/f
false
The more time that passes, the more inelastic the demand for a product becomes
false
balance sheet
financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.
Economies of scale occur when
firm's long run average costs decrease with output
Any cost that remains unchanged as output changes represents a firm's
fixed cost
Average fixed cost
fixed cost divided by the quantity of output produced
There are no....... in the long run
fixed costs
AFC =
fixed costs /output
Generally speaking the..... the demand curve passing through a given point,t he more elastic the demand
flatter
outputs
goods and services produced by firm
There is a ...... economic efficiency from a price ceiling when demand is inelastic
greater
The short-run average cost can never be less than the less long run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run
An accountant increases the price he chargers for his services by 14 percent. In response, the demand for his services decreases by 8 percent. Will the accountant revenue from his accounting services increase, decrease or stay the same?
increase
When Lynch said that "the Nook business will scale, " he meant that Nook business will
increase in size gaining economy of scale advantages
If the demand for OJ is inelastic, will an increase in the price of OJ increase or decrease the revenue received by orange juice sellers? If the price of OJ increase , revenue will
increase.
If the price of wine increases by 10 percent, then the quantity of beer demanded will .... by .... If so, then beer is a ....
increase; 3.1 inferior good
As you move up a linear demand curve, the price elasticity of demand in absolute value
increases
total cost ... as the level of production increases
increases
When marginal product of labor is greater than the average product of labor, hen the average product of labor must be
increasing
Industries with upward sloping long run supply curves are called
increasing cost industries
It is better to have outside directors on the board of directors, as opposed to only inside directors, because
independent outsiders would be better suited to monitor and control the management of the corporation
Dow Jones Industrial Average
index of the stock prices of 30 large US corporations
S&P 500
index prepared by Standard$Poor's Corporation and includes the stock prices of 500 large US firms
If you borrow money from a ban to buy a new car you are using ... finance
indirect
Is the demand for agricultural products elastic or inelastic? The demand for agricultural product is
inelastic because such products represent a small share in the consumer's budget
On the lower part of a linear demand curve below the midpoint, the demand is... and raising the price causes total revenue to ...
inelastic, increase
On the lower part of a linear demand curve below the midpoint, the demand is .... and raising the price causes total revenue to
inelastic; increase
coupon payment
interest payment on a bond
shutdown point is
intersection of AVC and MC
The 'extra penalties' the developed economies could face from the increase in perceived risk could be that
investors buying government debt might demand higher interest rates
sole proprietorship
is a firm owned by a single individual business not separate form owners.
The demand for crude oil
is more price elastic in the long run than int he short run, because in the long run a s substitute for crude oil may be found
Allocative efficiency is when every good or service
is produced up to the point where the marginal benefit for consumers equals the marginal cost of producing it
Marginal revenue (MR)
is the change in total revenue from selling one more product change in total revenue / change in quantity MR=delta TR /Delta q
Corporate governance
is the way a corporation is structured and the effect of that structure on firm behavior
Because the price of laptops falls in the long run as output increase, what is true about this industry?
it is a decreasing cost industry/
Suppose a business earned a positive accounting profit, but a negative economic profit, then
it will be very unlikely for the firm to remain in the business in the long run
Even before the Thai government began to suffer large losses on the rice subsidy program, Thailand may have been at risk of a credit downgrade because
its leaders were over spending and increasing the national debt
a perfectly competitive firm's marginal cost curve is also
its supply curve.
What do you think of Jill's reasoning?
jill is incorrectly ignoring the opportunity cost of using the building she owns.
The price elasticity of demand for a particular brand of raisin bran is in absolute value
larger than the price elasticity of demand for all breakfast cereals
The price elasticity of demand for a particular brand of raising bran is in absolute value
larger than the price elasticity of demand for all breakfast cereals
If a firm decided to maximize revenue, would it be likely to produce a smaller or larger quantity than if its were maximizing profit? The firm would produces a .... quantity of output.
larger.
If a firm increases the price of its product and its total revenue increases, further increases in its price will
lead to further increases in its total revenue as long as the demand remains inelastic
if a firm increases the price of its products and its total revenue increases, further increases in its price will
lead to further increases in its total revenue as long as the demand remains inelastic
If a product has fewer subsitutes available , it will have ... elastic demand
less
In general, the price elasticity of demand for a good will be ... elastic the ..... the share of the good in the average consumer's budget
less; smaller
In general, the price elasticity of demand for a good will be ..... elastic the .... the share of the good in the average consumer's budget
less; smaller
Suppose Sheri owns a restaurant that serves pizza using three inputs: workers, restaurant space and layout and ovens. if workers are variable restuarant space is variable and ovens are variable then Sheri is producing pizza in the
long run
total cost
look at atc line multiply cost by quantity
variable cost
look at avc multiply cost by quantity
For a given demand of gold, over time the entry of all these firms into gold mining will
lower the price of gold and decrease the economic profits from gold mining.
Use your answer above and the expression given for the marginal product of labor and the marginal cost of output to find an expression for marginal cost , delta TC/delta Q in terms of the wage, w, and the marginal product of labor delta Q/delta L .
marginal cost equals w /( delta Q/ delta L )
The increase in total revenue that results form selling one more unit of output is
marginal revenue
firms in a perfectly competitive industry price is equal to
marginal revenue P= MR MR=MC, P=MC
The profit maximizing output is at which
marginal revenue is equal to marginal cost. (perfectly competitive market )
stock market indexes
measures the performance of the us stock market -are averages of stock prices, with the value of the index set equal to 100 in a particular year, called base year.
outside directors
members of board of directors who do not have direct management role
The marginal cost curve intersects both the average variable cost and the average total cost curves at their .... points
minimum
normal rate of return
minimum amount that investors must earn on the funds they invest in a firm , expressed as a percentage of the amount invested.
The marginal cost curve intersects both the average variable cost and the average total cost curves their
minimum points
The demand curve for a luxury is ... elastic than the demand curve for a necessity
more
The demand for a good will be ... elastic the larger the share of the good in the average consumer's budget
more
The more narrowly we define a market the ... elastic demand will be.
more
the more time that passes the ... elastic the demand for a product becomes.
more
The price elasticity of demand for Miller beer should be ..... than the price elasticity of demand for all bear.
more elastic
if a product has more subsitutes availbale, it will have .... .... ... .
more elastic demand
An article discussed the market for green cars such as hybrid gasoline, electric cars, and diesel cars. One factor the article mentioned as affecting the market for green cars was the increasing gas mileage of convention gasoline powered cars. This factor is likely to cause the demand for green cars to become
more price elastic
The demand for crude oil is
more price elastic in the long run than in the short run because in the long run a substitute for crude oil may be found
When demand increases equilibrium price will rise... when supply is .... elastic.
more, less
When demand increases, equilibrium price will rise ..... when supply is .... elastic
more; less
When demand increases, equilibrium price will rise.... when supply is..... elastic
more; less
In the 2010 holiday season, Steve Richardson decided to cut he prices of his hand crafted wooden puzzles to increase sales. According to a newspaper account, " the number of orders at Stave Puzzles Inc. hanst been enough to offset the price cut. The demand for these puzzles
must be inelastic because the percentage increase in the quantity demanded for orders is less than the percentage decrease in price of the puzzles
Demand curve has
negative slope
is it possible to place a dollar value on the benefits to complying with sarbanes-oxley?
no. many of the benefits, such as trust in corporate governance cannot be measure explicitly
implicit cost
nonmonetary opportunity cost
to maximize profit
one will produce the number where marginal cost equals marginal revenue
price elasticity of demand (midpoint formula)
page 174
To help firm raise enough funds to operate railroads and other large scale businesses the US.
passed general incorporation laws which limit the liability of owners in corporations
Price elasticity of demand tells us the
percent change in quantity demanded as a result of a one percent change in price. E(d)= %delta Qd/%delta P
Cross price elasticity of demand formula
percent change in quantity demanded of one good / percentage change in price of another good
income elasticity of demand formula
percentage change in quantity demanded/ percentage change in income
price elasticity of demand formula
percentage change in quantity demanded/percentage change in price
E(d)=- infinite
perfectly elastic
if a supply curve is horizongal line is it
perfectly elastic ( the quantity supplied is infinitely responsive to price and the price elasticity of supply equals infinity. )
if the supply curve is a vertical line it si
perfectly inelastic ( no more parking spots even if demand goes up at least for a while)
if a supply curve is a vertical line it is..... , and if its is a horizontal line it is....
perfectly inelastic and has a elasticity value of zero; perfectly elastic and has an elasticity value of infinity
stock market meanings
pg 248-249
Supply curve has
positive slope
For a normal good, the income elasticity of demand will be
positive, but for an inferior good, the income elasticity of demand will be negative
The cross price elasticity of demand between substitutes are most likely ...., and the cross price elasticities of demand between complements is most likely ....
positive, negative
For a normal good, the income elasticity of demand will be
positive; but for an inferior good, the income elasticity of demand will be negative
The income elasticity of demand for a normal good is ... and for an inferior good is
positive; negative
E(d)= 0
prefectly inelastic
From 1950 to 2012, what production in the US increased dramatically, resulting in a substantial decline in wheat prices. Two key factors explaining this decline in prices are that the demand for wheat is ...... and the income elasticity of demand for wheat is ...
price inelastic, low
What is the relationship between price, average revenue and marginal revenue for a firm in a perfectly competitive market ?
price is equal to both average revenue and marginal revenue
P-E Ratio ( price-earnings ratio)
price of the firm's stock/earnings per share
The firms marginal cost curve is its supply curve only for
prices at or above average variable cost
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the
production function
Which of the following terms best describes the results of the forces of competition driving the market price to the minimum average cost of the typical firm?
productive efficiency
perfect competition results in
productive efficiency
The principal is the student and the agent is the
professor
The price elasticity of demand measures the responsiveness of
quantity demanded to a change in price.
The staggered elections for the board of directors
raise doubt about the true financial picture of the firm making the investors reluctant to invest in the firm
The staggered elections for their board of directors
raise doubt about the true financial picture of the firm making the investors reluctant to invest in the firm
marginal cost
read the graph for MC for cost only
The principal agent problem between the owner of the business and its sales force is
reduced when workers are paid on commission because it gives them an incentive to work harder
If the marginal cost of production is greater than the average total cost of production, the average total cost of production must be
rising
over the counter market
security dealers linked by computers
Demand is inelastic when
the percentage chagne in quantity demanded is less than the percentage change in price
the law of diminishing returns applies in the
short run
Sunk costs
should be treated as irrelevant to short run decisions makings. For any firm, whether total revenue is greater or less than variable costs is the key to deciding whether to shut down or to continue producing in the short run. As long as a firms total revenue is greater than its variable costs, it should continue to produce no matter how large or small its fixed costs are.
A perfectly competitive firm is losing money in the short run, and its price is less than its average variable cost. In order to minimize its losses in the short run, this firm should
shut down.
As output increases average fixed cost gets
smaller and smaller. This result occurs because in calculating average fixed cost, we are dividing something that gets larger and larger-output- into something that remains constant -fixed costs
if the supply of oil become more elastic, any increase in deamand will result in a
smaller increase in price and larger increase in quantity than when the supply of oil is inelastic
As output increases, the vertical distance between average total cost and average variable cost curves gets... and equals....
smaller; average fixed cost
An asset is ..... and a liability is .....
something that the company owns; anything that the company owes
Cross price elasticity of demand between beer and spirits is 0.15. So, beer and spirits are
substitutes
what is the difference between technology and technological change?
technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same outputs using fewer inputs
If Moody's decides to downgrade Thailand's debt rating, the likely result will be
the Thai government will have to pay a higher interest rate when it sells bonds
marginal product of labor
the additional output a firm produces as a result of hiring one more worker
perfectly inelastic demand
the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero (vertical line) no matter how much price may increase or decrease, the quantity demand remains the same. (insulin)
perfectly elastic demand
the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity (horizonal line) increase in price causes the q demanded to fall to zero.
marginal cost
the change in a firm's total cost from producing one more unit of a good or service
Income elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in income
The midpoint method for calculating price elasticity of demand is:
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices.
total cost
the cost of all the inputs and firm uses in a production
interest rate
the cost of borrowing funds, usually expressed as a percentage of the amount borrowed
A decrease in the price of a firm's bonds would tell managers which of the following?
the cost of external funds has increased
A stock is considered to be overvalued when
the current stock price is not supported by earnings fundamentals
The family farm has been disappearing because:
the demand for food has not increased proportionally with increases in income , and increases in the supply of food have resulted n significant decreases in food prices
As output increases
the difference between average total cost and average variable cost decreases. This result occurs because the difference between average total cost and average variable cost is average fixed cost which gets smaller as output increases.
P< ATC
the firm experiences loss
P>ATC
the firm makes profit
If market demand curve shifts to the right, how will a competitive firm's level of output change
the firm will increase its output , and its profits will increase.
P= ATC
the firms breaks even (total cost equals total revenue )
opportunity cost
the highest valued alternative that must be given up to engage in an activity
minimum efficient scale
the level of output at which all economies of scale are exhausted
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long run average cost curve
Discuss the shape of the long run supply curve in a perfectly competitive market.
the long run supply curve is a horizontal line equal tot he minimum point on the typical firm's average total cost curve.
the long run average cost curve shows
the lowest cost at which a firm is able to produce a given quantity of output in the long run
When the marginal product of labor is rising
the marginal cost of output is falling.
If the marginal product of labor is falling, is the marginal cost of production rising of falling? Briefly explain:
the marginal cost of that output is rising because the only additional cost of producing more output is the additional wages paid to hire more workers.
Explain why it is true that for a firm in a perfectly competitive market, the profit maximizing condition MR=MC is equivalent to the condition P=MC . When maximizing profits, MR=MC is equivalent to P=MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve
shutdown point
the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
What term do economist use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?
the normal rate of return
What is the formula for the price elasticity of demand?
the percentage change in quantity demanded divided by the percentage change in price
Demand is elastic when
the percentage change in quantity demanded is greater than the percentage change in price
The cross-price elasticity of demand is
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good
The formula for the price elasticity of supply is
the percentage change in quantity supplied divided by the percentage change in price
short run
the period of time during which at least one of a firms inputs is fixed
long run
the period of time in which a firm can vary all its inputs, adopt new technology and increase or decrease the size of its physical plant .
The principal is
the person who wants to get something done and hires the agent to do the job.
technology
the processes a firm uses to turn inputs into outputs of goods and services ( skills of managers, training of workers, speed and efficiency of machinery and equipment
The price of Japanese phones might be high with low volumes in poor countries because
the production of mobile phones exhibits economies of scale
production function
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
The marginal revenue curve for a perfectly competitive firm is
the same as its demand curve , because the demand curve for a perfectly competitive firm is also a horizontal line at the market price.
constant returns to scale
the situation in which a firm's long run average cost remain unchanged as it increases output
diseconomies of scale
the situation in which a firm's long run average costs rise as the firm increases output
economic loss
the situation in which a firm's total revenue is less than its total cost, including all implicit costs
productive efficiency
the situation in which a good or service is produced at the lowest possible cost
long-run competitive equilibrium
the situation in which the entry and exit of firms has resulted in the typical firm breaking even.
economies of scale
the situation when a firm 's long run average costs fall as it increases the quantity of output it produces
Suppose a professional basketball game is o played at a downtown urban area, which increases demand for parking on the night of the game. If the urban area has limited ability to create additional parking during periods of peak demand then
the supply of parking will be more inelastic and the price of parking will increase by a relatively large amount the night of the game.
average product of labor
the total output produced by a firm divided by the quantity of workers
corporate governance
the way in which a corporation is structured and the effect that structure has on the corporation's behavior
Consumers are usually price takers when they buy most goods and services because ...., while relatively few firms are price takers because....
their individual purchases are small relative to the market; their individual output is larger relative to the market.
if demand is unit elastic
then a decrease in price does no affect revenue because the increase in q demanded is proportionally the same as decrease in price.
if demand is elastic
then an increases in price reduces revenue because the decrease in quantity demanded is proportionally greater than the increase in price
average total cost , ATC, equals total cost , TC, divided by quantity, Q .
therefore TC= ATC x Q
The emerging markets have been about "solvency" because
these nations were deemed as potential default risks in the the past
Academic book publisher typically consider the cost of travel
to be fixed because it remains constant as output changes
The rising costs of chipmaking machines might lead chipmaking companies to build larger factories
to reach the minimum efficient scale of production
In the long run, competition drives the market price
tot he minimum pint on the typical firm's long run average cost curve
ATC
total cost / output = TC/q
average total cost
total cost divided by the quantity of output produced
firm will shut down if
total revenue < variable cost (PxQ) < VC or P< AVC
Average revenue (AR)
total revenue divided by the quantity of the product sold
Profit
total revenue minus total cost TR-TC
average total cost is .... shaped. As production increase from low levels, average total cost falls, before rising at higher levels of productions
u
In a perfectly competitive industry with increasing average costs, the long run supply curve will be
upward sloping
Any cost that changes as output changes represents a firm's
variable cost
average variable cost
variable cost divided by the quantity of output produced
In the long run, total cost equals
variable cost, and average total cost equals average variable cost.
AVC
variable cost/output
Which costs are affected by the level of output produced?
variable costs
In the long run all costs are
variable.
Direct finance is borrowing ....., while indirect finance is borrowing ....
via financial markets; from financial intermediaries
Using symbols we can write that the marginal product of labor is equal to delta Q/ delta L. Marginal cost is equal to delta TC/delta Q. Because fixed costs by definition don't change, marginal cost is also equal to delta VC /delta Q. If Jill Johnson's only variable cost is labor cost, then her variable cost is just the wage times the quantity of workers hired, or w/L. If the wage Jill pays is constant, then what is delta VC in terms of w and L?
w* delta L
The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up.
inelastic demand
when the percentage change in quantity demanded is less than the percentage change in pirce, so the price elasticity is LESS than 1 in absolute value
Shareholders would push for stronger corporate governance laws to that top managers of corporations
will have less ability to inflate profits
A firm that does not reach its minimum efficient scale
will lose money if it remains in business
Why do single firms in perfectly competitive markets face horizontal demand curves?
with many firms selling an identical product, single firms have no effect on market price.
inputs
workers, machines, and natural resources
If Avis and Zipcar, before the merger, each were already as efficient as possible as stand alone companies, would a merger provide any additional possible efficiencies for the combined company ?
yes, because economies of scale would increase.
In perfect competition, long run equilibrium occurs when the economic profit is
zero
