Micro Final Exam
Kelly is willing to pay $5.20 for a gallon of gasoline. The price of gasoline at her local gas station is $3.80. If she purchases ten gallons of gasoline, what is her consumer surplus?
$14
Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business?
$170
Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are
$25
If the market price for a good is $16, and the government imposes a $14 sales tax per unit, what is the per-unit burden of the tax on buyers? (the price buyers pay is $24 and the price sellers receive is $10)
$6
Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are
$7500
Mark purchases a book for $6, and his consumer surplus is $2. How much is Mark willing to pay for the book?
$8
Tyler purchases 5 pounds of hot dogs per month when his monthly income is $2,000 and 4 pounds of hot dogs per month when his monthly income is $2,200. What is Tyler's income elasticity of demand for hot dogs?
-2.33
Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. What is the change in the quantity of the good demanded if there is a 0.1 percent increase in the price of the good?
0.2
What shifts the supply curve?
1. Input prices (cost of production) 2. Technology (cost of production) 3. Number of sellers 4. Expectations
What can shift the demand curve?
1. Number of buyers 2. Income 3. Prices of related goods (substitutes move right, complements move left) 4. Tastes 5. Expectations
Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, what is the cross price elasticity of demand?
1.213
When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information, what type of elasticity does the demand for eBooks have?
1.36
Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 4 tables or 12 chairs, whereas Traci can make 8 tables or 20 chairs. Given this, what is the opportunity cost of 1 chair for each worker?
1/3 table for Ken and 2/5 table for Traci
Suppose a firm currently produces 325 units of output per day with 15 workers. The firm is able to produce 340 units of output with a 16th worker. What is the marginal product of the 16th worker?
15 units of output
Suppose the price of a bag of tortilla chips decreases from $3.00 to $2.50 and, as a result, the quantity of tortilla chips demanded increases from 200 bags to 300 bags. Using the midpoint method, what is the price elasticity of demand for tortilla chips?
2.2
Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, what is the price elasticity of demand for frozen chicken nuggets?
2.33
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by how much?
40%
Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate. Aruba needs 2 hours to make one cooler, and 5 hours to make one radio. Iceland needs 1 hour to make one cooler, and 4 hours to make one radio. Assume both countries have 80 labor hours available. If each country divides its time equally between the production of coolers and radios, what is total production for both goods?
60 coolers and 18 radios
Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is what?
8 units of output
How do you find average total cost?
ATC = TC/Q
How do you find AVC?
AVC = TVC/Q
Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Jamaica can produce 12 coolers and 6 radios in one day. Norway can produce 24 coolers and 3 radios in one day. What does each country have a comparative advantage in?
Jamaica has comparative advantage in radios and Norway has comparative advantage in coolers
Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Jamaica can produce 12 coolers and 6 radios in one day. Norway can produce 24 coolers and 3 radios in one day. What should each country specialize in?
Jamaica: radios, Norway: coolers
If a firm is experiencing constant returns to scale, what is happening?
LRAC is constant
If a firm is experiencing increasing returns to scale, what is happening?
LRAC is decreasing
If a firm is experiencing decreasing returns to scale, what is happening?
LRAC is increasing
When a firm's only variable input is labor, then the slope of the production function measures the...
MPL
Can someone have an absolute advantage and comparative advantage in a good?
No, they can only have absolute advantage
If P < AVC, what do firms do in the SR and LR?
SR: shutdown, LR: exit
How do you find total cost?
TC = ATC x Q
How do you find total revenue?
TR = P x Q
When elasticity = 1, price and total revenue do what?
TR remains constant when price changes
What causes a movement along the supply curve?
a change in the price of the good or service that is being supplied
What is a PPF?
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. What happens as a result?
a shortage of treadmills will develop
For a particular good, a 5% increase in price causes a 15% decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many substitutes for the good b. The good is a necessity c. The market for the good is broadly defined d. The relevant time horizon is short
a. There are many substitutes for this good
How do you find deadweight loss?
area of triangle next to tax revenue rectangle
Where does MC intersect AVC and ATC curves?
at their minimum points
What are some determinants of price elasticity of demand?
availability of close substitutes have more elastic demand; necessities (inelastic) vs. luxuries (elastic)
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? a. cellular phones become less popular b. traditional landline phones become more expensive c. the components used to produce cellular phones become less expensive d. firms expect the price of cellular phones to fall in the future
b. traditional landline phones become more expensive
When looking at a demand curve, what is the new consumer surplus after an increase in price?
black triangle
When looking at a supply curve, what is the new producer surplus after an increase in price?
black triangle
When looking at a demand curve, what is the additional consumer surplus to existing consumers after an increase in price?
blue rectangle
When looking at a supply curve, what is the additional producer surplus to existing producers after an increase in price?
blue rectangle
Who is a price taker in a competitive market?
both buyers and sellers
If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would happen to the equilibrium price and quantity of lattés if the price of muffins rises?
both the equilibrium price and quantity would decrease
If consumers view cappuccinos and lattes as substitutes, what would happen to the equilibrium price and quantity of lattes if the price of cappuccinos rises?
both the equilibrium price and quantity would increase
What is fixed/variable in the short run?
capital is fixed, labor is variable
A model that shows how dollars flow through markets among households and firms is called what?
circular flow diagram
What are specialization and trade closely linked to?
comparative advantage
What is the driving force of specialization?
comparative advantage
How do you determine whether P or Q is ambiguous?
draw two graphs and show a larger change and smaller change; the one that consistently goes up/down is for sure and the other is ambiguous
In a perfectly competitive market in the long run, the process of entry and exit will end when...
economic profits are zero (all opportunity to make profit are gone so LR equilibrium is established)
If long-run average total cost decreases as the quantity of output increases, the firm is experiencing...
economies of scale
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 ATC is falling as output rises
When the price of chai tea lattes is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. What kind of elasticity of demand does Maxine have?
elastic, and her demand curve would be relatively flat
What determines the tax burden ratio?
elasticity: more elastic goods put more burden on sellers, more inelastic goods put more burden on buyers
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
What would the demand curve representing the demand for luxury goods with several close substitutes look like?
fairly elastic
In the long run, inputs that were _______ in the short run become __________
fixed; variable
What does a unit elastic demand curve look like?
flat
In a competitive market, the actions of any single buyer or seller will...
have a negligible impact on the market price
When do you exit?
if P < ATC or TR < TC
When do you shutdown?
if P < AVC
When do you enter?
if P > ATC or TR > TC
Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Bubba gave up is counted as part of the shrimp business's what?
implicit costs
When does diminishing marginal product occur?
in the short run because capital is fixed
If MR > MC...
increase Q to raise profit
If the government removes a binding price ceiling from a market, then the price received by sellers will do what?
increase, and the quantity sold in the market will increase
An increase in price causes an increase in total revenue when demand is what?
inelastic
There are very few, if any, good substitutes for motor oil, so what kind of elasticity of demand would it have?
inelastic
If demand is elastic and price goes up, what happens to total revenue?
it decreases
When elasticity = 1...
it has unit elasticity
If demand is inelastic and price goes up, what happens to total revenue?
it increases
What happens when the price ceiling is set below the market price?
it is binding, causes a shortage, and causes the quantity demanded to exceed the quantity supplied
What happens when the price floor is set above the market price?
it is binding, causes a surplus, and causes the quantity supplied to exceed the quantity demanded
When elasticity > 1...
it is elastic
When elasticity < 1...
it is inelastic
What happens when the price ceiling is set above the market price?
it is nonbinding and nothing changes
What happens when the price floor is set below the market price?
it is nonbinding and nothing changes
Suppose there is a decrease in the price of corn. If corn is an input into the production of ethanol, what will happen to the supply curve?
it will increase/move to the right
What is an example of an explicit cost?
lease payments for the land on which a firm's factory stands
Economies of scale occur when a firm's...
long-run average total costs are decreasing as output increases
What is not possible in the SR?
market entry, increase in demand increases firms' profits
When elasticity is > 1, price and total revenue do what?
move in opposite directions
When elasticity is < 1, price and total revenue do what?
move in the same direction
Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Would the countries gain from trade?
neither would benefit from trade because neither has a comparative advantage
Are public goods excludable or non-excludable? Rival or non-rival?
non-excludable and non-rival
Are common resources excludable? Rival?
not excludable and rival
If a nonbinding price ceiling is imposed on a market, what happens to the quantity sold in the market?
nothing/stays the same
The marginal product of labor can be defined as the change in what?
output divided by the change in labor
A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?
people respond to incentives
What is marginal revenue equal to?
price (MR = P)
How do you find profit?
profit = TR - TC or profit = (P - ATC) x Q
With free entry and exit...
profits = 0 in the LR and P = min. ATC
Demand is said to be elastic when what?
quantity demanded changes proportionately less than price
Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. What will happen as a result?
quantity demanded decreases, quantity supplied increases, there is a surplus
When looking at a demand curve, what is the initial consumer surplus?
red triangle
When looking at a supply curve, what is the initial producer surplus?
red triangle
If MR < MC...
reduce Q to raise profit
When consumers face rising gasoline prices, they typically do what?
reduce their quantity demanded more in the long run than in the short run
What does trade allow for?
specialization
What would a demand curve that is perfectly inelastic look like?
straight up and down
When is supply more elastic?
the long run
When calculating a firm's profit, an economist will subtract only what?
the opportunity costs from total revenue because these include both the implicit and explicit costs of the firm
How do you find tax revenue when looking at supply and demand curve?
the rectangle's area
Matthew bakes apple pies that he sells at the local farmer's market. If the price of apples increases, what will happen?
the supply curve for Matthew's pies will decrease
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. What does this illustrate the importance of?
the time horizon in determining the price elasticity of demand
What are determinants of the price elasticity of demand for a good?
the time horizon, the definition of the market for the good, the availability of substitutes for the good
Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also, assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, what will happen?
the two countries' combined output of both goods will be higher than it would be in the absence of trade; Greece will produce more fish than it would produce in the absence of trade; Germany will produce more cars than it would produce in the absence of trade
The amount of money that a firm receives from the sale of its input is called what?
total revenue
When is profit maximized?
when MR = MC
When does zero profit occur?
when P = ATC
What is competitive equilibrium?
when P = MC
In the long run, each firm in a competitive industry earns...
zero economic profits
In the long run, the typical firm earns...
zero profit