MicroEcon 202
Total costs are:
fixed costs plus variable costs. Total costs are the sum of fixed and variable costs.
Which of the following could be a possible cross elasticity of demand measure for two products such as peanut butter and jelly?
-0.8 A negative cross elasticity of demand indicates that two goods are complements.
If concerts have a price elasticity of 2, then that means for every 1% decrease in price, the quantity demanded will increase by:
2%. An elasticity of 2 tells us that for every 1% decrease in price, quantity demanded will increase by 2%.
Suppose Sally is using the utility maximization rule. If the marginal utility for cranberries is 8 and cranberries cost $4, what is the cost of gasoline if the marginal utility of gasoline is 3?
$1.50 (Marginal utility for good A/Price of good A) = (Marginal utility for good B/Price of good B). The equation is 8/$4 = 3/$X, so $X = $1.50.
Assume a perfectly competitive market becomes monopolized. What would you expect to happen to the market price?
The market price would rise. The market price would rise.
Long-run supply curves are _____ short-run supply curves.
more elastic than Price elasticity of supply measures how responsive producers are to changes in price. Long-run supply curves are more elastic than short-run supply curves.
Complements are defined as having a(n):
negative cross price elasticity of demand. Complements have a negative cross price elasticity of demand. As the price of one good increases, the quantity demanded of the other good decreases.
Which of the following statements is FALSE?
All costs are fixed costs in the long-run. All costs are variable in the long-run.
Fat's Meats is part of a cartel that controls the kielbasa industry. Which of the following would cause instability in this cartel?
Fat's Meats engages in nonprice competition. Nonprice competition between cartel members, such as enhanced services, creates instability in a cartel.
Bob is a painter. When customers come to his studio, he studies their interest and tries to gauge how much they would pay for a piece, attempting to get as much money as possible from each customer. This is an example of which type of price discrimination?
First-degree price discrimination First-degree price discrimination, also known as perfect price discrimination, involves charging each customer the maximum price he or she is willing to pay.
Which strategy involves punishing your opponent forever once a defection from the cooperative outcome is made?
Grim trigger A player following a grim trigger strategy retaliates permanently after one defection by an opponent.
The quantity demanded of lemonade increased due to a decrease in price. Because of this, the demand for tea decreased. In this example, lemonade and tea are what type of goods?
Substitute goods. Substitutes will be switched out for each other by consumers based on the goods' relative prices.
_____ are costs that have already been incurred and cannot be recovered.
Sunk costs Sunk costs have already been incurred and cannot be recovered.
The demand for guitars increases but supply stays the same. What would happen to the equilibrium price in this situation?
The equilibrium price would increase.
The key to resolving a Prisoner's Dilemma is for the players to:
cooperate with one another. Although this is likely to be illegal because of antitrust laws, collusion is the best way to resolve a Prisoner's Dilemma.
If Susan's income increases by 20% and as a result, she buys 40% more lattes, then:
income elasticity of demand for lattes is 2. Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. It is calculated by dividing the percent change in quantity demanded by the percent change in income.
In the short-run, if output is zero, then total cost:
is equal to fixed cost. If output is zero, there is no variable cost.
According to the law of supply, the price of potato chips and the quantity of potato chips supplied are:
positively related.
Which of the following would be an example of a variable cost?
Per unit wages for a carpenter. Variable costs, including expenses such as labor and material costs, fluctuate with output.
The market price would not change when:
quantity supplied and quantity demanded are equal.
Short-run _____ will cause firms to enter an industry in the long-run.
economic profits Short-run economic profits will likely cause firms to enter an industry in the long-run.
The quantity demanded of peanut butter increased due to a decrease in price. Because of this, the demand for jelly also increased. In this example, peanut butter and jelly are what type of goods?
Complementary goods. Complementary goods are goods that are typically consumed together.
__________ is composed of consumer surplus and producer surplus that is lost from producing less than the efficient level of output.
Deadweight loss By producing less than the efficient level of output, some consumers will be unable to buy the good.
Which of the following is not a characteristic of an oligopoly?
Firms earn zero economic profits in the long-run. It is possible for oligopoly firms to earn economic profits in the long-run due to barriers to entry.
Considering the demand for socks, what would cause a movement from one point on the demand curve to a point farther down upon the same curve?
a sale on socks
A benefit of price discrimination to consumers is that price discrimination:
allows more consumers to purchase a certain good. In markets where price discrimination occurs, more people are allowed to purchase a certain good.
If marginal cost is less than average total cost, then:
average total cost is decreasing. When marginal cost is below average total cost, average total cost is decreasing. Marginal cost equals average total cost at the minimum average total cost.
Since monopolists can charge high prices for the good or service they produce, the monopoly firm is likely to earn economic profits. The key to the firm retaining its monopoly power is significant __________ in the industry.
barriers to entry The economic profits would attract entry, which would result in a lower price and smaller profits. The key to retaining monopoly power is significant barriers to entry in the industry.
After factoring in implicit and explicit costs, if a firm is generating profits greater than zero, it is earning:
economic profits. A firm that is generating profits greater than zero after taking into account implicit and explicit costs is earning economic profits.
If soda and potato chips are complements, then their cross elasticity of demand is:
negative. The cross elasticity of demand for complements is negative.
Cross elasticity of demand is defined as the percentage change in:
quantity demanded of one product divided by the percentage change in the price of another product. Cross elasticity of demand is the percentage change in the quantity demanded of product A divided by the percentage change in the price of product B.
The market price would likely fall when:
quantity supplied is greater than quantity demanded.
If the following demand elasticities, 0.05 and 0.6, are given for a particular good or service, then:
0.05 is the short-run demand elasticity and 0.6 is the long-run demand elasticity. Demand becomes more elastic when consumers have more time to adjust to price changes.
If the price of a good decreases from $32 to $24, and the quantity demanded of the good increases from 80 to 100, then, using the midpoint method, what is the price elasticity of demand for that good?
0.78 Ed = (20/90) / (-8/28) = -0.78. Taking the absolute value, | -0.78 | = 0.78
Which of the following indicates a possible income elasticity measure for a normal good?
0.8 A normal good has an income elasticity greater than 0 and less than one.
Fat's Meats is part of a cartel that controls the kielbasa industry. Which of the following would cause instability in this cartel?
More firms could enter the industry. More firms entering the industry causes instability in a cartel.
If the producers of cotton shirts face higher cotton prices, which of the following is likely to occur?
The supply of cotton shirts would decrease, the equilibrium price would rise, and the equilibrium quantity would fall. An increase in the cost of production would decrease the supply of cotton shirts, increase its price, and decrease equilibrium quantity.
Diego spends all of his income on chips and soda. If his budget line shifts outward, Diego will:
be able to buy more of both goods. The budget line shifts to the right as income increases. Diego can now buy more of both goods.
A surplus is represented by the distance:
between the demand curve and the supply curve above the equilibrium point. The distance between the demand curve and the supply curve above the equilibrium point represents a surplus (where quantity supplied is greater than quantity demanded).
When the price of product A rises, the quantity of product B that is purchased decreases. Products A and B are:
complements. The goods are complements. When the price of product A rises, the quantity demanded of product A decreases; since the quantity purchased of product B also decreases, the two goods must be consumed together.
When consumers are given more time to adjust to higher prices:
consumers have more choices from which to select from. Demand is more elastic if consumers have more choices.
Fat's Meats is in an oligopoly market. According to the kinked demand curve model, if it raises its prices to increase profit, its competitors will:
do nothing. The kinked demand curve model assumes that if one firm raises its prices, the other firms will do nothing and the firm that raised its price will lose market share.
For a monopolist, price is ____ marginal revenue.
greater than For a monopolist, marginal revenue is less than price.
Martha has a one-year lease on the facility where she produces confections. If she shuts down her business before the year is up, she still has to pay for the entire lease. Because of this, her lease is characterized as a(n):
sunk cost. Sunk costs have already been incurred and cannot be recovered.
Based on sales history, a retailer calculates income elasticity for Gummycrumbs to be -0.8. However, due to a recession, incomes in the market area are down 10%. Based on this information, it can be estimated that Gummycrumb sales will:
increase by 8%. An income elasticity of -0.8 means that sales will increase by 0.8 times the 10% decrease in income, which is an increase of 8%.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. If it sells surfboards for $400 each and the marginal cost for each surfboard is $300, the company should:
increase production. The profit maximization rule states that firms maximize profits by producing output at a level where marginal revenue equals marginal cost. No other level of output produces higher profits. In a competitive market, price equals marginal revenue, so the firm should increase production to the point at which marginal cost rises to $400.
Stores often advertise "one day only" sales. This technique uses the short time period to make demand more ______________.
inelastic The stores are using time pressure to make demand more inelastic.
Game theory explores the behavioral aspects of the _____ that is typical of oligopolies.
interdependence Game theory is an approach to analyzing oligopoly behavior using mathematics and simulations, assumptions about the players, time, level of information, strategies, and other aspects of the game. It is used to model the interdependence of oligopolists.
A sole proprietorship:
is a business consisting of a single owner who supervises and manages the business and is subject to unlimited liability. A sole proprietorship is relatively easy to establish because it has just one owner who assumes complete liability for the business.
If Susan's income increases by 20% and as a result, she buys 40% more lattes, then:
lattes are a luxury good. Luxury goods are defined as having an income elasticity greater than 1. In this case, lattes have an income elasticity of +40%/+20% = 2.
Typically, businesses that require large amounts of capital need more time to make _____ adjustments.
long-run Businesses that require large amounts of capital generally need more time to make long-run adjustments.
The _____ is a period over which no factor of production is fixed.
long-run The long-run is a period sufficient for firms to adjust all factors of production.
The perfectly competitive firm's short-run supply curve is the:
marginal cost curve above the average variable cost curve. The marginal cost curve above the average variable cost curve is the perfectly competitive firm's short-run supply curve.
The change in output that results from a change in labor is the:
marginal product. Marginal product is the change in output that results from a change in labor.
For a competitive firm, the profit-maximizing quantity is found where marginal revenue equals marginal cost. For a monopoly, the profit-maximizing quantity is where:
marginal revenue equals marginal cost. Like competitive firms, the profit-maximizing quantity for a monopoly is found where marginal revenue is equal to marginal cost.
Compared to a single-price monopolist, price discrimination:
may lead to higher prices for some consumers, but it also improves efficiency by allowing more consumers to purchase the goods they desire, reducing deadweight loss. Some consumers with lower elasticities may pay higher prices, but those with higher elasticities may now have access to certain goods, which reduces deadweight loss.
Compared with a single-price monopolist, a price-discriminating monopolist:
may lead to higher prices for some consumers, but it also improves efficiency by allowing more consumers to purchase the goods they desire, reducing deadweight loss. Some consumers with lower elasticities may pay higher prices, but those with higher elasticities may now have access to certain goods, which reduces deadweight loss.
Suppose that a sole producer can earn economic profits if he produces a certain output, but that the addition of a second producer would eliminate economic profits for both firms. This is a case of:
natural monopoly. A natural monopoly occurs when there are significant economies of scale, such that one firm can produce a good more efficiently than two or more competing firms.
When production technology improves, supply increases and the equilibrium:
quantity rises, and the equilibrium price falls. When supply increases, price decreases and quantity increases.
The market price would likely fall when:
quantity supplied is greater than quantity demanded. When quantity supplied is greater than quantity demanded, there is a surplus, and the market price will fall until equilibrium is reached.
The market price would likely rise when:
quantity supplied is less than quantity demanded.
A firm will MOST likely decrease the price of its output if the:
quantity supplied of the good exceeds the quantity demanded. If there is a surplus, the price will fall.
If the quantity demanded is greater than the quantity supplied:
some consumers will offer to pay more for the product. A shortage occurs when quantity demanded is greater than quantity supplied, and prices increase towards equilibrium.
Since consumers are taking fewer vacations, the demand for theme park tickets has decreased, even though its price has stayed the same. This change in demand is represented by:
the demand curve shifting to the left of the original curve. A decrease in demand for a reason other than price is represented by the creation of a new curve to the left of the original curve.
As demand for oil increases and pushes prices higher, more oil shale projects become profitable as a result of the higher price and the quantity supplied increases. This is an example of:
the demand curve shifting to the right. This is an example of the demand curve shifting to the right. The new oil projects coming online due to higher demand is an example of moving up the supply curve to a higher quantity supplied.
In general, the smaller the percent of household income spent on a product:
the lower the elasticity of demand. When the amount spent is a small portion of income, consumers are less sensitive to price.
Income elasticity of demand measures how responsive:
quantity demanded is to a change in consumer income. Income elasticity of demand measures how responsive quantity demanded is to changes in consumer income.
What will happen to the quantity demanded of a perfectly inelastic product when its price increases by 5%?
It will stay the same. For products with perfectly inelastic demand, quantity demanded does not change when the price changes.
John, an artist who makes sculptures of bears from tree stumps, charges more for larger sculptures. This is an example of which type of price discrimination?
John is not practicing price discrimination. In this case, John is charging different prices for different products.
_____ plants will have the highest short-run average costs at lower levels of output.
Larger Larger plants will have higher short-run average costs at lower levels of output but will have much lower average total costs at higher levels of output.
Which of the following is considered to be an explicit cost?
The payment of an electric bill. Explicit costs are paid directly to another economic entity; they include items such as wages, lease payments, taxes, and utilities.
Price discrimination based upon different levels of consumption is:
second-degree price discrimination. Second-degree price discrimination is based upon different levels of consumption.
Games in which the players' actions occur at the same time are called:
simultaneous-move games. In simultaneous-move games, the players' actions occur at the same time.
Demand is defined as the amount of a product that buyers are __________ to purchase over some time period at various prices.
willing and able. Demand requires both a willingness to purchase and an ability to purchase a product.
Perfect price discrimination requires that the price being charged is equal to:
willingness-to-pay. First-degree price discrimination, also known as perfect price discrimination, is based upon willingness-to-pay.
In the long-run, which factor of production can a firm NOT adjust?
All factors of production can be adjusted in the long-run. In the long-run, firms can adjust all factors, including leaving the industry.
Tic-tac-toe and golf are:
sequential-move games. In sequential-move games, players take turns.
Assume that Jim has $60 to spend on pizzas and wall climbing and has the budget line shown in the figure below. What is the price of a pizza?
$12 Since Jim can buy 5 pizzas with $60, the price of a pizza is $60/5 = $12.
Referring to the table below, the marginal cost of the third unit produced is:
$15 The marginal cost of the third unit is the change in variable cost, $70 - $55 = $15.
Metropolitan Power and Light is a monopoly in the electrical generation and distribution industry. If its marginal revenue equals $2 when its output is 100,000 kilowatt hours, what is its marginal cost if it is maximizing its profits?
$2 Profit maximization for a monopolist occurs when marginal revenue equals marginal cost.
Ted's Lawn Care has total fixed costs of $300,000, total variable costs of $200,000, and an output of 50,000 units. What is Ted's Lawn Care's average total cost?
$10 Average total cost is determined by dividing total costs by output. Total cost equals fixed costs plus variable costs. The equation is $500,000/50,000 = $10.
The following table shows the total product of labor for Adam's business, Santa Monica Artisan Cheeses. At which level of labor is average product the highest?
6 Average product is calculated by dividing total product by the amount of labor. Based on the table provided, 46/6 = 7.66 is the highest level of average product achieved.
Shannon just received a significant pay raise at work. Because of this pay increase, she has started to eat more sushi. In this example, sushi is what type of good?
Normal good. A good is termed a normal good when an increase in income results in a rising demand for that good, or when a decrease in income results in falling demand.
Suppose the demand for skateboards increases but supply stays the same. What would happen to the equilibrium price in this situation?
The equilibrium price would increase. The equilibrium price would increase because an increase in demand combined with an unchanged supply leads to an increase in equilibrium price.
Suppose that the local food store lowers the price of hot dogs. Which of the following would likely occur as a result?
The quantity demanded of hot dogs will increase and the demand for hot dog buns will shift to the right. A decrease in price results in an increase in the quantity demanded. As a result, the demand for a complementary good will increase.
In 2010, frost badly damaged the tomato crop in Florida. The crop loss caused tomato prices to increase. According to the law of demand, what will happen to the quantity of tomatoes demanded based on this price change?
The quantity demanded will decrease. The law of demand states that, while holding all other relevant factors constant, as price increases, quantity demanded falls.
When a certain company charges more for higher-quality products, which type of price discrimination is it practicing?
This company is not practicing price discrimination. Charging more for different-quality products is not a form of price discrimination.
The gaming console market is dominated by the likes of Microsoft, Sony, and Nintendo. If each company is willing to match price decreases but not price increases, this would result in:
a kinked demand curve. A kinked demand curve shows the market effects when firms match price decreases but not price increases.
If the supply curve is vertical, a decrease in demand will:
decrease price only. A vertical supply curve implies that quantity supplied cannot change at any price. Hence, only the price will decrease.
Ted's Lawn Care has made the decision to increase output. As output increases, average total cost will:
decrease to a certain point and then increase. Average total costs decrease to a certain point and then begin to increase as more output is produced.
In the short-run, total production for a firm will typically vary with the amount of:
labor. In the short-run, total product for a firm will typically vary with the amount of labor.
A basketball player's quickness, strength, and shooting accuracy can be considered:
labor. Labor includes the mental and physical talents of individuals that are used to produce products and services.
When quantity supplied is greater than quantity demanded, price is likely to:
fall.
When quantity supplied is less than quantity demanded, price is likely to:
rise.
Metropolitan Power and Light is a monopoly in the electrical generation and distribution industry. If it charges $1 per kilowatt hour, its marginal revenue would be ________.
$0.75 For a monopolist, marginal revenue is less than price.
Willco Manufacturing has total variable costs of $100,000 when the output is 50,000 units. When output is increased to 75,000 units, the total variable costs increase to $125,000. What is Willco Manufacturing's per unit marginal cost of producing these additional units?
$1 Marginal cost is determined by dividing the change in total variable costs by the change in output. The equation is ($125,000 - $100,000)/(75,000 - 50,000) = $25,000/25,000 = $1.
Ted's Lawn Care has total variable costs of $100,000 when output is 50,000 units. When output is increased to 100,000 units, the total variable costs increase to $175,000. What is Ted's Lawn Care's per unit marginal cost of producing these additional units?
$1.50 Marginal cost is determined by dividing the change in total variable costs by the change in output. The equation is ($175,000 - $100,000)/(100,000 - 50,000) = $75,000/50,000 = $1.50.
Ted's Lawn Care has total costs of $500,000 and an output of 50,000 units. What is Ted's Lawn Care's average total cost?
$10 Average total cost is determined by dividing total costs by output. The equation is $500,000/50,000 = $10.
Assume that Jim has $60 to spend on pizzas and wall climbing and has the budget line shown in the figure below. What is the price of an hour of wall climbing?
$24 Since Jim can buy 2.5 hours of wall climbing with $60, the price of an hour of wall climbing is $60/2.5 = $24.
If LMS Manufacturing sold 300,000 units and its total revenue was $900,000, what was the price per unit?
$3 Total revenue = Price x Quantity. Price can be found by rearranging the formula. Price = Total revenue/Quantity. The solution is $900,000/300,000 = $3.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. If at its profit-maximizing level of output marginal revenue is $300 per surfboard, what is the marginal cost of each surfboard?
$300 In a perfectly competitive market, a firm maximizes profit where marginal revenue equals marginal cost.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. The market price for surfboards in the long-run is $300. If Ocean Magic sells 250 surfboards at $300 and earns normal profits, what is its average total cost?
$300 When a firm is selling at the long-run market equilibrium price, the price equals average total cost.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. The market price in the long-run for surfboards is $325. If Ocean Magic sells 37 surfboards at $325 and is earning normal profits, what is its average total cost?
$325 When a firm is selling at the long-run market equilibrium price, the price equals average total cost.
Ted's Lawn Care has total variable costs of $200,000 and an output of 50,000 units. What is Ted's Lawn Care's average variable cost?
$4 Average variable cost is determined by dividing total variable costs by output. The solution is $200,000/50,000 = $4.
Foods sold on the street in developing countries is an example of perfectly competitive markets. If a vendor sells an item for the equivalent of $4 each and sells a total of 20 units, what is his or her marginal revenue?
$4 Price equals marginal revenue in perfectly competitive markets, so marginal revenue is $4.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. If it sells 20 surfboards for $400 each, what is its marginal revenue?
$400 Price equals marginal revenue in competitive markets, so marginal revenue is $400.
If the average total cost of selling bubble tea is $5 and a firm is earning a normal profit, what is the price of bubble tea?
$5 When a firm earns a normal profit, price equals average total cost.
Sullivan Landscaping recorded a profit of $20,000 in 2009. If its total revenue was $540,000, what was its total cost?
$520,000 Profit = Total revenue - Total cost. Therefore, Total cost = Total revenue - profit. The solution is $540,000 - $20,000 = $520,000.
Assume that Paul has $30 to spend on pizzas and wall climbing and has the budget line shown in the figure below. What is the price of a pizza?
$6 Since Paul can buy 5 pizzas with $30, the price of a pizza is $30/5 = $6.
Ocean Magic is a surfboard company that sells surfboards in a perfectly competitive market. If it sells 100 surfboards for a price of $120 each and average total cost is $40 each, what is the firm's total economic profit?
$8000 Economic profits are earned when price is greater than average total cost, as it is in this example. Economic profit is equal to price minus average total cost times the quantity sold. The calculation is ($120 - $40) x 100 = $8,000.
Mr. Warner buys 10 cartons of cigarettes a day for $50 each and sells them at a higher price. If Mr. Warner earns $450 in profit a day, what is his total revenue?
$950 Profit = Total revenue - Total cost. If profit is $450 and his cost is $500, this means his revenue must be $950.
Suppose that a monopolist decides to produce and sell 10 units that can be sold in the market for $8 each. If the firm wishes to sell 11 units, it must charge $7 each. The marginal revenue from selling the 11th unit is:
-$3. In the long-run, firms will enter the market when the price is greater than average total cost.
Suppose that the increase in price for a new video game is 10%, while the increase in quantity supplied of that same video game is 10%. What is the price elasticity of supply for the video game?
1 Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price. The calculation is 10%/10% = 1.
If Willco's Manufacturing production increased from 200 units to 210 units after hiring an additional employee, what is the marginal product?
10 Marginal product is determined by dividing the change in output by the change in labor. The solution is (210 - 200)/1 = 10/1 = 10.
Mary is consuming at a point on her budget line. Her income is $40 a week, and she purchases hamburgers and grilled cheese sandwiches. If both goods cost $2 each, and she purchases five hamburgers, how many grilled cheese sandwiches does Mary buy?
15 (Price of hamburgers x Quantity of hamburgers) + (Price of sandwiches x Quantity of sandwiches) = Income. $40 - ($2 x 5) = $30; $30/$2 = 15 grilled cheese sandwiches.
The following table lists marginal utility and price data for a number of products. What is the marginal utility per dollar for a hot dog?
15 Marginal utility per dollar = Marginal utility/Price. The calculation is: 30/$2 = 15.
The following table shows the total product of labor for Adam's business, Santa Monica Artisan Cheeses. At what level of labor does Adam's business begin to have diminishing marginal returns?
6 Marginal product is the change in output that results from a change in labor. Diminishing marginal returns occur when an additional worker adds to total output but at a diminishing rate. Marginal product begins to fall when the sixth employee is added.
Suppose that the increase in price for a new video game is 10%, while the increase in quantity supplied of that same video game is 60%. What is the price elasticity of supply for the video game?
6 Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price. The calculation is 60%/10% = 6.
The figure depicts average variable cost, average total cost, marginal cost, and average fixed cost for a firm. Which curve most likely represents marginal cost?
A Curve A represents marginal cost. It passes through the lowest points on both the average total cost and average variable cost curves.
Which of the following would enchance a cartel's stability?
A lack of nonprice discounts. The stability of a cartel will increase if firms avoid nonprice discounting.
Which of the following is an example of elastic supply?
A product that has a price elasticity of supply that equals 1.5 A product has elastic supply when the price elasticity of supply is greater than 1.
Which of the following would most likely occur in the short-run?
A retail store hires five new workers. Firms can adjust the number of workers in the short-run.
Which of the following is an example of price discrimination?
A theme park charging $50 for one-day admission and $80 for two-day admission. Price discrimination occurs when a firm charges different consumer groups different prices for the same product.
Which of the following is an example of price discrimination?
An airline company selling the same type of seat on the same plane for different prices. Price discrimination occurs when a firm charges different consumer groups different prices for the same product.
Which of the following is an example of a tit-for-tat strategy?
Attacking one of your enemy's ships every time the enemy attacks one of your ships. A tit-for-tat strategy is a simple strategy that repeats a competitor's prior move.
Ted's Lawn Care has made the decision to increase output. Which of the following will DECREASE continually as output increases?
Average fixed cost Average fixed costs decrease continuously as more output is produced.
The following figure depicts marginal cost, average variable cost, and average total cost for a competitive firm. At which point along the marginal cost curve would the firm be indifferent about shutting down and staying in business in the short-run?
B A firm is indifferent about shutting down and staying in business in the short-run when the price is equal to average variable cost.
Which of the following industries is least likely to be an oligopoly?
Blue jean designer There are hundreds of blue jean designers, each one of them offering a differentiated product.
Joe's Diner and Bev's Drive Thru, two competing restaurants, are considering whether to advertise. Each cell in the accompanying table shows Bev's payoffs on the left and Joe's on the right. If they play only once, choose at the same time, and have perfect information about their own payoffs, what is the likely outcome?
Both will advertise. This is a classic Prisoner's Dilemma. The payoff for both players would be higher if neither advertised. However, individually both are better off advertising regardless of which decision the other makes.
Assume that the three curves in the graph below represent the average total cost curve for three different plant sizes. Which plant should be built to produce an output of 1.0 units?
C 1.0 units can be produced for the lowest average total cost using plant C.
Which segment represents the short-run supply curve in the figure below?
CE The marginal cost curve equal to and above the average variable cost curve is the perfectly competitive firm's short-run supply curve.
The following figure depicts marginal cost, average variable cost, and average total cost for a competitive firm. At which point along the marginal cost curve would the firm earn positive economic profits?
D A firm will earn positive economic profits in the short-run whenever the price is above its average total cost.
Assume a monopoly market becomes perfectly competitive. What would you expect to occur?
Deadweight loss would be eliminated. An increase in competition reduces deadweight loss. If a market becomes perfectly competitive, deadweight loss is eliminated.
Delta Technologies, Inc., has seen economies of scale because of advanced technologies that have allowed it to make production more efficient. Delta Technologies, Inc., is in which type of industry?
Decreasing cost industry A decreasing cost industry is characterized by lower costs and prices because of technological advances and economies of scale.
Find the Nash equilibrium of the following simultaneous-move noncooperative game with perfect information.
Down and Left This is a Nash equilibrium because neither player has any reason to deviate.
Find the Nash equilibrium of the following simultaneous-move noncooperative game with perfect information.
Down and Right This is a Nash equilibrium because neither player has any reason to deviate.
Decreasing cost industries are common when a new technology or product is introduced. What is the shape of the long-run supply curve in an industry like computer-chip production?
Downward sloping The long-run supply curve in a decreasing cost industry is represented by a downward-sloping line.
When a certain company is able to secure all the total surplus in a market for itself, which type of price discrimination is it practicing?
First-degree price discrimination First-degree price discrimination, also known as perfect price discrimination, involves charging each customer the maximum price he or she is willing to pay.
The following diagram shows a typical firm's short-run output in a competitive market. What is likely to happen in the long-run?
Industry output will increase. Short-run economic profits will lead firms to enter an industry and increase industry output.
The following diagram shows a typical firm's short-run output in a competitive market. What is likely to happen in the long-run?
Industry output will stay the same. When the typical firm in a competitive market is producing at minimum average total cost, there is no pressure for firms to leave or enter the market.
After Lindsay received a raise at work, she stopped eating canned creamed corn. For Lindsay, which type of good is canned creamed corn?
Inferior good The quantity demanded of an inferior good falls when consumer income increases.
Rick received a 10% increase in salary and purchased only half as much macaroni and cheese as he had before. For Rick, which type of good is macaroni and cheese?
Inferior good The quantity demanded of an inferior good falls when consumer income increases. Inferior goods are those goods for which income elasticity is negative.
Yolen buys coffee and doughnuts each week. Suppose the price of coffee decreases from $2.39 per cup to $2 per cup. What happens to Yolen's budget line?
It pivots outward along the axis that measures the quantity of coffee purchased. The budget line pivots outward along the axis that measures the quantity of coffee purchased.
Franklin buys bananas and oranges each week. Suppose the price of bananas decreases from $1.29 per pound to $1.17 per pound. What happens to Franklin's budget line?
It pivots outward. The budget line pivots outward when the price of a good decreases.
Franklin buys bananas and oranges each week. If the price of oranges increases, what happens to Franklin's budget line?
It pivots. The budget line pivots when the prices of the goods purchased changes.
Megan receives a promotion at work and as a result makes $300 more each week. What happens to Megan's budget line after her promotion?
It shifts to the right. The budget line shifts to the right as income increases.
Megan receives a promotion at work and as a result, her hourly wages increase from $12.50 per hour to $15 per hour. What happens to Megan's budget line after her promotion?
It shifts to the right. The budget line shifts to the right as income increases.
Willco's Manufacturing has made the decision to increase output. What will happen to the average total cost as output increases?
It will decrease to a certain point and then it will increase. Average total costs decrease to a certain point and then begin to increase as more output is produced.
Which of the following would be an example of a fixed cost?
Liability insurance for a lawn company. Fixed costs do not change as a firm's output expands or contracts; such costs are often called overhead. These payments include items such as lease payments, administrative expenses, property taxes, and insurance.
Smaller plants will have _____ short-run average costs at lower levels of output than medium-size or large plants.
Lower Smaller plants will have lower short-run average costs at lower levels of output.
Suppose that the quantity demanded for a product rises by 9% as incomes of consumers rises by 3%. What type of good is this product?
Luxury good Income elasticity is 9%/3% = 3. Since income elasticity is greater than one, the good is a luxury good.
The profit maximizing level of output for a monopoly occurs where:
MR = MC < P. Profit maximization occurs where MR = MC, and price must be greater than this point.
In a perfectly competitive market, suppose the price for a certain good is currently $25 and average total cost is $18. What is expected to happen in the market in the long-run?
More firms will enter the market. In the long-run, firms will enter the market when the price is greater than average total cost.
In agriculture markets, many products are standardized because all firms sell the same thing. This is an example of which type of market structure?
Perfect competition A perfectly competitive market is one that deals with homogeneous, or standardized, products.
A firm that sells a standardized product, similar to all the other firms in its industry, is operating under which market structure?
Perfect competition Perfect competition is characterized by firms selling standardized products.
What would have to happen in the Prisoner's Dilemma to have Player 1 spend the least amount of time in jail?
Player 1 would have to confess and player 2 would have to not confess. For player 1 to spend no time in jail, player 1 would have to confess and player 2 would have to not confess.
The following figure depicts a monopoly market. If the monopolist maximizes profit, at what level of output will she produce?
Q1 To maximize profit, a monopolist produces at the level of output where MR = MC, which is at Q1.
Allied Ropes charges its customers $2 per foot of rope for the first 100 feet, $1.50 per foot for the second hundred feet, and $1 per foot for each additional foot above 200 feet. This is an example of which type of price discrimination?
Second-degree price discrimination Second-degree price discrimination occurs when a seller charges different customers different prices based upon the quantities they purchase.
Which of the following is a requirement for successful price discrimination?
Sellers must be able to prevent arbitrage. This is a required condition for successful price discrimination.
Which of the following is NOT a requirement for successful price discrimination?
Sellers must have higher price elasticities than buyers. This is not required for successful price discrimination.
Which of the following is a requirement for successful price discrimination?
Sellers must have some market power. For successful price discrimination, sellers must have some market power.
Which of the following would be an example of a variable cost?
Sheet metal used in manufacturing. Variable costs, including expenses such as labor and material costs, fluctuate with output.
Ocean Magic is a surfboard company that sells surfboards in a competitive market. What would happen if the market price for surfboards fell below Ocean Magic's average variable cost?
The company would have to shut down its manufacturing in order to minimize losses. Since the firm's variable costs are not being covered, it must shut down production so losses are minimized to its fixed costs only.
The following diagram shows a typical firm's short-run output in a competitive market. What is likely to happen in the long-run?
The firm's output will decrease. Short-run economic profits will lead firms to enter an industry, which will increase industry output. This will force prices down and cause the typical firm's output to decrease.
Which of the following is a characteristic of an oligopoly?
The firms are interdependent. An oligopoly is characterized by interdependence, which means that each firm must consider the responses of its competitors to its decisions.
Assume a perfectly competitive market becomes monopolized. What would you expect to happen to the level of output?
The level of output would fall. Reducing competition would cause the level of output output to fall.
The market price in a perfectly competitive market is $15 and 2,000 units are bought and sold. Assume the market then becomes monopolized. What would you expect to happen to the market price?
The market price would rise above $15. The market price is expected to rise with less competition.
In a perfectly competitive market, suppose the price for a certain good is $8 and average total cost is $4. What is expected to happen to the number of firms in this market in the long-run?
The number of firms should increase. When positive economic profits are being earned, firms will enter the market.
In a perfectly competitive market, suppose the price for a certain good is currently $15 and average total cost is $14. What is expected to happen to the price in the long-run?
The price will decrease. In the long-run, firms enter the market, pushing prices lower until economic profit is equal to zero.
In a perfectly competitive market, suppose the price for a certain good is currently $12 and average total cost is $14. What is expected to happen to the price in the long-run?
The price will increase. In the long-run, firms exit the industry, pushing prices higher until economic profit of the remaining firms is equal to zero.
In a perfectly competitive market, suppose the price for a certain good is currently $14 and average total cost is $14. What is expected to happen to the price in the long-run?
The price will remain constant. In the long-run, economic profit is equal to zero.
Which of the following is a characteristic of a monopoly market?
There are substantial barriers to entry. A monopoly is a one-firm industry that produces a product or service with no close substitutes and that has substantial barriers to entry.
What is a disadvantage of sole proprietorships?
There is limited ability to raise capital. Single owners are limited in their ability to raise capital.
Given a consumer's budget line, which combinations of goods would NOT be attainable?
Those to the right of the budget line. Points to the right of the budget line are unattainable.
Which of the following strategies allows for one mistake by your opponent before you retaliate forever?
Trembling hand trigger A trembling hand trigger strategy allows for one mistake by your opponent before you retaliate forever.
Suppose that Julie has $10 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which combination of candy bars and peanuts would NOT be attainable for Julie?
Two candy bars and five bags of peanuts. Two candy bars and five bags of peanuts would cost (2 x $2) + (5 x $1.50) = $11.50. This combination is not attainable.
The following tables show the total utility Miranda gains from consuming pizza and watching movies. If pizzas cost $5, movies cost $10, and Miranda's budget is $20, what combination of pizza and movies will she buy?
Two pizzas and one movie. Utility maximization occurs where (Marginal utility for good A/Price of good A) = (Marginal utility for good B/Price of good B). The second pizza gives 10/$5 = 2 utils per dollar, and the second movie gives 20/$10 = 2 utils per dollar, so utility is maximized.
Second-degree price discrimination is MOST likely to be used in which of the following industries?
Utility industry Second-degree price discrimination, which involves charging different customers different prices based upon the quantities they purchase, often occurs in the utility industry.
Which of the following is an example of price discrimination?
Which of the following is an example of price discrimination? Price discrimination occurs when a firm charges different consumer groups different prices for the same product.
Suppose that John has $8 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which combination of candy bars and peanuts would NOT be attainable for John?
Zero candy bars and six bags of peanuts. Six bags of peanuts would cost (6 x $1.50) = $9. This combination is not attainable.
A one-firm industry with no close product substitutes and with substantial barriers to entry is:
a monopoly. A monopoly is a one-firm industry with no close product substitutes and with substantial barriers to entry.
Increasing marginal returns occur when:
a new worker adds more to total output than the previous new worker, so that both average and marginal products are rising. Increasing marginal returns occur when marginal product rises with each additional worker.
Kip invents a device that extracts water from a tuna fish can after it is opened. Kip would have a monopoly on this invention because he has:
a patent. Patents are extended to firms and individuals who invent new products and processes. The patent protects the patent holder from product competition for a limited time.
Amco Airlines decides to lower its price in response to UN Airlines' price reduction. In game theory, this response is called:
a strategy. Players base strategies upon the information they have and the information they suspect other players hold.
Nash equilibrium is an outcome that occurs when:
all players choose their optimal strategy. Nash equilibrium is an outcome that occurs when all players choose their optimal strategy in response to all of the other players' potential moves.
Diminishing marginal returns occur when:
an additional worker adds to total output but at a decreasing rate. Diminishing marginal returns occur when marginal product falls with each additional worker.
Jet Ski Inc. sold a total of 100 jet skis last year. Its total revenue was $1 million and its total cost was $800,000. Jet Ski Inc. earned:
an economic profit of $200,000. Economic profit is calculated as the difference between total revenue and total cost.
Marginal cost equals average total cost at the point where:
average total cost is lowest. Marginal cost equals average total cost at its minimum point.
The following figure depicts marginal cost, average variable cost, and average total cost for a competitive firm. Which interval along the marginal cost curve represents the firm's short-run supply curve?
bd The marginal cost curve above the minimum point on the average variable cost curve is a firm's short-run supply curve.
Labor as a factor of production includes:
both the mental and physical talents of people. Labor as a factor of production includes both the mental and physical talents of people.
Average product is:
calculated by dividing the total output by the number of workers. Average product is calculated by dividing the total output by the number of workers.
Hyundai's plant in Ulsan, South Korea, is thought to be the largest car factory in the world. It has an annual capacity of 1.86 million cars. The car factory is an example of:
capital. Physical capital consists of manufactured products that are used to produce other goods and services.
At the level of output at which marginal revenue equals marginal cost, a firm should:
continue to operate at the same level of output. Average total cost is determined by dividing total cost by output. Total cost equals fixed costs plus total variable costs. When MR = MC, the firm is producing at its "best" level of output. However, "best" may mean minimizing losses, breaking even, or earning economic profits.
In 1906, Will Keith Kellogg founded the Battle Creek Toasted Corn Flake Company, better known today as Kellogg's. From a company that started with only 44 employees, today Kellogg's has grown to have thousands of stockholders. Kellogg's is a:
corporation. Kellogg's is a corporation with many shareholders.
Compared to single-price monopoly markets, in monopoly markets with price discrimination:
deadweight loss is lower. Price discrimination decreases deadweight loss as more consumers are able to purchase a certain good.
Suppose a third worker adds 15 units to total production while a fourth worker adds 8 units to total production. The company has:
diminishing marginal returns. Diminishing marginal returns occur when an additional worker adds to total output but at a diminishing rate.
The following figure depicts a monopoly market. If the monopolist maximizes profit, what price will he charge?
i The demand curve tells the price that the monopolist should charge at the level of output where MR = MC.
In May of 2011, Bayer announced that it was open to merging with another pharmaceutical firm. Jim Edwards, writing for BNET (the CBS Interactive Business Network), said that such a merger would benefit Bayer but would be to the detriment of the merger partner. He wrote, "Once a drug company reaches a certain size there are built in inefficiencies that no amount of cost cutting can get rid of." Edwards is referring to:
diseconomies of scale. Diseconomies of scale occur at a range of output at which average total costs begin to increase because management loses efficiency. Edwards refers to these as diseconomies of scale; as he explains it, "The more drugs you sell, the more drug factories, brand managers, and lawyers you need to manage those sales. You can't just live without them."
Willco's Manufacturing had to raise its prices recently because it became so large that management became inefficient and costs increased. This is because of:
diseconomies of scale. Diseconomies of scale occur at a range of output at which average total costs begin to increase because of a lack of efficiency on the part of management.
Walmart undersells its competitors because of:
economies of scale. Economies of scale occur as a firm's output increases so that its long-run average total costs begin to decrease.
If normal profit is being earned in a perfectly competitive market, price minus average total cost is:
equal to zero Price minus average total cost is equal to zero when normal profit is being earned in a perfectly competitive market.
The existence of natural monopolies can be attributed to:
extremely large economies of scale. The existence of natural monopolies can be attributed to extremely large economies of scale. In these cases, multiple firms would cause costs to rise and result in losses for all firms.
The short-run is defined as a period of time when plant capacity and the number of __________ cannot change.
firms in an industry The short-run is defined as a period of time when plant capacity and the number of firms in an industry cannot change.
Price discrimination based upon an individual's willingness-to-pay is:
first-degree price discrimination. First-degree price discrimination is based upon willingness-to-pay.
Panamint Springs, California, is located on State Route 190. The community's gas station is the last one for miles in either direction. This means that this gas station:
has monopoly power. Since the community's gas station is the last gas station for miles, it can likely charge more than other gas stations. Monopoly power implies that a firm has some control over price.
Dave sells tortillas to local supermarkets. According to the price and quantity indicated in the following figure:
he earns a normal profit. A normal profit occurs when economic profit equals zero. This occurs when the market price is equal to Dave's minimum average total cost.
Dave sells tortillas to local supermarkets. According to the price and quantity indicated in the following figure:
he should continue selling tortillas in the short-run to minimize losses. If the price is below average total cost, but above average variable cost, then Dave should continue to sell tortillas in the short-run in order to minimize losses.
Dave sells tortillas to local supermarkets. According to the price and quantity indicated in the following figure:
he should shut down immediately. If the price is below average total cost and also below average variable cost, then Dave should shut down in the short-run.
In the market for construction products (e.g., wallboard, lumber), production by all firms is based upon government standards. This is an example of:
homogeneous products. This is an example of homogeneous, or standardized, products.
Assume that the market for wheat is perfectly competitive. An individual seller would face a demand curve that is a(n):
horizontal line. The demand curve for a firm in a competitive market is a horizontal line at the market equilibrium price.
Some fast-food restaurants and retail stores seem to be able to clone their operations from market to market without a noticeable rise in costs. Therefore, it can be expected for the long-run supply curve to be:
horizontal. The long-run supply curve in a constant cost industry is represented by a horizontal line.
A good with an income elasticity that is positive, but less than one, is said to be a(n):
normal good. A good with an income elasticity between 0 and 1 is a normal good.
Short-run _____ will cause no change in the number of firms in an industry in the long-run.
normal profits Short-run normal profits will cause no change to the number of firms in an industry in the long-run.
After factoring in implicit costs, if a firm is generating zero profit, it is earning:
normal profits. A firm that is generating zero profit after implicit costs are factored in is earning normal profits.
The kinked demand curve model in an oligopoly market assumes that if a firm raises prices for its products, its competitors will:
not raise its own prices. If a firm raises prices for its products, its competitors will not raise their own prices, as they expct their market share to increase.
Game theory is an approach to analyzing _____ behavior using mathematics and simulations, assumptions about the players, time, level of information, strategies, and other aspects of the game.
oligopoly Game theory is an approach to analyzing oligopoly behavior using mathematics and simulations, assumptions about the players, time, level of information, strategies, and other aspects of the game.
A monopoly is a __________-firm industry with no close product substitutes and with substantial barriers to entry.
one A monopoly is a one-firm industry with no close product substitutes and with substantial barriers to entry.
Assume a perfectly competitive market becomes monopolized. Deadweight loss is expected to occur because:
output would fall and price would rise. Output is expected to fall and price is expected to rise.
When a certain store sells one tube of toothpaste for $3 but also sells two tubes of toothpaste for $5, this is an example of:
second-degree price discrimination. Second-degree price discrimination occurs when a seller charges different customers different prices based upon the quantities that they purchase. In this case, buying two tubes of toothpaste results in a lower price per tube.
Soccer matches and business pricing are:
simultaneous-move games. In simultaneous-move games, the players' actions occur at the same time.
Perfectly competitive firms can only earn normal profits in:
the long-run. In the long-run, firms can only earn normal profits because firms can enter and leave the industry and change the total output for the industry.
The supply curve is most elastic in:
the long-run. The long-run is defined as a period of time long enough for firms to alter their plant capacities and for the number of firms in an industry to change. The supply curve is most elastic in the long-run.
A budget line graphically illustrates:
the possible combinations of two goods that can be purchased with a given income, given the prices of both goods. A budget line graphically illustrates the possible combinations of two goods that can be purchased with a given income, given the prices of both goods.
If a firm has $9,000 of fixed costs and $21,500 of variable costs, then this time period is referred to as:
the short-run. In the short-run, some costs are fixed and others are variable.
Price discrimination based upon charging different groups of people different prices is:
third-degree price discrimination. Third-degree price discrimination charges different groups of people different prices.
Suppose that when the price of hot dogs increases by 40%, the demand for hot dog buns decreases by 30%. What is the cross elasticity between hot dogs and hot dog buns?
-0.75 Cross elasticity of demand = Percentage change in quantity demanded of good A/Percentage change in price of good B. The calculation is -30%/+40% = -0.75.
If the price of gasoline increases by 10% and the quantity demanded falls by 5%, then what is the price elasticity of demand for gasoline?
0.5 Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price; therefore, -5%/10% = -0.5, which in absolute value terms is 0.5
Suppose that when the price of beef increases 25%, the quantity demanded of chicken increases by 20%. What is the cross elasticity between beef and chicken?
0.8 Cross elasticity of demand = Percentage change in quantity demanded of good A/Percentage change in price of good B. The calculation is +20%/+25% = 0.8.
Using the midpoint method, what is the price elasticity of demand for a product whose price increases from $2 to $4 and whose quantity demanded decreases from 10 to 5 units?
1 Ed = (5/7.5) / (2/3) = 1
Suppose that when the price of movie rentals from DirecTV increases by 40%, the demand for movie rentals from U-verse increases by 60%. What is the cross elasticity between Direct TV and U-verse movie rentals?
1.5 Cross elasticity of demand = Percentage change in quantity demanded of good A/Percentage change in price of good B.
If a 30% change in the price of grape soda leads to a 45% change in quantity demanded, then what is the price elasticity of demand for grape soda?
1.5 Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price; therefore, 45%/30% = 1.5.
If the price falls from $3 to $2, and the quantity demanded rises from 200 to 400 units, what is the price elasticity of demand using the midpoint method?
1.67 Ed = (200/300) / (-1/2.5) = -1.67. Taking the absolute value, | -1.67 | = 1.67
If the price of coffee increases by 50% and the quantity demanded falls by 10%, then what is the price elasticity of demand for coffee?
1/5 Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price; therefore, -10%/50% = -1/5, which in absolute terms is 1/5.
If grapefruits have a price elasticity of 4, then that means for every 1% decrease in price, the quantity demanded will increase by:
4%. An elasticity of 4 tells us that for every 1% decrease in price, quantity demanded will increase by 4%.
Which of the following is the MOST likely effect of an increase in the price of flashlights upon the market for batteries?
A decrease in equilibrium price and a decrease in equilibrium quantity. If the price of flashlights increases, the demand for batteries will decrease and equilibrium price and quantity will decrease.
Which of the following will NOT cause the supply curve for kayaks to shift to the left and the price of kayaks to increase?
A decrease in the price of kayaks. A decrease in the price of kayaks will decrease the quantity supplied, but not cause a shift in the supply curve.
The quantity demanded for office chairs has increased due to a change in price. How would this change in quantity demanded be represented on the demand curve?
A movement from one point on the curve to a lower point on the curve. An increase in quantity demanded brought about by a change in price is represented by a movement from one point on the curve to a lower point on the curve.
Starting from point E, which point is the most likely outcome of a decrease in taxes levied on the sale of soda pop?
C An increase in the subsidy for the production of a good will cause an increase in the supply of that good, shown as a shift of the supply curve from S0 to S1.
Starting from point E, which point is the most likely outcome of an increase in the subsidy for the production of a good?
C An increase in the subsidy for the production of a good will cause an increase in the supply of that good, shown as a shift of the supply curve from S0 to S1.
Which of the following illustrates an inferior good?
Cassie eats less macaroni and cheese because she received a large year-end bonus at work. A good is termed an inferior good when an increase in income results in a declining demand, and vice versa.
Starting from point E, which point is the most likely outcome of a decrease in subsidies given to celery producers by the government?
D A decrease in subsidies given by the government for the production of a good will cause a decrease in supply, shown as a shift of the supply curve from S0 to S2.
Starting from point E, which point is the most likely outcome of an increase in price?
D An increase in price will cause a reduction in quantity demanded, shown as a movement upward along the original demand curve.
Starting from point E, which point is the most likely outcome of an increase in the cost of a resource used in the production of a good?
D An increase in the cost of a resource used in the production of a good will cause a decrease in the supply of that good, shown as a shift of the supply curve from from S0 to S2.
Starting from point E, which point is the most likely outcome of an increase in the price of a production substitute for a good? (Hint: A production substitute is a good that a firm could switch to producing.)
D An increase in the price of a production substitute for a good will cause a decrease in the supply of the original good, shown as a shift of the supply curve from S0 to S2.
Starting from point E, which point is the most likely outcome of an increase in the wages of workers manufacturing soda pop?
D An increase in the price of a resource used in the production of a good will cause a decrease in supply, shown as a shift of the supply curve from S0 to S2.
In 2004, Walmart discovered that strawberry pop-tarts sold at about seven times the usual rate when a hurricane was predicted to hit Florida. Which of the following best explains this situation?
Demand increased due to expectations. The expectation of a hurricane resulted in increased demand for frosted strawberry pop-tarts.
If the price of apples causes quantity demanded to fall on the elastic portion of the demand curve, what will an increase in price do to total revenue?
It will fall. Since quantity demanded falls on the elastic portion of the demand curve, an increase in price will cause a large reduction in quantity demanded, lowering total revenue.
Assume that the demand for taxi services is inelastic. If the price of taxi services increases, what will happen to total revenue?
It will increase. Total revenue will increase when the price is increased on a product with inelastic demand.
If the price of apples causes quantity demanded to fall on the elastic portion of the demand curve, what will a decrease in price do to total revenue?
It will rise. An increase in price along the inelastic portion of the (linear) demand curve causes total revenue to rise.
Which of the following products approximately has the highest price elasticity of demand?
Leisure air travel Leisure air travel has an estimated price elasticity of demand of 2.4, so its price elasticity is fairly elastic.
Jason just lost his job and therefore, he has less income to purchase and eat streak. In this example, steak is what type of good?
Normal good. A normal good is a good where an increase in income results in rising demand, or when a decrease in income results in falling demand.
If labor costs rise due to a restriction on immigration, production costs of vegetables grown in California rise as well. What is likely to happen to the supply of vegetables and to prices?
Supply will decrease and prices will rise.
Industry experts predicted that the price of gasoline would rise above $4 a gallon, even if the Organization of Petroleum Exporting Countries (OPEC) increased its output. What must be true in this case?
The increase in demand is greater than the increase in supply. For there to be an increase in price with an increase in supply, there must have been an even larger increase in demand.
While the price of bagels has remained the same, the demand for them has increased. What could be a cause of this increase in demand?
The number of people buying bagels has increased. The number of buyers in a market can change demand even when price stays the same. This event would cause the demand for bagels to increase.
Because of increased competition in the late 1990s and early 2000s, the price of cell phones dropped dramatically. According to the law of demand, what will happen to the quantity demanded for cell phones based on this price change?
The quantity demanded will increase.
According to the law of demand, a decrease in the price of a product will lead to which result?
The quantity demanded will increase. The law of demand states that, while holding all other relevant factors constant, as price decreases, quantity demanded rises.
Because of increased competition in the late 1990s and early 2000s, the price of cell phones dropped dramatically. According to the law of demand, what will happen to the quantity of cell phones demanded based on this price change?
The quantity demanded will increase. The law of demand states that, while holding all other relevant factors constant, as price decreases, quantity demanded rises.
Suppose the price of gasoline has increased from $2.00 per gallon to $3.00 per gallon. Which of the following might happen to the quantity of gasoline demanded, assuming all else equal?
The quantity of gasoline demanded will fall.
Suppose the price of sugar has increased from $1.00 per pound to $1.50 per pound. Which of the following might happen to the quantity of sugar supplied, assuming all else equal?
The quantity of sugar supplied will rise.
According to the law of supply, if the price of cars increases, what will happen to the quantity of cars supplied?
The quantity supplied will increase.
Suppose that the supply of oil and the demand for oil both decrease next year. What will happen to the equilibrium price if the decrease in demand is larger?
There is not enough information to determine what will happen to the equilibrium price of oil. A decrease in supply with a larger decrease in demand will decrease the equilibrium price.
Suppose there is a decrease in the price for ice cream cones, but quantity demanded and quantity supplied stayed the same. What had to have happened to supply and demand in order for it to have stayed the same?
There was a decrease in demand and an increase in supply. A decrease in the price that does not affect quantity demanded or quantity supplied is caused by a decrease in demand and an increase in supply of the same magnitude.
Suppose there is an increase in the price for ice cream cones, but quantity demanded and quantity supplied stayed the same. What had to have happened to supply and demand for it to have stayed the same?
There was an increase in demand and a decrease in supply. An increase in the price that does not affect quantity demanded or quantity supplied is caused by an increase in demand and a decrease in supply of the same magnitude.
Suppose there is an increase in the price of gasoline, but the quantity exchanged in the market remained the same. What had to have happened to supply and demand in order for this to have occured?
There was an increase in demand and a decrease in supply. For there to be an increase in the price and no change in market quantity, there must have been an increase in demand and a decrease in supply of the same magnitude.
Which of the following is most price elastic?
Vacation travel Vacation travel is not a necessity and can be high priced, making it more elastic.
During the Major League Baseball World Series, the quantity demanded for baseball tickets is greater than the quantity supplied of baseball tickets. This situation is referred to as:
a shortage.
During the 2011 baseball season, the average attendance for Florida Marlins' home games were 18,772. Hwever, the capacity for the Marlins' stadium is 36,331. This situation is referred to as:
a surplus A surplus exists when the price is above market equilibrium and quantity supplied exceeds quantity demanded.
If the number of tomato growers in the market increases, the supply:
of tomatoes increases and the price decreases. More tomato growers will increase its supply and decrease its price.
If the price of pork falls, we would then expect that the price of beef will:
also fall because farmers will shift resources from pork production to beef production. The supply of beef will increase and its price will decrease because farmers will shift resources from pork production to beef production.
A reduction in the supply of a good might be the result of:
an increase in the price of an alternative product that could be produced with the same resources.
A shortage is represented by the distance:
between the demand curve and the supply curve below the equilibrium point. The distance between the demand curve and the supply curve below the equilibrium point represents a shortage (where quantity demanded is greater than quantity supplied).
When the price of a good changes in a market:
both quantity demanded and quantity supplied for the good change. Consumers and producers both react to price changes.
Price elasticity of demand measures how:
consumers respond to a change in price. Price elasticity of demand measures the change in quantity demanded caused by a change in the product's price.
Whether two goods are substitutes or complements can be determined by computing the:
cross elasticity of demand. Cross elasticity of demand is used to determine if goods are substitutes or complements.
Price elasticity of demand is a measure of how responsive a change in quantity demanded is to a change in:
price Price elasticity of demand measures how responsive a change in quantity demanded is to a change in the price of a product.
The ratio of the percentage change in quantity demanded to the percentage change in price is called:
price elasticity of demand Price elasticity of demand measures how responsive a change in quantity demanded is to a change in price.
Ceteris paribus, the effect of a decrease in income on a normal good is to shift the:
demand curve to the left, reducing both equilibrium price and output. A decrease in income will decrease demand for a normal good and decrease its price and quantity.
If the price elasticity of demand for corn dogs is 1.8, then the price elasticity for corn dogs is considered:
elastic. If price elasticity is greater than 1, then price elasticity of demand is elastic.
If the price elasticity of demand for ice cream is 1.6, then the price elasticity for ice cream is considered:
elastic. If price elasticity is greater than 1, then price elasticity of demand is elastic.
If farmers begin using better fertilizers to grow corn, we would expect a(n) __________ in the supply of corn.
increase An improvement in technology would make it easier to grow corn, thereby increasing its supply.
Ceteris paribus, a decrease in the number of businesses selling pizza will cause a(n):
increase in the equilibrium price of pizza. A decrease in the number of producers will decrease supply and increase price.
According to the following figure, an increase in demand will:
increase price only. Since the supply curve is vertical in this case, an increase in demand will only increase price.
Assuming everything else stays the same, an increase in the price of smartphones will __________ of smartphones.
increase the quantity supplied According to the law of supply, an increase in the price of a good will increase the quantity supplied of that good.
If the price elasticity of demand for facial tissue is 0.4, then the price elasticity for facial tissue is considered:
inelastic. If price elasticity is less than 1, then price elasticity of demand is inelastic.
According to the law of demand, the price of coffee and the quantity of coffee demanded are:
negatively related.
If a competitive market is NOT at equilibrium:
the price will change and in response, market participants will move along the existing supply and demand curves until the market reaches equilibrium. In a competitive market, the price will increase if the current price is below equilibrium. If the current price is above equilibrium, it will decrease.
Over time, LCD TV production costs have fallen. Also, more people around the globe have enough money to buy LCD TVs due to increases in income from economic growth. The net result of these two forces has been more LCD TVs sold for lower prices. This is an example of:
the supply and demand curves shifting to the right, with supply shifting more than demand. Supply shifts to the right due to lower production costs while demand shifts to the right due to higher consumer income. We know that supply must have shifted more than demand because our new equilibrium is at a higher quantity and lower price.
In the free market, the main signal to the market that brings the price to equilibrium comes from:
the surplus or shortage of output for sale. When there is a surplus of a good, it is put on sale. When there is a shortage of a good, its price increases.
