MICROECON EXAM 2

If the marginal utility from consuming the fourth unit of a product is 20 and the total utility from all four units is 126, then the total utility from consuming three units must be

106 (126 - 20)

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total costs are.

20k

The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $60,000 Annual lease on building = $30,000 Annual revenue from operations = $250,000 Payments to workers = $100,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's total economic costs are

284k

The price elasticity of demand for widgets is 2. Assuming no change in the demand curve for widgets, an increase in sales of 12 percent implies a(n)

6 percent reduction in price.

Units - Rev 3 - 36 4 - 80 5 - 150 6 - 252 7 - 350 8 - 440 At what consumption level for this product does diminishing marginal utility set in?

7 units

What is true concerning purely competitive industries?

In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

Suppose the price of movie tickets changes. The price change leads to a 20 percent decrease in the quantity demanded of movie tickets. This causes the total revenue from movie tickets to increase by 10 percent. Is the demand for movie tickets elastic, inelastic, or unit-elastic?

Inelastic (price and total revenue show a direct relationship)

What conditions are true when an average, or representative, firm in a purely competitive industry is in long-run equilibrium?

MR equals MC. The firm is earning a normal profit. The MC curve is horizontal.

How do you calculate marginal utility?

The total utility of the current unit - the total utility of the previous unit

What happens when marginal utility is positive?

When marginal utility is positive, an increase in the quantity consumed will increase total utility.

Suppose the income elasticity of demand for toys is +1.2. This means that

a 5 percent increase in income will increase the purchase of toys by 6 percent. (6/5 = 1.2)

If a purely competitive decreasing-cost industry is realizing economic losses, we can expect industry supply to

decrease, output to fall, price to rise, and profits to rise.

Which of the following is most likely to be an implicit cost for Company X?

forgone rent from the building owned and used by Company X

To economists, the main difference between the short run and the long run is that

in the long run all resources are variable, while in the short run at least one resource is fixed.

If the demand for product X is inelastic, a 20 percent decrease in the price of X will

increase the quantity of X demanded by less than 20 percent.

Suppose a firm is producing in the long run. When it produces 2,000 units of output, its total cost is $4,000. When it produces 2,300 units of output, its total cost is $4,100, and when it produces 2,600 units of output, its total cost is $4,200. This firm is experiencing __________ returns to scale.

increasing

Assume the XYZ Corporation is producing 40 units of output. It is selling this output in a purely competitive market at $15 per unit. Its total fixed costs are $200 and its average variable cost is $12 at 40 units of output. This corporation

is realizing an economic Loss of −$80.

In a decreasing-cost industry,

lower demand leads to higher long-run equilibrium prices.

Assume for a competitive firm that MC = AVC at $10, MC = ATC at $13, and MC = MR at $15. This firm will

maximize its profit by producing in the short run.

When a firm is maximizing profit, it will necessarily be

maximizing the difference between total revenue and total cost.

** Suppose that MUx/Px exceeds MUy/Py. To maximize utility, the consumer who is spending all her money income should buy

more of X and/or less of Y.

We would expect the cross elasticity of demand between dress shirts and ties to be

negative, indicating complementary goods.

Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect

new firms to enter, causing the market price of soybeans to fall.

In pure competition, if the market price of the product is lower than the minimum average total cost of the firms, then

other firms will exit the industry and the industry supply will decrease.

The basic formula for the price elasticity of demand coefficient is

percentage change in quantity demanded/percentage change in price.

Suppose that an 8 percent increase in the price of normal good Y causes an 8 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is

positive, and therefore these goods are substitutes.

Marginal utility can be

positive, negative, or zero.

Which characteristic would best be associated with pure competition?

price takers

Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting

profits were $0 and its economic losses were $500,000.

Average revenue is conceptually equivalent to the

unit price of the product.

For which product is the income elasticity of demand most likely to be negative?

used clothing

How do you maximize utility?

Buy product 1 until product 2's total utility is greater, then buy product 2

Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were

$200,000 and its economic profits were $0. (4000x300 = 1.2m rev - 1m explicit cost - 200k implicit)

Harvey quit his job at State University, where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The explicit costs of Harvey's firm in the first year were

$605,000 (55x 11k)

The total revenue of a purely competitive firm from selling 6 units of output is $48. Based on this information, the unit price of the output must be

$8

Suppose that as the price of Y falls from $4.00 to $3.50, the quantity of Y demanded increases from 80 to 94. Then the absolute value of the price elasticity (using the midpoint formula) is approximately

1.21

What is the Midpoint formula?

Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]

Complete the following statements. In a decreasing-cost industry, an increase in demand will result in economic ____________. As a result, firms will _________ the industry, resulting in an ___________________________over time. A long-run adjustment will eventually cause the price level to ___________, causing it to ______________________ before the demand shift. There will be _______________ firms in the industry, and the long-run industry supply curve will be ___________________________________.

profits, enter, an increase in supply, decrease, occur at a lower level, more, downward sloping

If a firm has at least some control over the price of its product, then the firm cannot be in which market model?

pure competition

Augi's Art Shack sells art supplies in a perfectly competitive market. The firm is currently realizing economic profits of $42,000 in the short run. In the long run we would expect Augi's to

realize economic profits of $0.

You are the only seller of eggs in town, and the price-elasticity coefficient for eggs is known to be 1.2. If you want to increase your sales quantity by 6 percent through a price change, what should you do to the price?

reduce price by 5 percent (6/5 = 1.2)

Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $6 and $3, respectively. The marginal utility of the last units of A and B are 30 and 18, respectively. These data suggest that Ms. Thomson

should buy more B and less A.

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm

should continue producing in the short run but leave the industry in the long run if the situation persists.