Microeconomics Exam #2

Refer to the figure below. The absolute value of the slope of the demand curve D1 is ______, and the absolute value of the slope of demand curve D2 is ______.

2;1/2

If 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand?

3

If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to?

3

If there is a 20 percent increase in the price of a good that leads to a 60 percent decrease in the quantity demanded, then what is the price elasticity of demand?

3

If the slope of the demand curve is -2, price per unit is $6 per unit, and quantity demanded is 8 units, then the price elasticity of demand is?

3/8

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product

Suppose that each serving of Mac amp; Cheese costs $0.50 to make no matter how many servings are produced. This means that the price elasticity of supply for Mac amp; Cheese is ______ and the supply curve is ______.

infinite; perfectly elastic

A technological innovation that reduces a firm's marginal cost will lead to:

an increase in the firm's supply

A technological innovation that reduces a firm's marginal cost will lead to

an increase in the firms supply

As one moves down along a linear demand curve (i.e., from high price, low quantity pairs to low price, high quantity pairs), the demand:

becomes less elastic

Refer to the figure below. If Mallory and Rick are the only two consumers in this market and the price of soda increases from $0.75 to $1.00 per can, the quantity of soda demanded in the market will ______ by ______ cans per month.

decrease; 40 When the price of soda is $0.75 per can, the quantity of soda demanded in the market is 50 cans per month (30 by Mallory and 20 by Rick), and when the price of soda is $1.00 per can, the quantity of soda demanded in the market is 10 cans per month (10 by Mallory and 0 by Rick). So when the price of a can of soda increases from $0.75 to $1.00, the market quantity of soda demanded decreases 40 cans per month.

Suppose a perfectly competitive firm is producing 77 units of output, and the marginal cost of the 77th unit is 11. If the firm can sell each unit of output for $8 and the firm's revenue is sufficient to cover its variable cost, the firm should:

decrease production

A change in consumers' incomes causes a change in:

demand

Inelastic

describes demand that is not very sensitive to a change in price

Elastic

describes demand that is very sensitive to a change in price

An imperfectly competitive firm is one that:

has at least some influence over the market price

It takes many years to train to become an orthopedic surgeon. This suggests that, in the short run, a sudden increase in the demand for orthopedic surgeons will:

have little effect on the number of trained orthopedic surgeons

All else equal, compared to small-budget items such as paper towels, the price elasticity of demand for big-ticket items such as refrigerators is ______:

higher

A price-taker faces a demand curve that is

horizontal at the market price

Inelastic

if the absolute value of its price elasticity is less than 1

All else equal, the price elasticity of demand for a good tends to be lower...

if the good has few close substitutes

Suppose a 10% increase in the price of aspirin leads to a 5% decrease in the quantity demanded of aspirin. The demand for aspirin, therefore, is

inelastic

Suppose that the short-run price elasticity of demand for electricity is 0.03 and the long-run price elasticity is 1.2. One would classify the short-run elasticity as being ___________ and the long-run elasticity as being __________?

inelastic, elastic

Suppose that the short-run price elasticity of demand for electricity is 0.03, and the long-run price elasticity of demand is 1.2. One would classify the short-run elasticity as being ___________ and the long-run elasticity as being ____________.

inelastic;elastic

For any horizontal demand curve, the price elasticity of demand is:

infinite

The primary objective of most private firms is to:

maximize profit

In most markets, scarce goods or services are rationed among competing users using:

monetary prices

A firm should shut down if its total revenue is less than its _____ even when the firm produces the level of output at which price equals marginal cost.

variable cost

Suppose Sarah owns a small company that makes wedding cakes. The table below shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. Number of Cakes Per Day Total Cost Per Day 0 $100 1 $180 2 $220 3 $300 4 $400 5 $520 6 $660 If Sarah's fixed costs double, then in the short run, her profit-maximizing level of output:

will not change Since a change in fixed cost will have no effect on the cost of producing an additional unit of output, Sarah's profit-maximizing level of output will not change.

If the quantity demanded of a good is Q when the price for the good is P, the price elasticity of demand for that good at that point is:

(P/Q) × (1/slope)

Four Characteristics of Perfectly Competitive Markets

+all firms sell the same standardized product +the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged +productive resources are mobile +buyers and sellers are well informed

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: Hours Per Day Cleaning Windows Total Number of Windows Cleaned 0 0 1 7 2 11 3 14 4 16 5 17 The first hour John spends cleaning windows costs him ______ that he could have earned in the grocery store.

$7

If the price elasticity of demand for chicken is 2, then a 20% decrease in the price of chicken will lead to a:

40% increase in the quantity demanded of chicken

If the price elasticity of demand for cigarettes is 0.55, and the price of cigarettes increases by 10 percent, then the quantity of cigarettes demanded will fall by:

5.5 percent The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.55, and price increases by 10 percent, then quantity demanded must decrease by 5.5 (= 10 × 0.55) percent.

Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this year, Casey did not plant any vegetables and went to work at a bank instead. Which of the following best explains Casey's career change?

Casey's opportunity costs of gardening exceeded Casey's opportunity costs of working at the bank

If the price elasticity of demand to stream the movie "The Room" is 1.4, this means?

a 5 percent increase in the price leads to a 7 percent decrease in quantity demanded

How does a change in price (P) and quantity (Q) impact profits?

a change in profit depends on the magnitude of change in P and Q

If crude oil is a variable factor of production for a firm, then an increase in the price of crude oil will lead to:

a decrease in the firm's supply

Perfectly Elastic Demand Curve

a horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity

Which of the following will cause an increase in market supply?

a technological innovation that lowers marginal cost of producing the good

Perfectly Inelastic Demand Curve

a vertical line reflecting a situation in which any price change has no effect on the quantity demanded; the elasticity value equals zero

Taking a limousine to a five star restaurant in New York is

a want to both Joe Average and Donald Trump

A good's nominal price is the

absolute price of the good in dollar terms

Air conditioner vs. gasoline

air conditioner- (needs to be installed) so more elastic gasoline- more inelastic bc you have to buy gas

If the cross-price elasticity of demand between two goods is -1.2, then the two goods are:

complements

If two products are close substitutes, then the...

cross-price elasticity of demand between them will be positive

If the cross-price elasticity of demand between lettuce and salad dressing is negative, then when the price of lettuce rises, the demand for salad dressing will?

decrease

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. The lemonade market in Jenny's neighborhood is more likely to be perfectly competitive if...

each lemonade stand sells the same kind of lemonade

If a firm shuts down in the short run, then its

economic loss will equal its fixed cost

If a firm shuts down in the short run, then its:

economic loss will equal its fixed cost

If the percentage change in the price of a good is less than the resulting percentage change in the quantity demanded of that good, then the demand for that good is:

elastic

If the price elasticity of demand for a good is greater than one, then the demand for that good is:

elastic

At the midpoint of a straight-line demand curve, the price elasticity of demand is:

equal to one

If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should

expand output to earn greater profits or smaller losses

If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should:

expand output to earn greater profits or smaller losses

If a perfectly competitive firm can sell each unit of output for $9, and the marginal cost of the last unit produced is $8.50, then the:

extra benefit of the last unit produced is greater than the extra cost

What is price elasticity of demand?

for a good it is the measure of the responsiveness of the quantity demanded of that good to changes in its price ex: if a 2 percent reduction in the price of pork led to a 6 percent increase in the quantity of pork demanded, the price elasticity of demand for pork would be... percent change in quantity demanded/percent change in price = 6 percent/ 2 percent = -3

An increase in the price of a variable factor of production...

increases a firm's marginal cost, leading to a decrease in supply

If consumers cannot readily switch to a close substitute when the price of a good increases, the demand for that good is likely to be...

inelastic

If the price of textbooks increases by 1 percent and the quantity demanded falls by one-half percent, then the demand for textbooks is?

inelastic

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:

inelastic

A fixed factor of production:

is fixed only in the short run

Refer to the figure below. If the price rises from $10 to $14, what will happen to the price elasticity of supply?

it decreases

The price elasticity of demand is typically expressed as a positive number because?

it's convenient to use absolute values

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increases the output

Suppose the price of a Snickers candy bar is $2.00 at both the airport and the grocery store. The price elasticity of demand for a Snickers candy bar at an airport is likely to be ______ the price elasticity of demand for a Snickers candy bar at the grocery store.

less than

Suppose Sarah owns a small company that makes wedding cakes. The table below shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. Number of Cakes Per Day Total Cost Per Day 0 $100 1 $180 2 $220 3 $300 4 $400 5 $520 6 $660 If the market for wedding cakes is perfectly competitive, and wedding cakes sell for $95 each, then at her profit-maximizing level of output, Sarah will earn a ______ of ______ per day.

loss of $15

If the demand for a good is highly elastic, that good is likely to have:

many close substitutes

If a production process exhibits diminishing returns, then as output rises:

marginal cost will eventually increase

On a given linear demand curve, as price increases demand becomes?

more elastic

New car vs. pine tree air freshener

new car- more elastic pine tree air freshener- more inelastic

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ______ in the short run, and will ______ in the long run.

not shut down; exit the industry

Off brand salt vs. Morton's salt

off brand- more elastic Morton's more inelastic

Calculating Price Elasticity of Demand

percentage change in quantity demanded/percentage change in price plus one divided by the slope (P/Q)+(1/slope)

If the demand curve is horizontal, then demand is:

perfectly elastic

The price elasticity of supply for the Hope Diamond is zero because there is only one. Therefore, the supply curve for the Hope Diamond is

perfectly inelastic

The price elasticity of demand for a good measure the responsiveness of?

quantity demanded to a one percent change in price of that good

In surveying their alumni, State U's economics department discovered that ramen noodle consumption declined once students graduated and found jobs. One conclusion the survey team might draw from this result is that...

ramen noodles are an inferior good

The dollar price of a good relative to the average dollar price of all other goods and services is the good's:

real price

Oil and oil products remain the main fuel for cars, planes, ships, and power plants. The amount of oil still in the earth is finite. Given this information, the supply of gasoline is ______.

relatively inelastic

Nominal Price

the absolute price of a good in dollar terms

Unit elastic

the absolute value of its price elasticity is equal to 1

demand is said to be unit elastic if...

the absolute value of its price elasticity is equal to 1

The demand for a good is said to be elastic with respect to price if...

the absolute value of its price elasticity is greater than 1

It is said to be inelastic if...

the absolute value of its price elasticity is less than 1

The inputs used to produce cupcakes (e.g., flour, sugar, butter, and labor) are also used to produce cookies, cakes, muffins, pies and many other goods. This suggests that

the elasticity of supply of cupcakes is relatively high

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good. Which of the following statements is always true?

the firm should shutdown if its total revenue is less than its variable cost.

Real Price

the nominal price of a good relative to the average dollar price of all other goods

Suppose that a new drug has been approved to treat a life-threatening disease. The demand for that drug is shown on the graph below. Prior to approval of this drug, the only treatment for this condition was any one of several non-prescription, or over-the-counter, pain relievers. The demand for one brand of the several non-prescription pain relievers is also shown on the graph. A likely reason for the difference in the slopes of the demand curves is that:

the over-the-counter pain reliever has many substitutes, but the new drug does not

The demand for a good falls when...

the real price of a substitute falls or the real price of a complement rises

Elastic

with respect to price if the absolute value of its price elasticity is greater than 1