Microeconomics Exam 2
Average variable cost and average total costs get closer together as output increases because
average fixed costs decrease as outputs increases
In the short run, ______ costs exceed _____ costs.
average total; average variable
Economists usually assume that ________ is a fixed input in the _______ run.
capital; short
What statement is TRUE? Fixed costs
do NOT exist in the long run
It is essential to establish specific criteria to judge the performance of any economic system. Two such criteria
efficiency and equity
Marginal cost is _______ average variable cost when______
equal to; to average variable cost is minimized
Fixed costs are best described as:
Costs that are incurred even if the firm is currently producing nothing
Suppose a policy change will generate $10,000 of benefits for low-income families and $120,000 of costs for high-income families. This change can best be described as
inefficient
Which statement is NOT true regarding the total variable cost curve?
is a horizontal line
Long Run
is that period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter the industry and/or existing firms can exit the industry
Producer surplus
is the difference between the current market price and the cost of production for the firm
Consumer Surplus
is the difference between the maximum amount a person is willing to pay for a good and its current and market price
Short Run
is the period of time for which two conditions hold: The firm is operating under fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry
The short-run supply curve of a perfectly competitive firm is:
the portion of the marginal cost curve that lies above minimum average variable cost
To determine the optimal method of production for a good or service, a perfectly competitive firm needs to know all of the following EXCEPT
the prices charged by its rivals
Production
the process by which inputs are combined, transformed, and turned into outputs
The optimal method of production is
the production method that minimizes cost for a give level of output
Which of the following assumptions about perfect knowledge is true?
** ALL OF THE ABOVE*** 1. firms possess knowledge of all available information concerning wage rates, capital costs, and output prices 2. Households possess knowledge of the qualities and prices of everything available in the market 3. Firms and households possess all of the information they need to make market choices
A firm that is breaking even is
** ALL of THE ABOVE** - in an industry that is not attracting new firms - earning zero economic profit - earning a normal rate of return
You receive an award that pays you $300 per month for the next 5 years
- You consume MORE normal goods - You would work MORE - You would INCREASE your saving
3 Basic Decisions Every Household MUST make
1. How much of each PRODUCT to DEMAND 2. How much LABOR to SUPPLY 3. How much to spend today and how much to save for the future
The substitution effect of a price change
A fall in the price of a product might cause a household to shift its purchasing pattern away from substitutes toward that product
A profit-maximizing strategy becomes a loss minimization strategy when a firm in a perfectly competitive industry is producing where
AVC>P>ATC
If marginal cost is below the average variable cost, average variable cost will be declining.
Agree: Any time MC is below the AVC, AVC will be declining
When marginal cost (MC) is falling, which of the following must be true?
Average variable cost (AVC) is falling
A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.
Disagree: A firm suffering losses in the short run should continue to operate as long as price is greater than average variable cost
Firms that exhibit constant returns to scale have U-shaped long-run average cost curves
Disagree: Firms with constant returns to scale will have horizontal long-run average cost curves
Consumer surplus describes a situation in which there is excess quantity supplied.
FALSE
Deciding to invest in capital is a short-run decision
FALSE
For economic analysis, the short run is considered less than one year
FALSE
If Harrold runs a grocery store and is making a normal rate of return, we can infer that he is also making an economic profit
FALSE
In the short run, firms can enter an industry but not exit an industry
FALSE
When one market reaches a new equilibrium, the general equilibrium condition has been satisfied.
FALSE
EX: The yearly lease payments on its current inventory of Boeing 737 jets
FIXED COST
What can be said of a firm's short-run supply curve?
It is the marginal cost curve of the competitive firm
A resource's _________ is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus, while _______ is the average amount produced by each unit of a variable factor of production
MARGINAL PRODUCT;AVERAGE PRODUCT
Explain how the following event would affect the cost curves. A company's primary supplier of resources implements a 3 percent price increase for all of its supplies.
Marginal cost, average variable cost, and average total cost will increase. Average fixed cost will not change.
Public Good or Not a Public Good: A new roller coaster at Cedear Point Amusement park in Sandusky, Ohio.
NOT a public good
In a perfect competitive market in the long run, profits are driven to zero due to which of the following relationships?
P*=SRMC=SRAC=LRAC
If a firm's profit is $0, then it must be true that
TR equals TC
Efficiency is the condition in which the economy is producing what people want at the least possible cost.
TRUE
For economic analysis, the long run is any period in which all inputs are variable (regardless of the length of time involved)
TRUE
General equilibrium exists when all markets in an economy are simultaneously in equilibrium
TRUE
For the following business, what is the likely fixed factor of production that defines the short run? The fixed factor of production for a dentists in price practice is most likely:
The office and the dental equipment
Which of the following is most likely to be a variable cost for a firm?
The payroll taxes that are paid on employee wages
Assume firms break even in an industry. New firms ______ attracted to the industry and current ones _____ exiting it.
are not; are not
Marginal cost (MC) intersects average variable cost (AVC) and the average total cost (ATC)
at their lowest, or minimum, points
Examining the equilibrium conditions of individual markets and for households and firms separately is referred to as
partial equilibrium analysis
Average fixed costs
fall as output rises
In the short run, a firm
has at least one fixed factor of production
Firm stop producing tapes and start producing compact discs because people prefer compact discs to tapes. This will
improve effiency
Economic costs
include both a normal rate of return on investment and the opportunity cost of each factor of production
Furthermore, with external diseconomies, the long-run industry supply curve _____ with output.
increases
Diminishing marginal returns implies
increasing marginal costs
Society will benefit from less of being produced when the price of a good is
less than the marginal cost to produce that good
Suppose a competitive industry experiences external diseconomies. If so, then:
long-run average costs increase when industry output expands.
Perfect Competition
many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices
In the short run, rims earning a profit will want to _______ their profits while firms suffering losses will want to ____ their losses
maximize;minimize
A condition is Pareto optimal when
no change is possible that will make some members of society better off without making some members of society worse off.
Resources are allocated efficiently among firms in a perfectly competitive market because
of the assumption of profit maximization
In an industry characterized by perfect competition
price is higher than marginal cost AND output is less than it would be under perfect competition
Which statement is NOT true? Variable costs
remain constant as output goes up
When the marginal product is falling, the marginal cost is
rising
Suppose there is a permanent shift of consumer preferences away from pretzels and toward potato chips. The most likely result would be
short-run profits in the potato chip market increase
Marginal Utility (MU)
the additional satisfaction gained by the consumption or use of one more unit of something
An example of a positive externality is
the beauty of a home's well-kept lawn.
Marginal cost (MC) measures:
the increase in total cost that results from producing an additional unit of output
The household budget constraint reveals
the limits imposed on household choices by income, wealth, and product prices
The law of diminishing marginal utility states:
the more of any one good consumed in a given period, the LESS satisfaction (utility) gendered by consuming each additional (MARGINAL) unit of the same good
The labor supply curve shows
the quantity of labor SUPPLIED at difference WAGE RATES. Its shape depends on ho households react to changes in the WAGE RATE
Utility
the satisfaction a product yields relative to its alternatives
The choice set or opportunity set available to consumers is
the set of options that is defined and limited by a budget constraint
In the long run,
there are no fixed factors of production
Homogeneous Products
undifferentiated outputs-- products that are identical to or indistinguishable from one another
Perfectly competitive firms must make all of the following decisions EXCEPT:
what price to charge for its output
The law of diminishing returns occurs:
when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines
