Microeconomics Exam 2

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Economic Profit =

Accounting Profit - Implicit Costs OR Revenue - Explicit Costs - Implicit Costs

What is the primary difference between accounting and economic profit?

Accounting profits ignore implicit costs; economic profits consider them

Capital-Intensive Technology EX

Airplanes produced in the U.S.

The budget line shows possible production bundles

False

The money that a firm spends on rent is an example of an implicit cost

False

Your are taking a principles of economics class using Sapling Learning. As you use Sapling Learning more and more, you find both doing homework as well as learning the subject to be increasingly enjoyable

Increasing Marginal Utility

Economies of Scale

Increasing outputs results in a lower average cost

Diseconomies of Scale

Increasing outputs results in higher average costs

Constant Returns to Scale

Increasing outputs results in no change to average cost

Economies of scale

Increasing returns to scale (negative slope of line)

Charlie budgets a portion of his income for attending ball games and movies. Assuming he is utility maximizing, what would happen to his consumption of ball games if the ticket price fell, ceteris paribus

It would rise

Jeff finds some steaks for $16 for which he would have been willing to pay $20. The butcher notices the meat is near the expiration date and gives him an extra 75% off

Jeff's CONSUMER surplus: $16

Fixed Cost EXs

Lease on building Industrial equipment costs Interest on current debt Regulatory compliance costs Annual salaries of top management

Above Marginal Revenue (MR)

Losses

What happens to MC when diminishing marginal returns set in?

MC begins to increase

When increasing marginal returns are present MP is increasing. What is happening to MC when MP is increasing?

MC is decreasing

Maximizing Utility Equation

MUx/Pricex = MUy/Pricey

Which condition below indicates that a consumer is maximizing his or her utility regarding spending on two goods?

MUx/Pricex = MUy/Pricey

Assumed in Perfect Competition

Many sellers Price taking behavior

If hiring Kristen causes average product to increase, Kristen's ________ has to be above current average product

Marginal Product

The Total Effect

Increase in quantity demanded attributable to the combination of the income and substitution effect

The Income Effect

Increases in quantity demanded that are attributable to changes in purchasing power as the price of a good falls

The Substitution Effect

Increases in quantity demanded that are attributable to the good becoming cheaper relative to other goods

Joe notices that when he hires another worker, the amount of cars his company can wash increases

Marginal Product

This is the change in total output divided by the change in the number of workers

Marginal Product

Profit Maximizing Quantity

Marginal Revenue (MR) = Marginal Cost (MC)

Which economic concept is most instrumental in resolving the diamond-water paradox?

Marginal Utility

Not Assumed in Perfect Competition

Significant barriers to entry Firms selling a similar but differentiated good A small number of producers

In the long run firms will enter this industry which shifts the industry supply curve to the right

True

In the long run, firms ENTER the industry, REDUCING market price and driving economic profit to zero

True

Long run equilibrium is restored when P=LRAC=SRATC=MC

True

Marginal cost and marginal productivity are inversely related

True

Marginal cost is the change in a firm's total cost due to a one-unit change in output

True

Marginal utility is the extra satisfaction experienced by one additional unit of consumption

True

Market Failure is when market provision of a good results in an inefficient quantity

True

Market Failure occurs when either negative or positive externalities are present

True

Short run economic profits attract resources

True

The budget line depicts the combinations of two goods a consumer can buy given her income and the current prices

True

The higher price in the SR gives rise to economic profit

True

The increases in price shifts the P=MR curve up to reflect the new price in the SR

True

The principle of diminishing marginal utility states that the additional utility a CONSUMER receives from an additional unit of a good or service DECREASES as consumption of it INCREASES

True

Utility is a measure of the satisfaction people receive from their choices

True

Utility is the enjoyment a person gains from consumption

True

When demand increases, price increases in the short run (SR)

True

Imperfect Information

Undisclosed plumbing problems in a house for sale

EX of variable inputs

Upper management salaries Computers Hourly labor Shipping Beads Chairs 2 year-lease on office and retail space

Average Variable Cost

VC/Q

Total Cost =

Variable Cost + Fixed Cost

Average Variable Cost

Variable Cost/Quantity

A firm's _______ are costs that increase as quantity produced increases.

Variable costs

When is allocative efficiency met in a perfectly competitive market

When price equal marginal cost

Negative Marginal Utility

When the consumption of an additional unit of a good or service makes a person worse off

Diminishing Marginal Utility

When the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units

Individual Consumer Surplus =

Willingness to spend - price paid

MR > MC

means the additional revenue a firm gets for selling the good is higher than the additional cost; profits grow in this range of output as more units are produced

Total Surplus =

(Difference in Cost) x equilibrium number/2

Total Opportunity Cost =

(Explicit Cost + Implicit Cost) X Quantity

Economic profit can be different from the accounting profit

True

Economists assume that rational consumers seek to maximize total utility

True

Government sometimes intervenes when market failure occurs

True

Implicit costs are related to a firm's opportunity costs

True

Diseconomies of Scale

A 50% increase in inputs results in <50% increase in outputs

Economies of Scale

A 50% increase in inputs results in >50% increase in outputs

Constant Returns to Scale

A 50% increase in inputs results in a 50% increase in outputs

Not a Negative Externality EX

A donut shop emits a delicious smell into the air as a by-product of production

Negative Externality EX

A factory emits pollution into the atmosphere as a by-product of production

Imperfect information EX

A firm hiring a new employee from a list of candidates who responded to a posting on monster.com

Imperfect information EX

A firm selling car insurance

Not an example of Imperfect information

A firm that is going to promote one of 2 internal candidates for a management position

Demand curve for an individual perfectly competitive firm's product

A horizontal line

Public Goods

A lighthouse that can be see by any ship passing

Negative Externality EX

A neighbor plays loud music that annoys the surrounding community

Not an example of Imperfect information

A person buying a new Toyota Camry

Not a Negative Externality EX

A person gets a flu-shot and is therefore less likely to spread illness to others

Imperfect information EX

A person purchasing a used Hyundai Sonata

Negative Externality EX

A person smokes a cigarette and imposes secondhand smoke on others

Not a Negative Externality EX

A person who lives along buys a DVD, but finds the movie unenjoyable

Not a Negative Externality EX

A person with no allergies that gets a mosquito bite from a disease-free mosquito

Not an example of Imperfect information

A student choosing between his 2 favorite pizza spots for lunch

Total Cost =

ATC x Q

Alice is willing to spend $30 on a pair of jeans, and has a coupon for $10 off she found online. She selects and purchases a $35 pair of jeans, pre-discount

Alice's CONSUMER surplus: $5

Diseconomies of Scale

Also known as decreasing returns to scale

Economies of Scale

Also known as increasing returns to scale

Market Power

Amos owns the only ice creams shop in his town, where the average temperature is 105 degrees Fahrenheit

Externalities

An airport runway next to a neighborhood

This is total output divided by the number of workers

Average Product

When 8 weavers are employed and output is 80 baskets, _________ is equal to 10 baskets

Average Product

Average Cost =

Average Variable Cost (AVC) + Average Fixed Cost (AFC) WHICH IS THE SAME AS TC/Q = VC/Q + FC/Q

Variable Cost EXs

Cost of metal used in manufacturing Cost of wood used in manufacturing Postage and packaging costs

Marginal Cost =

Change in Total Cost/ Change in Quantity

Marginal Cost

Change in total cost divided by change in output

Claire is trying to sell her used calculus textbook online. She asks for $150 or best offer and is willing to sell for anything over $100. She is able to sell it for $125

Claire's PRODUCER surplus: $25

Market Power

Complete control of an essential input

Sheila is a coffee addict. She finds that regardless of whether she visits Starbucks three times a day or once a month, each Grande Americano that she drinks tastes awesome. She never seems to get tired of drinking coffee

Constant Marginal Utility

Brian likes running. His friend Mark challenges him to run a marathon "cold turkey," i.e without any prior training. As he begins the race, he feels exuberance and confidence as he passes by runners, thinking this is the greatest feeling ever. At mile 10, he starts slowing down and feeling tired, thinks that if he could stop, mile 10 would be the perfect distance. By mile 20, he experiences the dreaded runner's "wall." Brian is later seen screaming in agony, saying "no more" and regrets running the marathon. By the end of the marathon Brian vows to never run again

Decreasing Marginal Utility

Michelle rarely ate out as a child as her parents cooked every night. She remembers that it was a real treat to be able to go out even to get fast food. Now, Michelle has finished her first semester at college and has had McDonald's once a week for the past semester. She plans to learn to cook soon so she doesn't have to eat out any more, being sick of fast food

Decreasing Marginal Utility

Diseconomies of scale

Decreasing returns to scale (positive slope of line)

An additional worker adds less to total output than the previous worker hired

Diminishing Returns

These costs often show ________ illustrated by the increasingly steeper slope of the total cost curve

Diminishing marginal returns

Beth likes pillows since they're really comfortable to sleep on. However, she finds that if there are more than 3 pillows on her bed, they become too tall to sleep on

EX of decreasing Marginal Utility

It's 120 degrees outside and you just walk into your air conditioned apartment after getting groceries. Your are thankful for the air conditioning and wonder how you could live without it, but after cooling down, you don't notice the air conditioning any more

EX of decreasing Marginal Utility

James is at Buffet Palace and is notoriously known to be able to eat a lot. However, he puts less and less food on his plates after round 1 until he can no longer eat any more

EX of decreasing Marginal Utility

Which of the statements below is true of the Long-Run Industry Supply Curve (LRIS)

External diseconomies results in an increasing cost industry and an upward sloping LRIS curve

A deadweight loss means consumers are not making rational decisions

False

A deadweight loss means that producers are not maximizing profits

False

A deadweight loss means the economy is inside the production possibilities frontier

False

A firm's explicit costs are always larger than its implicit costs

False

AVC must be above ATC for the graph to be valid

False

Costs that are small and unimportant with little impact on profits are called marginal costs

False

Diminishing marginal utility means that consumption of an additional unit decreases utility

False

Externalities are the only example of market failure

False

Judi has $50 to spend. If movies cost $8 and books cost $5, Judi can purchase 5 movies and 3 books

False

Marginal utility is always negative

False

Marginal utility is always positive

False

Market Failure occurs when negative externalities are present, but not when positive externalities are present

False

Market Failure occurs when positive externalities are present, but not when negative externalities are present

False

Numerical utility values are relatively easy to calculate

False

Which set of conditions best describes partial equilibrium?

Firms are producing where marginal cost equals the price and households are consuming where the marginal utility per dollar spent on each good or service is equal

Total Costs =

Fixed Cost + Variable Cost

Variable Costs =

Fixed Cost - Total Cost

Average Fixed Cost =

Fixed Cost divided by Quantity

A firm's _______ are costs that are incurred even if there is not output

Fixed costs

Externality

Fritz decides to bring back fresh sauerkraut from his vacation to Germany, and the horrible stench causes many people on his return flight to become ill

Diamond-Water Paradox Explained

Goods that have a high value in use, thus higher total utility, are often priced lower than those that have a low value

Externality

Hydraulic fracturing, known as fracking, has allowed oil drillers to reach new, untapped reserves. However, it has also caused an increase in seismic activity in areas where it is done

Alsace Cellular is the first and only company to sell 3D phones, and thus can charge whatever price they like

Market Power

The possible combinations of two goods that a person can consume given her income

NEITHER total utility or marginal utility

Public Goods

National Defense

Nicole has in her possession a hockey puck from 2010 Winter Olympic Games and sells it on eBay. She will only sell the puck if the winning bid is greater than or equal to $500. After bidding closes, the last bid stands at $500

Nicole's PRODUCER surplus: $0

Average Product of Labor

Number of X produced divided by the number of workers who produced it

Which statement best summarizes the difference between partial and general equilibrium analysis?

Partial equilibrium focuses on a single market but general equilibrium considers every market simultaneously

Total Revenue =

Price X Quantity

Individual Producer Surplus =

Price received - Willingness to sell

Total Revenue =

Price x Quantity sold

The relationship between the factors of production used by a firm and the maximum output possible is called the ...

Production Function

Equation to determine quantity using budget and price

Q = Budget/Price of good EX: 240 budget/8 dollars for sushi = quantity of 30 sushi

Assume the law of diminishing marginal utility holds true for Quincy with ice cream and pretzels. He decides to eat LESS ice cream and MORE pretzels...the result is...

Quincy's marginal utility of ice cream increases, and his marginal utility of pretzels decreases

Imperfect Information

Reduced mileage on a used car's odometer

Externalities

Renovating an old house to increase its value

Accounting Profit =

Revenue - Explicit Costs (rent, equipment, and supplies)

Roy is willing to pay $2.50 for a sports drink. He notices the price is $2.79 and chooses not to purchase a sports drink

Roy's CONSUMER surplus: $0

Average (Total) Cost

TC/Q

Profit =

TR - TC

Which "law" does this illustrate?

The Law of Demand

Marginal Cost

The amount by which total cost increases when an additional unit is produced

Description of Total Utility

The amount of satisfaction that a consumer gets from consuming a bundle of goods and services

Marginal Cost is defined as...

The change in total costs from producing one more unit of output

Description of Marginal Utility

The change in utility from consuming one additional unit of a good

Marginal Utility

The extra satisfaction a person obtains from consuming one more unit of a good or service

Consumer surplus =

The maximum price a buyer is willing to pay and the market price

Market Power

The only utility company in town

If you eat a slice of pizza that gives you food poisoning, your utility will likely decrease

True

Which statement best explains the answer to the question posed above?

The ratio of the marginal utility of ball games to the price of ball games went up compared to the ratio for movies

Utility

The satisfaction experienced from consuming a good or service

Average Variable Cost

The sum of all costs that change as output changes divided by the number of units produced

Why does the total cost curve get steeper as output increase?

There are diminishing returns to labor

Average Cost (Average Total Cost)

Total Cost/Quantity

Total Cost

Total Fixed Cost + Total Variable Cost

Total Variable Cost

Total Fixed Cost - Total Cost

Average Product

Total Product divided by Number of Workers

Economic Profit =

Total Revenue (TR) - Total Cost (TC)

Profit =

Total Revenue - Total Cost

Economic Profit =

Total Revenue - Total Opportunity Cost

Average (Total) Cost

Total cost divided by quantity of output

A budget line slopes downward because to buy more of good 1, a consumer has to buy less of good 2

True

A deadweight loss means social welfare is not being maximized

True

A deadweight loss means there is a misallocation of resources

True

A deadweight loss occurs because the economy is not on the optimal point on the production possibilities frontier

True

A marginal cost curve will always intersect the average total cost curve at the minimum average total cost

True

As you move along a particular budget line, the prices faced by the consumer and the consumer's income are held constant

True

Bill's TOTAL UTILITY increases as his consumption of ice cream goes up

True

Due to satiation, Madison's MARGINAL UTILITY starts to decline as she consumes more pizza

True

Economic profit and accounting profit both make use of explicit costs

True

Producer surplus is shown graphically as the area:

above the supply curve and below the market price

What is a constant cost industry

an industry that can grow and shrink without long-run average costs being affected LRIS is a horizontal line

The law of diminishing marginal utility says that...

as a person consumes more and more of a certain good, the addition to total satisfaction decreases

while economists include

both explicit and implicit costs

Marginal Cost

change in TC/change in Q

Constant returns to scale

constant returns to scale (flat part of graphed line)

In the short run, these costs ________ as production increases

do not change

The long-run industry supply curve in a decreasing-cost industry is...

downward sloping

Market demand curve for a perfectly (or purely) competitive good

downward sloping line

Increasing-cost industries experience

external diseconomies

Decreasing-cost industries experience

external economies

Capital-intensive Technology EX

financial advice

Above ATC on a graph

firm earns a profit

Between ATC and AVC on a graph

firm incurs a loss

The point where ATC and MC intercept =

firm is making zero economic profit

Below AVC on a graph

firm shuts down

What is a Util?

it is the unit used by economists to measure RELATIVE satisfaction from the CONSUMPTION of GOODS AND SERVICES

Economic profit is typically...

lower than accounting profit

Perfect competition

many firms entry and exit is relatively easy firms sell a homogeneous product

A perfectly competitive industry is characterized by the following

many firms producing identical products with no control over the market price

This stems from the difference in how costs are calculated. Accountants will include...

only explicit costs

A perfectly-competitive firm must choose the production technology that minimizes costs. Such a production method is known as the ...

optimal method of production

Perfectly competitive firms are...

price takers, meaning that they cannot influence the market price, BUT they can sell as much as they wish at this price

When just enough firms enter the market and begin producing...

profits will be driven to zero, industry output increases, but price is the same

Labor-intensive Technology EX

shirts produced in Vietnam

The LONG RUN is best defined as a time period...

that is long enough to change all factors of production

One thing that distinguishes the short run and the long run is...

the existence of fixed costs

MC > MR

the extra cost of producing an additional unit exceeds the additional revenue; profits decline in this range as more units are produced

The marginal cost curve often decreases at first and then starts to increase. This is explained by...

the law of diminishing returns

Producer surplus is the difference between

the market price and the minimum price a seller is willing to accept

Short run supply =

the portion of MC above AVC

In the short run, perfectly (or purely) competitive firms will maximize their profit by producing...

the quantity where marginal revenue = marginal cost the quantity where price equals marginal cost

Labor-Intensive Technology EX

toys produced in China

Consumer surplus is show graphically as the area

under the demand curve and above the market price

The long-run industry supply curve in an increasing-cost industry is...

upward sloping

Shutdown price of a firm =

where AVC and MC intersect


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