Microeconomics final exam
In a competitive industry, a firm sells 100 flashlights and earns a marginal revenue of $15 on the 100th flashlight it sells. If the firm were to sell an additional flashlight, the firm's marginal revenue for that 101st flashlight would be
$15
At the initial price of $10, demand is 100. If the price increases to $20, the quantity demanded falls to 96. Using the midpoint formula, what is the elasticity?
-.0612
For a competitive firm supplying wheat, if the world price (P) equals the firm's min average cost (min AC), then profits will be
0
In the long run, after this rise in demand, what will profits typically be in Industry X?
0
On January 27, 2011, the price of Ford Motor Company stock hit an almost 10-year high at $18.79 per share. (Two years prior, in January 2009, Ford stock was trading for about a tenth of that price.) Suppose that on January 27, 2011, you owned 10,000 shares of Ford stock (a small fraction of the almost 3.8 billion shares). Suppose you offered to sell your stock for $18.85 per share, just slightly above the market price. How many shares would you sell?
0
(%) Suppose instead that on January 27, 2011, you wanted to sell your 10,000 shares of Ford stock but you reduced your asking price to $18.75 per share? How many shares would you sell?
10,000
Suppose instead that on January 27, 2011, you wanted to sell your 10,000 shares of Ford stock but you reduced your asking price to $18.75 per share? How many shares would you sell?
10,000
In the graph below, what is the total value of consumer surplus?
150
According to research cited in this video, an estimated ____ lives will be saved if 20,000 people get a flu shot.
5
For the next two questions, consider a monopolist who faces the following market conditions:Demand: P=100-2QFixed cost=100Marginal cost=20The profit-maximizing price that the monopolist will charge for each item is ______.
60
Remember: Demand: P=100-2QFixed cost=100Marginal cost=20The monopolist's total profit will be _______.
700
Even if profit is negative, if revenues are ______ variable costs, then it's best to stay open in the short run.
>
A demand curve is said to be elastic when an increase in price reduces the quantity demanded by ________.
A large amount
Which characteristic below best describes the demand curve that you as an individual seller of Ford stock face?
A perfectly elastic demand curve
A competitive market has which of the following characteristics?
All of the above.
It's more costly to grow incense in Eastern Africa than in Arabia Felix. Which region would you expect to see more incense grown in?
Arabia Felix
Speculation: time as
Arbitrage: location
In a competitive market, sellers sell their product
At the world price.
A government is deciding between command and control solutions versus tax and subsidy solutions to solve an externality problem. For questions 2 and 3, identify the best solution. Suppose that whales are threatened with extinction because a large number of people like to eat whale meat. Governments are torn between banning all whaling except for certain religious ceremonies, and heavily taxing all whale meat. Assume there are only a few countries in the world who consume whale meat, and that they have fairly efficient governments.
Ban the eating of whale meat.
The following table shows productivity of two individuals, Sarah and Caitlyn, on two different tasks: book production and t-shirt production.
Caitlyn
Is the following situation caused by moral hazard or asymmetric information? Maria is halfway to work before she realizes that she forgot to lock the back door. Because she has renter's insurance, she decides it is not worth being late just to go home to lock the door.
Caused by moral hazard
What is the least common cost structure for an industry?
Costs decrease as industry output increases.
At this point in the story, what sort of cost industry (constant, increasing, or decreasing) would you consider doughnut shops owned by Cambodians to be?
Decreasing
Whenever money is used to purchase capital, interest costs are incurred. Sometimes those costs are explicit—like when Alex borrowed the money from the bank—and sometimes those costs are implicit— like when Tyler had to forgo the interest he could have earned had he left his funds in a savings account. If an economist and accountant calculated Alex and Tyler's costs, for whom would they have identical numbers and for whom would the numbers differ?
Economist and accountant would agree on Alex's costs and disagree on Tyler's.
Economist and accountant would agree on Alex's costs and disagree on Tyler's.
Economist.
Cultural influences often create externalities, for good and ill. A happy movie might make people smile more, which improves the lives of people who don't see the movie. A new fashion trend for tight-fitting clothing might hurt the body image of people who think they won't look good in the new trendy clothing. Let's consider the market for one cultural good that unrealistically raises expectations about the opposite sex: the romance novel. In romance novels, men are dangerous yet safe, wealthy yet never at work, they ride high-speed motorcycles yet never get in terrible accidents, they look fantastic even though they never waste endless hours at the gym, and so on. (Of course, advertising that focuses on sexy female models may also unrealistically raise expectations about the opposite sex so feel free to change our example as you see best.) Romance novels impose an external cost on men, who have to try to live up to these unrealistic expectations. Suppose the government taxed the romance novel to reduce the externality. How should the government spend the money?
Efficiently
When that happens, do firms, workers, and capital tend to enter Industry X, or do they tend to leave?
Enter
Why is it important to incentivize not only vaccine development but also fast vaccine development?
Every day without a vaccine costs lives and GDP.
The benefit your neighbor receives from hearing you play your pleasant music
External Benefit
The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms
External Benefits
For the following six questions, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. Scenario 1: In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000. Is this an external cost or an external benefit?
External cost
Where are you more likely to see businesses "bundling" a lot of goods into one package: In industries with high fixed costs and low marginal costs (like computer games or moviemaking), or in industries with low fixed costs and high marginal costs (like doctor visits, where the doctor's time is expensive)?
High-fixed-cost and low-marginal-cost industries
Suppose that the elasticity of demand for milk is estimated to be .25. If dairy farmers raise their prices by 10%, revenues will ___________.
Increase
The monopolist's markup is bigger when demand for the product is more
Inelastic
Where will you see more price discrimination: In monopoly-type markets with just a few firms or in competitive markets with many firms?
Monopoly-type markets
Which of the following trade-offs is illustrated by the production possibilities frontier?
Once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other.
"Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron." - President Dwight Eisenhower (1953) Which of the following concepts in economics most closely describes President Eisenhower's statement?
Opportunity cost of defense spending
As Ngoy started hiring more Cambodian refugees to work in his donut shop, this made it more likely that
Other Cambodians would open donut shops.
Firms will exit an industry when
P is less than AC.
Suppose the state of Virginia passes a law that bans smoking in restaurants. As a result, residents of North Carolina who do not like breathing second-hand smoke begin driving across the border to Virginia to eat at restaurants there. Which of the following principles does this best illustrate?
People respond to incentives
The pleasure you receive from listening to your iTunes download
Private Benefit
The safety you enjoy as a result of having the security system
Private Benefits
The price you pay for a security system for your home
Private Cost
The price you pay for an iTunes download
Private cost
A competitive firm maximizes profit by choosing
Quantity
Absolute advantage is found by comparing different producers'
Resource requirements per unit of output
Let's review the basic mechanism of the elimination principle with the following questions. When demand rises in Industry X, what happens to profits? Do they rise, fall, or remain unchanged?
Rise
Consider the list below of unusual insurance products. Which insurance product is least likely to suffer from asymmetric information problems (e.g., moral hazard, adverse selection)?
School bus safety insurance that pays out if and only if you get hit and killed by a school bus
Price ceilings often lead to
Search costs and Quality reductions.
Beyonce is planning to sell her house, and she is considering making two upgrades to the house before listing it for sale. Replacing the kitchen countertops will cost her $2,500 and replacing the roof will cost her $9,000. Beyonce expects the new kitchen countertops to increase the value of her house by $2,000 and the new roof to increase the value of her house by $10,000.
She should replace the roof but not replace the kitchen countertops.
If Starbucks can produce more coffee in one day than McDonalds can produce in one day, then
Starbucks has an absolute advantage in the production of coffee.
LoJack is an example of a vehicle tracking system designed to help police recover stolen vehicles. Steve Levitt found evidence that Lojack and other vehicle tracking devices create a positive externality of decreasing all car thefts because car thieves do not know which cars have Lojack installed, making them more hesitant to break into any car.
Subsidize purchase of vehicle tracking devices.
Will the Coase theorem's assumptions likely be true in the following scenario? (In other words, will the parties be likely to strike an efficient bargain?) My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes an external cost on him and on his property value.
The Coase Theorem should hold.
In the competitive children's pajama industry, a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is a constant cost industry, then in the long run, what exactly happens to the price of children's pajamas?
The price of pajamas increases by exactly $2
If this is an increasing cost industry instead, will the long-run price of pajamas rise by more than $2 or less? (Hint: The long-run supply curve will be shaped just like an ordinary supply curve. If you treat this like a $2 tax per pair, you'll get the right answer.)
The price of pajamas increases by less than $2.
Katie observes that when the price of one good increases, the demand of another good decreases. Of the following pairs, which set of goods is she observing?
Toothpaste and toothbrush
When do consumers bear more of the incidence of a tax than suppliers?
When demand is less elastic than supply
Which item likely has the most elastic demand in the short run?
a car
The opportunity cost of going to college would be the highest for whom among the following?
a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree
Airline stocks go up when vaccine developers make progress because
airlines and other companies will benefit from vaccine development
The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the
amount of the other good that must be given up.
When Jane gets vaccinated against the flu, she imposes _____________ on others.
an external benefit
In a recession, you notice that demand for hair dye kits increases. This would lead you to believe that a hair dye kit is
an inferior good.
Star athletes like LeBron James and Tiger Woods who drop out of college to play professional sports
are well aware that their opportunity cost of attending college is very high.
Suppose there is a price floor of $80 imposed in the following market. Triangle B represents
b. Deadweight social loss.
Fast forward 40 years: What kind of cost structure are Californian doughnut shops probably in now?
constant
Refer to the figure above/below which represents the circular flow diagram. Which arrow represents the flow of income or salary payments?
d
According to the theory of compensating differentials, which low-skilled jobs in the United States will tend to pay the most: The safe jobs or the dangerous jobs?
dangerous jobs
tax
drives a wedge that increases the price consumers have to pay and decreases the price producers receive
The annoyance of your neighbor because she doesn't like your achingly conventional music
external cost
The crime that is more likely to occur to your neighbor once a criminal sees a "Protected by alarm" sticker on your window.
external cost
True or false: When a particular good imposes an externality on bystanders, output at the market equilibrium is always too high.
false
When a competitive firm maximizes profit, profits are always greater than 0.
false
Monopoly firms charge a price that is ___________ marginal cost.
higher than
Which of the following jobs is attempting to correct for an externality?
homeowners association
In the long run, constant supply curves are
horizontal
Does this tend to increase short-run supply in Industry X or reduce it?
increase
We mentioned that carpet manufacturing looks like a decreasing cost industry. In American homes, carpets are much less popular than they were in the 1960s and 1970s, when "wall-to-wall carpeting" was fashionable in homes. Suppose that carpeting became even less popular than it is today: What would this fall in demand probably do to the price of carpet in the long run?
increase carpet price
In the ancient Western world, incense was one of the first commodities transported long distances. It grew only in the south of the Arabian Peninsula (modern-day Yemen, known then as Arabia Felix) and was transported by camel to Alexandria and the Mediterranean civilizations, notably the Roman Republic. As the republic expanded into a richer and larger empire, the demand for incense grew and planters in Arabia added a second and then a third annual crop (though this incense was not as high of a quality). Cultivation also crossed to the Horn of Africa even though such fields were farther away from Rome. The fact that additional annual crops were of lower quality indicates that this industry has
increasing cost
subsidy
is a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction.
A competitive firm maximizes profit by choosing a level of output where the world price is equal to the firm's
marginal cost
Given what you've learned about externalities, should human-caused global warming be completely stopped?
no
Given your answer to the previous question (%), should you sell your shares at $18.75?
no
When we tax goods with external costs, this always creates
none of the above
Which of the following values would give Sarah a comparative advantage in T-shirt production?
none of the above
The economic definition of profit differs from the accounting definition of profit in that the economic definition includes
opportunity cost
A flu shot is an example of a
positive externality
You've been hired as a management consultant to WaffleCo, a maker of generic-brand frozen waffles. They're each trying to figure out if they should produce a little more output or a little bit less in order to maximize their profits. The firms all have typical marginal cost curves: They rise as the firm produces more. Your staff did all the hard work for you of figuring out the price of the firm's output is $4 per box and the marginal cost of producing one more unit of output is $2 per box at its current level of output. However, they forgot to collect data on how much the firm is actually producing at the moment. Fortunately, that doesn't matter. In your final report, you need to decide if the firm should produce more, less, or stay at the current output level. What do you recommend?
produce more
When economists talk about people being interdependent, they are referring to the fact that in the global marketplace we all
rely upon one another for the goods and services that we consume
The main reason why households and economies face many decisions and tradeoffs is that
resources are scarce.
Katy Perry decides to spend 4 hours working overtime rather than going to the park with her friends. She earns $15 per hour for overtime work. Her opportunity cost of working is
the enjoyment she would have received had she gone to the park.
People aren't willing to pay more for a bottle of water than for a diamond because
the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.
A rational decisionmaker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
Pewdiepie decides to spend four hours playing video games rather than attending his classes. His opportunity cost of playing games is
the value of the knowledge he would have received had he attended his classes.
When an economy is operating at a point on its production possibilities frontier, then
there is no way to produce more of one good without producing less of the other.
A labor supply curve can have a negative slope.
true
Which type of cost is dependent on the amount of quantity produced by a firm?
variable cost
The opportunity cost of a product is
what you give up in order to get that product
