Microeconomics Final Exam

Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market?

exactly $2.50

What represents the firm's long-run condition for exiting a market?

exit if P < ATC

The "invisible hand" refers to

the marketplace guiding the self-interests of market participants into promoting general economic well-being

The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of one chair is

1/5 table of Mike and 1/3 table for Sandy

If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a

40 percent decrease in the quantity demanded

Average total cost (ATC) is calculated as follows:

ATC = (total cost)/(quantity of output).

Which of the following is a characteristic of natural monopoly? Fixed costs are typically a small portion of total costs Average total cost declines over large regions of output The product sold is a natural resource such as diamonds or water All of the above are correct

Average total cost declines over large regions of output

Which of the following is NOT a characteristic of a perfectly competitive market? Firms are price takers Firms have difficulty entering and exiting the market There are many sellers in the market Goods offered for sale are largely the same

Firms have difficulty entering and exiting the market

Which of the following statements best expresses a firm's profit-maximizing decision rule? If marginal revenue is greater than marginal cost, the firm should increase its output If marginal revenue less than marginal cost, the firm should shut down in the short run If marginal revenue equals marginal cost, the firm should produce exactly one more unit of output All of the above are correct

If marginal revenue is greater than marginal cost, the firm should increase its output

Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts?

It increases

If Korea is capable of producing either shoes or soccer balls or some combination of the two, then

Korea's opportunity cost of shoes is the inverse of its opportunity cost of soccer balls

Which of the following statements about models is correct? The more details a model includes, the better the model Models assume away irrelevant details Models cannot be used to explain how the economy functions Models cannot be used to make predictions

Models assume away irrelevant details

What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you?

Price will rise, and the effect on quantity is ambiguous

What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea (a substitute for coffee) fell?

Quantity would fall, and the effect on price would be ambiguous

Which of the following changes would NOT shift the demand curve for a good or service? a change in income a change in the price of a good or service a change in expectations about the future price of the good or service a change in the price of a good or service

a change in the price of a good or service

The "invisible hand" is

a concept developed by Adam Smith to describe the virtues of free markets.

When demand is inelastic, a decrease in price will cause

a decrease in total revenue

When demand for a good is relatively inelastic, a decrease in supply will result in

a relatively large change in equilibrium price and a relatively small change in equilibrium quantity

One of the defining characteristics of a perfectly competitive market is

a similar product

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

The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is

an implicit cost

A rightward shift of a supply curve is called

an increase in supply

If a good is normal, then an increase in income will result in

an increase in the demand for the good

Suppose good X has a negative income elasticity of demand. This implies that good X is

an inferior good

If the demand for a product decreases, ceteris paribus, then we would expect equilibrium price

and equilibrium quantity to both decrease

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,

average fixed cost is 50 cents

At the profit-maximizing output, a monopoly's marginal cost will

be less than the price per unit of its product

Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic vases, but Regan is better at producing both goods. In this case, trade could

benefit both Jayson and Regan

In a market economy, supply and demand determine

both the quantity of each good produced and the price at which it is sold

Monopolies use their market power to

charge a price that is higher than marginal cost

If the cross-price elasticity of two goods is negative, then the two goods are

compliments

Private markets fail to account for externalities because

decisionmakers in the market fail to include the costs or benefits of their behavior to third parties

The exit of existing firms from a competitive market will

decrease market supply and increase market price

Economists view positive statements as

descriptive, making a claim about how the world is

If a monopolist can practice perfect price discrimination, the monopolist will

eliminate consumer surplus, eliminate deadweight loss, and maximize profits

Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good?

equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will

experience losses but will continue to produce rubber bands

Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors while Mexico has a comparative advantage in auto parts. Also suppose the US has an absolute advantage in the production of both semiconductors and auto parts. The US should

export semiconductors to Mexico and import auto parts from Mexico

A competitive market is in long run equilibrium. If demand decreases, we can be certain that price will

fall in the short run. All, some, or no forms will shut down in the short run, and some of then will exit the industry in the long-run. Price will then rise to reach the new long-run equilibrium

In perfectly competitive markets,

firms produce identical products, np individual buyer can influence the market price, and no individual seller can influence the market price

For a competitive market,

if a seller charges more than the going price, buyers will go elsewhere to make their purchases.

Wiladee used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is counted as part of the tailoring firm's

implicit costs

If marginal cost is below average total cost, then average total cost

is falling

For a self-sufficient producer, the production possibilities frontier

is the same as the consumption possibilities frontier

In the short run, a firm operating in a competitive industry will shut down if price is

less than average variable cost

Which of the following is the best example of a variable cost? monthly wage payments for hired labor annual property tax punishments for a building monthly rent payments for a warehouse annual insurance payments for a warehouse

monthly wage payments for hired labor

When externalities exist, buyers and sellers

neglect the external effects of their actions, and the market equilibrium is not efficient.

A congested side street in your neighborhood is

not excludable and rival in consumption

Because public goods are

not excludable, people have an incentive to be free riders.

The deadweight loss associated with a monopoly occurs because the monopolist

produces an output level less than the socially optimal level

If there is an increase in market demand in a perfectly competitive market, then in the short run

profits will rise

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the

quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases

explicit costs

require an outlay of money by the firm

The phenomenon of scarcity stems from the fact that

resources are limited

An increase in quantity demanded

results in a movement downward and to the right along a demand curve

Resources are

scarce for households and scarce for economies

A marginal change is a

small, incremental adjustment

Ashley bakes bread that she sells at the local farmer's market. If she purchases a new convection oven that reduces the costs of baking bread, the

supply can Ashley's bread will increase

Consumer surplus is

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

the available factors of production technology

If a price ceiling is not binding, then

the equilibrium price is above the price ceiling

If education produces positive externalities, we would expect

the government to subsidize education

A production possibilities frontier is a straight line when

the rate of tradeoff between the two goods being produced is constant

In the long run, a profit-maximizing firm will choose to exit a market when

total revenue is less than total cost

Profit is defined as

total revenue minus total cost

We can say that the allocation of resources is efficient if

total surplus is maximized

In the short run, a firm incurs fixed cost

whether it produces output or not

In the short run, a firm incurs fixed costs

whether it produces output or not

In the long run, each firm is a competitive industry earns

zero economic profits