Microeconomics Final Exam review
Because poor people are ________ likely to have adequate healthcare, guaranteeing everyone in society the best healthcare would likely ________ equality. Paying laid-off workers unemployment benefits until they find a new job will likely__________ equality and _________ efficiency.
less; increase; increase; decrease
Suppose the market for cars is unregulated. That is, car prices are free to adjust based on the forces of supply and demand. If a shortage exists in the car market, then the current price must be ___________ than the equilibrium price. For the market to reach equilibrium, you would expect
lower, buyers to offer higher prices.
One of the growers is excited by this advancement because now he can sell more crops, which he believes will increase revenue in this market. As an economics student, you can use elasticities to determine whether this change in price will lead to an increase or decrease in total revenue in this market. Using the midpoint method, the price elasticity of demand for wheat between the prices of $15 and $9 per bushel is _____ which means demand is _____ between these two points. Therefore, you would tell the grower that his claim is ________ because total revenue will _______ as a result of the technological advancement.
$0.67; inelastic; incorrect; decrease
Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Xavier has an accounting profit of _____ and an economic profit of ____.
$50, $10
Jake is a retired teacher who lives in New York City and does some consulting work for extra cash. At a wage of $50 per hour, he is willing to work 7 hours per week. At $65 per hour, he is willing to work 10 hours per week. Using the midpoint method, the elasticity of Jake's labor supply between the wages of $50 and $65 per hour is approximately _______, which means that Jake's supply of labor over this wage range is ______
1.35; elastic
The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is:
1/2
Positive externality
A benefit that is enjoyed by a third-party as a result of an economic transaction.
Perfectly competitive firm shutdown scenario
A business needs to make at least normal profit in the long run to justify remaining but in the short run a firm will produce as long as price per unit > or equal to average variable cost (AR = AVC). This is called the shutdown price in a competitive way.
Sunk cost
A cost that an entity has incurred and which it can no longer recover by any means.
Negative externality
A cost that is suffered by a third-party as a result of an economic transaction.
Variable cost
A cost that varies with the level of output. M = variable cost
Profit
A financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.
Complementary product
A good with a negative cross-elasticity of demand, in contrast to a substitute product. Ex. Pencils and erasers.
Oligopoly
A market form wherein a market or an industry is dominated by a scarce amount of large sellers.
Long-run cost
A period of time in which all factors of production and costs are variable.
PPC curve
A possible tradeoff of producing combination of goods with constant technology and resources per unit time.
World Price
A price for a good and service in all countries other than one's own.
Substitute product
A product from another industry that offers similar benefits to the consumee as a product produced by the firms, within the industry. Ex. Coca-Cola and Pepsi.
Tariff
A tax or duty to be paid on a particular class of imports or exports.
Pure competition
A term that describes a market that has a broad range of competitors who are selling the same products.
Economic theory
A theory of commercial activities (such as the production and consumption of goods).
Law of demand and supply
A theory that explains the interaction between the supply of a resource and the demand for that resource.
Monopolistic competition
A type of imperfect competition that many producers sell products that are differentiated from one another and hence are not perfect substitutes.
What is the equation of Average Fixed Cost?
AFC = ATC - AVC
What is the equation for Average Total Cost?
ATC = TC/Q
What is the equation of Average Variable Cost?
AVC = TVC/Q
Comparative advantage
An economic law referring to the ability of any given economic actor to produce goods and services at the lower opportunity cost than other economic actors.
Marginal utility
An important economic concept because economists use it to determine how much of an item a consumer will buy.
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?
An increase in the price of grapes, an input to jelly
Midpoint formula
Applied when one is required to find the exact center point between two defined points.
The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result?
Average total cost and average fixed cost.
A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If the firm were to increase production to 21 units, which of the following must occur?
Average total cost would decrease.
Fixed cost
Business cost, such as rent, that are constant whatever the quantity of goods or services produced. C = fixed cost
Average total cost (ATC)
Can be very handy for firms to compare efficiency at different output or when adjusting different factors of product.
Because you understand the law of demand, you can deduce that the correct graphical representation of the demand for CDs must be __________. Moreover, you know that at a price of $10 per CD, the __________ is five million CDs.
D1, quantity demanded
True or False: An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.
False, An increase in the demand for notebooks will cause the demand curve to shift to the right, resulting in a movement along the supply curve. Provided the supply curve is upward-sloping, both the quantity of notebooks demanded and the quantity supplied will increase.
A price change causes the quantity demanded of a good to decrease by 30%, while the total revenue of that good increases by 15%. True or False: The demand curve is elastic in this region.
False, the demand curve is inelastic in this region or is the supply curve elastic.
True or False: The market for tomatoes does not exhibit the two primary characteristics that define perfectly competitive markets.
False. Perfectly competitive markets are characterized by large numbers of buyers and sellers who cannot influence market prices and buy and sell identical products.
Normal goods
For which both income and demand increases.
Inferior goods
For which demand declines as a level of income or real GDP in the economy increases.
Indifference curve (consumer theory)
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent.
How do we understand a competitive firm's profit maximation?
In order to maximize profits in a perfectly competitive market, one needs to set marginal revenue equal to the marginal cost. MR = MC.
Economic profit
Includes the opportunity costs associated with production and is therefore lower than accounting profit. Ex. Economic Price = loss of $10,000 Formula: EP = TR - (EC + IC)
Revenue
Income, especially when of a company or organization and of a substantial nature. TR = Price * quantity
Why do we think of shifts in demand and supply curves due to non-price factors?
It is another important non-price factor that determines demand is the price of related goods.
Jake lives in New York City and loves to eat desserts. He spends his entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.25, and a piece of apple pie is priced at $5.00. At his current consumption point, Jake's marginal rate of substitution (MRS) of pudding for pie is 3. This means that Jake is willing to trade three bowls of pudding per week for one piece of pie per week. Does Jake's current bundle maximize his utility—in other words, make him as well off as possible? If not, how should he change it to maximize his utility?
Jake could increase his utility by buying more pudding and less pie per week.
A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm?
Marginal cost is $8, and average total cost is $5.
Production Possibilities Curve (PPC)
Models of a two-good economy by mapping production of one good on the X-axis and production of the other good on the y-axis.
Suppose there is a policy debate regarding the United States' imposing trade restrictions on imported tires. Which of the following justifications is the congresswoman using to argue for the trade restriction on tires?
National-security argument
Can you name the four types of market structure?
Pure competition, monopolistic competition, monopoly, and oligopoly
Elasticity
Refers to the degree of responsiveness in supply or demand in relation to charges in price.
Government regulations
Regulations that are issued by various government departments and agencies to carry out the intent of legislation enacted by congress.
Diminishing marginal productivity
Results from rising short term average costs.
Antitrust laws
Statutes developed to protect consumers from rapacious business practices by making it illegal for businesses to compete in unfair ways.
What is the equation of Total Cost?
TC = (AVC + AFC) * Q
What is the equation of Total Fixed Cost?
TFC = TC - TVC
What is the equation for Total Variable Cost?
TVC = AVC * output
Absolute advantage
The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
Marginal Cost
The cost added by producing one additional unit of a product or service. Marginal Cost = ATC/AQ
Short-run cost
The cost which has short-term implications to the production process i.e. these are used over a short range of output.
Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets?
The demand curve shifts to the right.
Accounting profit
The difference between total monetary revenue and total costs but total costs include both explicit and implicit costs.
Monopoly
The exclusive possession or control of the supply or trade in a commodity or service.
Opportunity cost
The loss of potential gain from other alternatives when one alternative is chosen.
Disequilibrium
The price at which the quantity demanded is not equal to the quantity supplied.
Equilibrium
The price at which the quantity demanded of a good equals the quantity supplied.
People in the U.S. state of Iowa eat both corn and potatoes. It is technically possible for farmers to grow both corn and potatoes in Iowa, yet almost no farmers grow potatoes. Instead, every year, Iowa exports corn and imports potatoes from the U.S. state of Idaho, where farmers specialize in potatoes. Which of the following principles of economic interaction best describes this scenario?
Trade can make everyone better off.
Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. What is the opportunity cost of something? Your aunt's opportunity cost of running a hardware store for a year is ____ Suppose your aunt thought she could sell $510,000 worth of merchandise in a year. True or False: Your aunt should open the store.
What must be given up to acquire it; $550,000; false. Because the total opportunity cost of $550,000 exceeds the projected revenue of $510,000, your aunt should not open the store, as her economic profit would be negative. See Section: Economic Profit versus Accounting Profit.
A life-saving medicine without any close substitutes will tend to have:
a small elasticity of demand
Suppose the large number of auto accidents in a small town results in new legislation that requires all citizens of the town to install new anti-lock brakes on their cars. These new brakes cut the time it takes a car to stop by 50%, allowing drivers to more easily avoid collisions with other cars and pedestrians. The new brakes ____________ the probability that a vehicle will collide with another vehicle but also gives drivers an incentive to drive more __________ , which could potentially _________ the number of car accidents in the town.
decrease; recklessly; increase
true or false: All inferior goods are Giffen goods.
false, not all inferior goods are giffen goods.
The production function becomes _______ as the number of hours spent fishing increases. True or False: The total-cost curve is increasing and convex because there are diminishing returns to fishing time.
flatter; true
Economics is best defined as the study of
how society manages its scarce resources.
In a perfectly competitive market, all producers sell ________ goods or services. Additionally, there are __________ Buyers and sellers. Because of these two characteristics, both buyers and sellers in perfectly competitive markets are price ___________.
identical, many, takers
A marginal change is one that
incrementally alters an existing plan.
A linear, downward-sloping demand curve is
inelastic at some points and elastic at others.
A good without any close substitutes is likely to have relatively __________ demand, since consumers cannot easily switch to a substitute good if the price of the good rises. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand? The price elasticity of demand is also affected by the given time horizon. Compared to the short-run demand for oil, the demand for oil in the long run will tend to be __________ elastic.
inelastic; A heart valve for heart attack victims; more
Ana is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Because her pool sessions are helping her swim more quickly, Ana plans to reduce by 1 hour per week the time she spends training on the bike and increase by 1 hour the time she spends in the swimming pool; however, her husband says that she should stop doing any biking and running and spend all 20 hours per week in the pool. Which basic principle of individual choice does Ana's plan illustrate that her husband's advice does not?
many decisions are made on the margin.
If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?
prices and quantities both rise
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $1.5 million. If it would cost $2 million to finish development and make the product, you _________ go ahead and do so. The most you should pay to complete development is ___________million.
should not, $1.5
The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.
supply, lower
An increase in ________ will cause a movement along a given demand curve, which is called a change in ________.
supply, quantity demanded
Adam Smith's phrase "invisible hand" refers to
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
If a nation has high and persistent inflation, the most likely explanation is
the central bank creating excessive amounts of money.
An increase in the supply of a good will decrease the total revenue producers receive if
the demand curve is inelastic.
A change in which of the following will not shift the demand curve for hamburgers?
the price of hamburgers
Diminishing marginal product explains why, as a firm's output increases,
the production function gets flatter, while the total cost curve gets steeper.
The ability of firms to enter and exit a market over time means that, in the long run,
the supply curve is more elastic
Your opportunity cost of going to a movie is
the total cash expenditure needed to go to the movie plus the value of your time.
Total revenue
the total income of a business and is calculated by multiplying the quantity of goods sold by the price of the goods.
True or false: All Giffen goods are inferior goods.
true
Before you started applying for college, a job recruiter offered you a full-time cashier position at a doctor's office, earning an after-tax salary of $28,000 per year. However, you turn down this offer and attend your first year of college. The additional monetary cost of college to you, including tuition, supplies, and additional housing expenses, is $35,000. You decide to go to college, probably because
you value a year of college at more than $63,000
