Principles of Microeconomics CLEP
In the long run,
all inputs are considered to be variable.
A lighthouse is typically considered an example of a public good because
all passing ships are able to enjoy the benefits of the lighthouse without paying.
The impact of one person's actions on the well-being of a bystander is called
an externality.
One advantage market economies have over central planning is that market economies
are more efficient.
If a firm is making zero economic profit,
it is covering its opportunity costs.
A price-taker firm will tend to expand its output as long as its
marginal cost is less than the market price.
Since a firm in a monopolistically competitive market faces a
downward-sloping demand curve, it will always operate at excess capacity.
A downward-sloping portion of a long-run average total cost curve is the result of
economies of scale.
Economics is primarily the study of
scarcity.
Marginal utility is
the difference between any two successive total utility figures.
Profit is defined as
total revenue minus total cost.
If a firm produces nothing, which of the following costs will be zero?
Variable cost
A good is NOT scarce in a society if
all members of a society can have all they want of it.
If a decrease in income increases the demand for a good, then the good is
an inferior good.
As a group, oligopolists would always be better off if they would act collectively
as a single monopolist.
A profit-maximizing firm will continue to expand output
as long as revenues from the production and sale of an additional unit exceed the marginal cost of the unit.
When marginal cost is less than average total cost,
average total cost is falling.
When marginal cost exceeds average total cost,
average total cost is rising.
A fundamental source of monopoly market power arises from
barriers to entry.
A monopoly's marginal cost will likely
be less than average variable cost.
A bottle of wine costs $8, and a quiche costs $5. At Robert's present levels of consumption, he spends all of his income and receives marginal utility of $10 from the last bottle of wine and marginal utility of $4 from the last quiche. To maximize his total utility, Robert should
buy more wine and less quiche.
If a tax is imposed on a market with inelastic demand and elastic supply,
buyers will bear most of the burden of the tax.
In perfectly competitive price-taking markets, firms
can sell all of its output at the market price.
A group of firms that are acting in unison to maximize collective profits is called a
cartel.
To increase their profits further, members of a cartel have an incentive to
cheat.
An agreement among firms in the same industry over production and price is called a
collusion.
In a perfectly competitive market, the barriers limiting the entry into or the exit from the market are
considered nonexistent.
If the expansion of output in an industry leads to unchanged resource prices, the industry is most likely to be a(n)
constant cost industry.
When a firm operates under conditions of a monopoly, its price is
constrained by demand.
One would expect to observe a diminishing marginal product of labor when
crowded office space reduces the productivity of new workers.
Private markets don't account for externalities because
decision makers in the market fail to take account of the external effects of their behavior.
For most goods and most people, marginal utility probably
declines as consumption increases.
If all else is constant, a higher price for ski lift tickets would be expected to
decrease ski sales.
The "competition" in monopolistically competitive markets is most likely a result of
free entry.
The government provides public goods because
free-riders make it difficult for private markets to supply the socially optimal quantity.
The marginal utility of a unit of good X
generally depends on how much X the consumer already possesses.
A price ceiling that is not binding
has no effect on today's market.
In a perfectly competitive market, the actions of any single buyer or seller will
have a negligible impact on the market price.
Compared to those with higher incomes, low-income families are less likely to
have both a husband and a wife in the labor force or be headed by a college graduate.
A perfectly elastic demand curve will be
horizontal.
Economics is defined as the study of
how society manages its scarce resources.
One way in which monopolistic competition differs from oligopoly is
in oligopoly markets, there are only a few sellers.
Measuring poverty using an absolute income scale (like the poverty line) is likely to be deceptive because
income measures don't include the value of in-kind transfers
The marginal product of labor is equal to the
increase in output obtained from a one-unit increase in labor.
A higher price for batteries would tend to
increase the demand for electricity.
Tom is buying a quantity of wheat at which the marginal utility (in dollars) exceeds price. He should
increase wheat consumption, thus lowering MU to the level at which MU = P.
The sharp reduction in marginal tax rates during the 1980s
increased the visible income for high-income Americans.
Total utility
increases as long as marginal utility is positive.
A diminishing marginal product of labor occurs when adding another unit of labor
increases output but not by as large a margin as previous units of labor.
Sally tells you that she thinks the price of her favorite stationery will increase in the near future. She will probably respond by
increasing her current demand for the stationery.
Optimizing consumers will select a consumption bundle in which their
marginal rate of substitution is equal to the relative price ratio.
The rate at which a consumer is willing to exchange one good for another, and at which a constant level of satisfaction is maintained, is called the
marginal rate of substitution.
If a monopolist faces a downward-sloping market demand curve, its
marginal revenue is always less than the price of the units it sells.
A profit-maximizing monopolist will produce the level of output at which
marginal revenue is equal to marginal cost.
The profit-maximizing rule for a firm in a monopolistically competitive market is to select the quantity at which
marginal revenue is equal to marginal cost.
When the price of a commodity rises, we can expect
marginal utility of the last unit purchased to rise.
The theory of consumer choice is based on the hypothesis that each consumer wants to
maximize total utility.
Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. If all else is constant, Joan's income elasticity of demand for hamburger is
negative, so Joan considers hamburger to be an inferior good.
When externalities exist, buyers and sellers
neglect the external effects of their actions, and the market equilibrium is not efficient.
If a price-taking firm selling in a perfectly competitive market offers its product at a higher price than others, it will
not have the capacity to sell any output.
A key determinant of labor productivity is
the amount of human capital workers acquire through education and training.
Equity means that
the benefits of society's resources are distributed fairly among society's members.
The combination of two goods a consumer chooses depends on
the consumer's budget constraint and preferences.
The economic inefficiency of a monopolist can be measured by
the deadweight loss.
A dress manufacturer is expecting higher prices for dresses in the near future. We would expect
the dress manufacturer to supply fewer dresses now.
When a profit-maximizing firm makes a decision to employ a worker, that decision is based on
the individual contribution that the worker makes to the profit of the firm.
Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. If this market is not required to internalize this externality,
the market equilibrium would not be the socially optimal quantity.
The value of the marginal product of any input is equal to the marginal product of that input multiplied by
the market price of the output.
Economic mobility refers to
the movement of people among income classes.
Economists compute the price elasticity of demand as
the percentage change in the quantity demanded divided by the percentage change in price.
The supply curve of a price taker firm in the short run is
the portion of the firm's marginal cost curve that lies above average variable cost curve.
The rental price of capital is
the price paid to use capital for a limited time period.
If the minimum wage is above the equilibrium wage,
the quantity demanded of labor will be less than the quantity supplied.
Utility measures
the satisfaction a consumer receives from consuming a bundle of goods.
One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,
the size of the factory is fixed.
Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's economic profit equals
$-80. Economic profit is total revenue minus opportunity costs (explicit costs and implicit costs) or $-80.
Jerry has two jobs, one for the winter and one for the summer. In the winter, he workers as a lift attendant at a ski-resort and earns $10 per hour. During the summer, Jerry drives a tour bus around the ski resort and earns $12 per hour. During the winter months, what is Jerry's opportunity cost of taking an hour off work to go skiing?
$10
What is the monopoly's profit under the following conditions? The profit-maximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. Average cost for 10 units of output is $6.
$100. Total revenue is $160, and total cost is $60. Therefore, profit is equal to $100.
Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's accounting profit equals
$170. Accounting profit equals total revenue minus explicit costs or 170
Fred has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends writing, he can earn $75. If Fred decides to spend 80 hours a week playing volleyball on the beach and the rest of his time writing, how much income will he have available to spend on consumption goods?
$2,400. Fred spends 32 hours writing times $75 per hour for a total of $2,400.
Elaine values the utility of her first cup of coffee at $1; a second cup, $0.75; and a third cup, $0.50. If Elaine drinks three cups of coffee for breakfast, her total utility is equal to
$2.25.
XYZ Corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold were sold for a price of $95. The total revenue of the XYZ Corporation is
$26,125. Total revenue is 275 units times $95, which equals $26,125.
Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time to instruct them if he is also to maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. What is the total opportunity cost Farmer Tony incurred for his spring day in the field planting wheat?
$380. Opportunity cost is equal to the implicit cost ($250) plus the explicit cost ($130) or $380.
Fred has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends writing, he can earn $75. What is the implicit price that Fred pays for the satisfaction derived from playing an hour of volleyball?
$75
Consider a profit-maximizing monopoly pricing under the following conditions: The profit-maximizing price charged for goods produced is $16.The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. The socially efficient level of production is 12 units. The demand curve and marginal cost curves are linear. What is the deadweight loss?
$8
Which of the following would cause both the equilibrium price and equilibrium quantity of number two grade potatoes (an inferior good) to increase?
A decrease in consumer income
If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?
A decrease in demand
When a firm has little ability to influence market prices, it is said to be in what kind of a market?
A perfectly competitive market
Which of the following best illustrates the concept of "derived demand" ?
An automobile producer's decision to supply more cars will lead to an increase in the demand for automobile production workers.
If buyers lose interest in a product (their tastes decrease) and the number of suppliers increases, what would you expect to occur in the market for the good?
Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
Suppose that both demand and supply decrease. What would you expect to occur in the market for the good?
Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
Suppose that the number of buyers in a market increases and a technological advancement occurs simultaneously. What would we expect to happen in the market?
Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
Which one of the following factors is NOT an explanation of the positive relationship between market price and quantity supplied?
For most firms, unit costs decrease as output increases in the long run.
Suppose that John receives a pay increase. We would expect
John's demand for inferior goods to decrease.
If the marginal utility to Juan of sleeping an extra hour (from 8 a.m. to 9 a.m.) is negative,
Juan should get up at 8 a.m.
Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true?
Meatball prices will exceed marginal cost.
Suppose you like banana cream pie made with vanilla pudding. Although all other factors are constant, you notice that the price of bananas has gone up. How would your demand for vanilla pudding be affected by the price of bananas?
My demand would decrease.
Which of the following is the best example of a public good?
National defense
For a profit maximizing monopolist,
P > MR = MC.
What will occur in the rice market if buyers are expecting higher prices in the near future?
The demand for rice will increase.
Suppose that large-scale pork production has the potential to create groundwater pollution. Why might this type of pollution be considered an externality?
The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.
Which of the following would NOT be a determinant of demand?
The prices of the inputs used to produce the good
In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic incentives for producers?
To produce to meet the output target, without regard for quality or cost
Which of the following costs does NOT vary with the amount of a firm's output?
Total fixed costs
What is the law of demand?
When the price of a good falls, buyers respond by purchasing more, all else remaining the same.
Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized mutually beneficial trades are
a deadweight loss to society.
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.
adverse selection
Economists generally believe that rent control is
a highly inefficient way to help the poor raise their standard of living.
When the price of a good increases, ceteris paribus, consumers perceive
a loss in well-being since they can no longer purchase the same bundle that they had previously.
Less demand paired with a larger supply would necessarily result in
a lower equilibrium price.
An externality exists when
a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
A monopoly that arises from exclusive ownership of a key resource results in
a price that exceeds marginal cost of production.
The earned income tax credit is an example of
a wage subsidy.
The amount of a good an individual has
affects the rate at which the consumer is willing to trade.
Labor markets are different from most other markets because labor demand is
derived.
Monopolistic competition differs from perfect competition because in monopolistically competitive markets,
each of the sellers offers a somewhat different product.
The defining characteristic of a natural monopoly is its
economies of scale over the relevant range of output.
A firm in a perfectly competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1,000 door knobs. After the increase in output, its average revenue will
equal $10.
Consumers maximizes total utility (measured in money terms) when, at the chosen quantity of every good the consumers buys, their marginal utility
equals the price of every good.
Competitive firms that maximize profit will hire workers until the value of the marginal product
equals the wage.
Suppose that the incomes of buyers in a particular market for a normal good declines while a reduction in input prices occurs. What would we expect to occur in this market?
equilibrium price would decrease, impact on amount of goods sold would be ambiguous.
Rent control is
example of price ceiling.
Private goods are
excludable and rival.
When the price of a good decreases, ceteris paribus, the lower price
expands the consumer's set of buying opportunities.
Factor markets are different from product markets in an important way, because
factor demand is a derived demand.
Regulation of a firm in a monopolistically competitive market
is unlikely to improve market efficiency.
When a firm is a profit maximizer,
it does not care directly about the number of workers it hires.
When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,
its demand curve will be a tangent to its average total cost curve.
As a group, oligopolists would always be better off collectively if they would
limit production.
Constant returns to scale occur when
long-run average total costs are constant as output increases.
Economies of scale occur when
long-run average total costs fall as output increases.
Diseconomies of scale occur when
long-run average total costs rise as output increases.
An important implicit cost incurred by almost all businesses is the
opportunity cost of financial capital that has been invested in the business.
Comparative advantage is based on
opportunity costs.
Chocolate chip ice cream would tend to have very elastic demand because
other flavors of ice cream are almost perfect substitutes.
For a monopoly firm, which of the following equalities is true?
price = average revenue
The legal maximum price at which a good can be sold is a
price ceiling.
In a market economy, economic activity is guided by
prices.
The deadweight loss associated with a monopolistically competitive market is a result of
pricing above marginal cost.
Suppose you make gold jewelry. If the price of gold falls, we would expect you to
produce more jewelry than before at each possible price.
Economists assume that monopolists behave as
profit maximizers.
If the value of the marginal product exceeds the wage, hiring another worker would be
profitable.
A good from which it is impossible or at least very costly to exclude nonpaying customers, and of which many individuals can share the consumption and benefit of the same unit of the good, is called a
pubic good.
Goods that are nonexcludable and nonrival are
public goods.
One problem with regulating a monopolist on the basis of cost is that
regulations do not provide an incentive for the monopolist to reduce its cost.
A consumer possesses five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will
rise to $2.25.
In the midst of a price war, a soft drink company determines that the price of a six-pack is $0.69 and expects that price to hold for up to three months. If the firm temporarily shuts down for three months, it could avoid $0.84 per six-pack in costs. Economic theory suggests that the firm should
shut down but only temporarily, if it expects the price to be sufficiently high after three months.
In monopolistically competitive markets, economic profits
signal new firms to enter the market.
Markets are often inefficient when negative production externalities are present because
social costs exceed private costs at the private market solution.
Efficiency means that a
society is getting the most it can from its scarce resources.
When firms are encouraged to enter monopolistically competitive markets,
some firms in the market must be making economic profits.
An optimizing consumer will select a consumption bundle in which utility is maximized
subject to constraints imposed by their budget.
Data on the distribution of income among individuals and families in the United States indicate that
substantial inequality in annual income emanates from differences in education, age, hours worked, and family size.
If the cross-price elasticity of demand is 1.25, then the two goods would be
substitutes.
The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" is called
the Sherman Act.
The marginal utility of a unit of good Y to Jane is
the additional utility that Jane gets from consuming one more unit of Y.
Wheat is the main ingredient in the production of flour. If the price of wheat increases, all else equal, we would expect
the supply of flour to decrease.
When firms are able to increase the amount of physical capital available to workers,
the value of the marginal product of labor will increase.
Land resources are compensated according to
the value of the marginal product of land.
Natural monopolies differ from other forms of monopoly because
they are generally not worried about competition eroding their monopoly position in the market.
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
they are unable to maintain monopoly power.
The poverty line reflects an annual income equal to approximately
three times the cost of providing an adequate diet.
When deciding whether to hire an additional worker, firms look at how the additional worker would affect
total profit.
Economic profit is equal to
total revenue minus the opportunity cost of producing goods and services.
The value of the marginal product of labor is equal to the change in
total revenue with the addition of the last worker.
To maximize profit, a competitive firm hires workers until the point where
value of the marginal product curve and the wage curves intersect.
If one observes a profit-maximizing firm decreasing employment, it is possible to infer that the
wage exceeds the value of the marginal product.
The majority of income in the United States comes from
wages and fringe benefits.
Air pollution creates a negative production externality. As such,
welfare will be enhanced when some, but not all, air pollution is eliminated.
The opportunity cost of an item is
what you forgo to get that item.
In economics, the opportunity cost of a good or service is
what you sacrifice to acquire it.
In economics, the opportunity cost of an item or entity is
what you sacrifice to obtain it.
Jerry has two jobs, one for the winter and one for the summer. In the winter, he works as a lift attendant at a ski-resort and earns $10 per hour. During the summer, Jerry drives a tour bus around the ski resort and earns $12 per hour. Assume that Jerry has an upward-sloping labor supply curve. Jerry's employer is considering an increase in his summer wage. If Jerry is offered $14 per hour, he should
work more hours.
The marginal product of labor (where Δ denotes "change") can be defined as
Δoutput / Δlabor.
