Unit 1-6 Progress check MCQ
is inelastic The demand elasticity can be determined by applying the total revenue test because whether total revenue increases, decreases, or remains the same when price changes depends on the price elasticity of demand. Price and total revenue move in opposite directions if demand is elastic and move in the same direction if demand is inelastic. In this case, an increase in the price resulted in an increase in total revenue. Thus, demand must be inelastic. That is, the percentage increase in price outweighs the percentage decrease in quantity demanded, resulting in a net increase in total revenue
A 10 percent increase in the price of a good results in a 44 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices
The price of the good A change in the price of the good (an increase or a decrease), all other things remaining constant, causes a movement along a given demand curve for the good as described by the law of demand. An increase in price causes an upward movement resulting in a decrease in quantity demanded, and a decrease in price causes a downward movement along the demand curve, resulting in an increase in quantity demanded.
A change in which of the following causes a movement along a given demand curve for a normal good?
4 Building 4 playgrounds maximizes net benefits (net benefits = total benefits - total costs = $140,000-$110,000 = $30,000)(net benefits = total benefits - total costs = $140,000-$110,000 = $30,000).
A city is considering building playgrounds in city parks located near residential areas. The city planner presented to the township the following cost and benefit estimates to help the city council decide how many playgrounds to build. What is the optimal number of playgrounds to maximize net benefits?
An increase in fixed costs An increase fixed costs will increase the firm's total cost but not marginal cost. Marginal cost only changes with changes in variable cost. Therefore, marginal revenue will continue to be equal to marginal cost and the firm will not change its quantity to maximize its profit.
A competitive profit-maximizing firm is currently producing at an output level at which the marginal revenue is equal to marginal cost. Which of the following changes will NOT affect the profit-maximizing quantity?
It will decrease by 20 percent The absolute value of the price elasticity of demand is 2 and is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore, the percentage change in quantity demanded will be 20% (this is calculated by multiplying the 2 by 10%). The price elasticity of demand illustrates the negative relationship between price and quantity demanded. Therefore, an increase in price by 10% will result in a decrease in quantity demanded by 20% for an absolute value of a price elasticity of demand of 2.
A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded?
Employ less labor and more capital because the marginal product per dollar spent on labor is less than the marginal product per dollar spent on capital. The cost-minimizing combination of inputs is based on marginal product per dollar spent. In this example, the marginal product per dollar spent on labor is 0.5 (50/$100)(50/$100), which is less than the marginal product per dollar spent on capital, which is 0.75 (30/$40)(30/$40). Thus, the firm can minimize the cost of the given output by using less labor and more capital.
A firm is currently producing 3,000 units of output daily by employing 20 units of labor at a price of $100 per unit and 40 units of capital at a price of $40 per unit. The marginal product of the last unit of labor employed is 50, and the marginal product of the last unit of capital employed is 30. In order to minimize its production costs, the firm should do which of the following?
increase its profits A firm sets its price equal to the maximum amount a consumer is willing to pay for that unit to capture additional consumer surplus and to increase its profits.
A firm with market power engages in price discrimination in order to
The average product of the factor input Neither a firm's decision to hire a factor nor its demand for a factor depends on the average product of the factor. A firm's decision to hire a factor of production depends on the productivity of the factor, as measured by the marginal product of the factor, the factor's price (or marginal factor cost), and the price of the firm's product (or the demand for the product the factor produces).
A firm's decision to hire a factor of production DOES NOT depend on which of the following?
It remains constant. The vertical distance between total variable cost and total cost at each output level is total fixed cost, which is constant.
A graph shows quantity of output produced on the horizontal axis and shows total variable cost and total cost on the vertical axis. Which of the following is true about the vertical distance between total variable cost and total cost as output increases?
the number of rival firms producing more differentiated products decreases The degree of elasticity depends on the number of competitors and the degree of product differentiation. Both a smaller number of rivals and more differentiated products make it more difficult for consumers to be responsive to price changes, therefore, the firm will face a less elastic demand curve.
A monopolistically competitive firm's demand curve will be least elastic if
How will goods or services be produced? Using a wind turbine determines how electricity is provided or what resources are used to produce it. By specifying the resources to be used, it determines the method by which they will be produced. Therefore, it answers the question how goods and services will be produced.
A power company decides to use wind turbines to provide electricity instead of coal. Which basic economic question does this decision answer in a free market economy?
Shut down in the short run and exit the market in the long run. The firm is profit-maximizing, therefore it is producing the quantity at which MRMR equals MCMC. However, when price is less than average variable cost, the firm is better off shutting down to minimize its costs to fixed costs only in the short run and exit the market in the long run. By continuing to produce in the short run, the firm is unable to cover its variable costs and part of its fixed costs because price is less than average variable cost.
A profit-maximizing firm is currently producing a quantity at which price is less than average variable cost. To maximize profit, the firm will do which of the following in the short run and the long run?
a lighthouse individuals cannot be excluded from taking advantage of a lighthouse (nonexcludable), and the use of a lighthouse by one individual does not affect another individual from using the lighthouse (nonrival). A lighthouse is a public good.
An example of a good that is nonrival and nonexcludable is
The demand curve for good Y will shift to the right because the goods are substitutes in consumption. The goods are substitutes in consumption because an increase in the price of good X causes buyers to want to buy more of good Y. An increase in the price of good X results in an increase in demand for the substitute good Y, which is represented by a rightward shift of the demand curve for good Y.
An increase in the price of good X causes buyers to want to buy more of good Y. Which of the following explains the resulting change in the market?
Tax revenue is $300, deadweight loss $100 The answer can be found through the process of elimination. We can rule out Options A and B because there is always a deadweight loss unless either demand or supply is perfectly inelastic. If demand were perfectly inelastic, the buyer price would have increased by the amount of the tax. If supply were perfectly inelastic, the buyer price would not have increased at all. Since buyer price increased by $3, we know that neither supply nor demand is perfectly inelastic, which rules out Options "A" and "B" . We can also rule out Options "D" and "E" . The tax collected by the government could only be $500 if the equilibrium quantity did not change after the tax was implemented. The only case in which the equilibrium quantity would not change after the tax is implemented is if either demand or supply is perfectly inelastic. But we know that neither demand nor supply is perfectly inelastic. Therefore, the government revenue must increase by something less than $500. The only option in which there is some deadweight loss and the tax revenue collected by the government is less than $500 is Option "C".
Assume that the market for a good is characterized by a downward-sloping demand curve and an upward-sloping supply curve and the market is in equilibrium at a price of $20 and a quantity of 100 units. After the government imposes a $5 per-unit excise tax on the good, the price that buyers pay for the good increases by $3. Which of the following are possible values for the government tax revenue and deadweight loss in the market?
The total economic surplus in the market would increase. The improvement in production technology shifts the supply curve to the right. A shift in the supply curve to the right lowers the equilibrium price and raises the equilibrium quantity. Consumer surplus would increase with the decrease in price and the increase in quantity. The change in producer surplus would be indeterminate because of the offsetting effects of the price and quantity change on producer surplus. However, any loss in producer surplus resulting from a lower price would be transferred to consumer surplus. Thus, total economic surplus in the market would definitely increase.
Assume that the market for a good is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Suppose that there is an improvement in technology for producing the good. Which of the following would occur?
Equating marginal private benefit and marginal private cost must have resulted in inefficiencies in the market. A market will produce where marginal private benefit equals marginal private cost. Therefore, either the demand curve did not capture all the benefits of the good or the supply curve did not capture all the costs of the good, which led to an inefficient use of resources and a suboptimal level of output being produced in the market.
Assume the government implements a policy that causes a market to produce the socially optimal level of output. Which of the following must be true?
Average fixed cost is decreasing, and both average variable cost and average total cost are increasing. Marginal cost is above average variable cost and average total cost, causing both to increase. Average fixed cost always decreases.
At a firm's current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true?
A 6 percent increase in the quantity demanded of good X. The cross-price elasticity of demand between goods X and Y is 0.6, which is the ratio of the percentage change in the quantity of good X demanded to the percentage change in the price of good Y. This implies that the 10 percent increase in the price of good Y will result in a 6 percent increase in the quantity demanded of good X. This value is obtained by multiplying the cross-price elasticity by the percentage change in the price of good Y. That is, 0.6 times 10 percent equals 6 percent.
At the current prices of goods X and Y, the quantity demanded of good X is 10 units, and the quantity demanded of good Y is 5 units. The cross-price elasticity of demand between goods X and Y is 0.6. A 10 percent increase in the price of good Y will result in which of the following?
Country X's PPC PPC will shift outward over time. Economic growth through more resources will cause an outward shift in the PPCPPC . Emigration will increase Country X's labor force. The growth in the labor force is one factor that causes economic growth.
Because of conflict and political instability in Country Y, millions of its citizens emigrate to Country X. Which of the following best explains what will happen to Country X?
government involvement in the allocation of resources. In a command economy, the means of production are owned by the government. The decision to allocate resources and the distribution of goods and services are determined by the government. It does not primarily rely on markets for allocating resources and goods.
Compared to a market economy, in a command economy there is greater
An increase in population An increase in population causes demand to increase. When demand increases, the demand curve shifts to the right. A shift to the right in the demand curve raises the equilibrium price and equilibrium quantity.
Consider the market for arugula, a normal good. Which of the following changes would result in an increase in both the equilibrium price and the equilibrium quantity of arugula?
Compare additional costs and additional benefits when making a decision To maximize benefit, rational individuals compare additional costs and additional benefits when making a decision. As long as the additional benefit of an action exceeds the additional cost it will be beneficial to undertake the activity.
Cost-benefit analysis assumes rational agents do which of the following?
equal to average total cost When the price is equal to the average total cost, the firm is earning zero economic profit and there is no motivation for the firm to exit the market or for new firms to enter the market.
Firms will have no incentive to exit or enter this market if the price in this market is
Q3 Q3 corresponds to where marginal cost intersects demand which is the allocatively efficient quantity.
For the monopolistically competitive firm represented by the graph above, the allocatively efficient quantity of output is
Marginal product must be positive and decreasing. Marginal product is the rate of change in total product, so if marginal product is positive and decreasing, each additional worker adds fewer output than the worker before and total product will increase but by smaller and smaller amounts. Therefore, total product will be increasing at a decreasing rate.
Given a short-run production function, which of the following is true when total product is increasing at a decreasing rate?
Q3 At Q3 profit is maximized because price (marginal revenue) is equal to marginal cost. Producing more output beyond that will reduce total profit.
Given the price P4, what is a firm's profit-maximizing quantity of output?
$5,000 Habib earns an accounting profit of $10,000. Subtracting the $5,000 implicit cost associated with the forgone interest income, Habib earns a positive economic profit of $5,000.
Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to
Nation Y must have a comparative advantage in producing coffee. Given that Nation Y has a lower opportunity cost than Nation X , it must have a comparative advantage.
If Nation X produces coffee at a higher opportunity cost than Nation Y, which of the following is true?
Firms will enter the market and cause the price to fall. The positive economic profit attracts new firms to enter the market, increasing supply and putting a downward pressure on price. This will eliminate economic profits in the long run.
If a typical firm in a perfectly competitive market earns positive economic profit in the short run, what will most likely happen in the long run?
Three The third worker's marginal revenue product is 6×$10=$60, which is greater than the wage, $55. However, the fourth worker's marginal revenue product is 5×$10=$50, which is less than the wage, $55. Thus, the firm will maximize profit by employing three workers.
If the firm sells its product at the market price of $10 per unit, how many workers should the firm employ to maximize profit if the wage rate is $55?
$50 The marginal revenue product of the fourth worker is equal to the marginal product of the fourth worker (that is, the amount that production increases when a fourth worker is added) multiplied by the price of the product. In this case, MRP=(26−21)×$10=$50
If the firm sells its product at the market price of $10 per unit, the marginal revenue product of the fourth worker is
imposing a per-unit tax of $1.00 A per-unit tax of $1.00 equals the marginal external cost and therefore internalizes the externality. The socially optimal quantity, which is 20 units, will be produced.
If the government wants the firm to internalize the externality, the government can do so by
Consumer surplus equals area (a+b), producer surplus equals area (c+d), and deadweight loss equals area (e). The consumer surplus is the area under the demand curve and above the price, given by area (a+b)(a+b); the producer surplus is equal to the economic profit of the monopoly, given by area (c+d)(c+d); and the deadweight loss is given by area (e)(e), indicating the reduction in total economic surplus.
If the monopolist charges a single price for teddy bears, which of the following describes an accurate outcome?
Consumer surplus and deadweight loss will be zero because all economic surplus will be transferred to producer surplus. Producer surplus will increase, and consumer surplus and the deadweight loss will decrease to zero, because all economic surplus will be captured by the monopolist as profit. Producer surplus will be equal to area (a+b+c+d+e.
If the monopolist engages in perfect price discrimination, which of the following will happen?
60 The marginal utility per dollar spent on the fifth apple is 250−220 / 0.50 = 60.
If the price of an apple is $0.50, the marginal utility per dollar spent on the fifth apple is:
Price equals average total cost in the long run, but not necessarily in the short run. Perfectly competitive firms must earn zero profit in the long run, meaning price must equal marginal cost and average total cost. Profit can be positive, negative, or zero in the short run.
In a comparison of a profit-maximizing perfectly competitive firm's short-run equilibrium to its long-run equilibrium, which of the following is true?
fewer workers and pay a lower wage The monopsonistic (single buyer) firm will equate its marginal factor cost with the marginal revenue product and set the wage on the supply curve, which lies below the marginal factor cost curve. Thus the monopsonistic firm offers a wage less than the wage set in a perfectly competitive market and hires fewer workers.
In comparison to a firm in a perfectly competitive labor market, a firm in a monopsonistic labor market typically will hire
the market is at equilibrium The competitive market in equilibrium is allocatively efficient and maximizes the total economic surplus. In the absence of externalities, the market equilibrium quantity is the same as the socially optimal quantity. At the socially optimal quantity, the marginal benefit of consuming the last unit equals the marginal cost of producing the last unit.
In the absence of externalities, the perfectly competitive market maximizes economic surplus when
Perfect competition The private market equilibrium in perfect competition is the same as the socially optimal output because the marginal social benefit equals the marginal social cost, where price is equal to marginal cost.
In the absence of externalities, which market structure produces the socially optimal quantity?
P2 and Q2 Total economic surplus is maximized when the market is in equilibrium. The market equilibrium occurs at a price of P2, and a quantity of Q2. Raising or lowering the quantity relative to the equilibrium reduces total surplus and creates inefficiency (deadweight loss).
In the market described by the diagram above, the total economic surplus will be maximized at which of the following price and quantity combinations?
Providing producers of a product with a per unit subsidy A subsidy provided by the government to producers in effect lowers the cost of producing the product, which increases profitability and thereby shifting the market supply curve to the right and increasing equilibrium quantity. Binding price floors and price ceilings will always result in a smaller quantity being bought and sold than the equilibrium quantity.
In which of the following cases would government intervention in a market result in an increase in the quantity sold?
$4,000 The correct answer is $4,000. The $4,000 equals the total revenues minus the total explicit and implicit costs. The total opportunity cost is the sum of the $50,000 salary offer plus the $6,000 interest forgone. Subtracting $56,000 from the accounting profit of $60,000 gives an economic profit of $4,000.
Kieran owns and operates his own bike shop. In the past week, a competitor offered to buy Kieran's bike shop for $100,000 and hire Kieran for $50,000 per year. Assume the annual interest rate is 6 percent, and Kieran's accounting profit from his bike shop is $60,000. Kieran's economic profit is
a large number of firms A large number of firms is a common characteristic in both monopolistic competition and perfect competition.
Monopolistically competitive markets are characterized by
Aga exchanges 2 1/2 units of good X for 1 unit of good Y from Kaza. Kaza's opportunity cost of producing 1 unit of Y is 2 units of X and Aga's opportunity cost of producing 1 unit of YY is 3 units of X; thus, exchanging 1 unit of Y for 2 1/2 units of X is beneficial to both nations.
Nation Aga can produce either 3 units of good X or 1 unit of good Y with one hour of labor, while nation Kaza can produce either 4 units of good X or 2 units of good Y with one hour of labor. Assuming that labor is the only input, mutually beneficial exchange can take place between Aga and Kaza if
Beta has an absolute advantage in the production of good Beta has an absolute advantage in the production of good X given that it can produce more XX in an hour than Alpha can (4 is greater than 3).
Nation Alpha can produce either 3 units of good X or 1 unit of good Y with one hour of labor, whereas nation Beta can produce either 4 units of good X or 2 units of good YY with one hour of labor. Assuming that labor is the only input, which of the following is true?
act independently in setting price and output Firms in monopolistic competition act independently in setting price and output while firms in oligopoly are interdependent in setting price and output.
One difference between monopolistic competition and oligopoly is that firms in monopolistic competition are assumed to
A slice of apple pie. Apple pie is the next best alternative to ice cream. By choosing the ice cream, Oren gave up the opportunity to enjoy apple pie, the next best alternative.
Oren's father tells Oren he can have one dessert after dinner. He can choose from a scoop of ice cream, a slice of apple pie, a cup of chocolate pudding, or a piece of fruit. Oren prefers chocolate pudding to a piece of fruit; he prefers apple pie to chocolate pudding; and he prefers ice cream to apple pie. If Oren chooses a scoop of ice cream, what is his opportunity cost?
No, because he can increase his total utility by purchasing more music downloads and fewer snacks. The utility-maximizing condition is not fulfilled. Utility maximization requires that the marginal utility of the last dollar spent on music downloads must equal the marginal utility of the last dollar spent on snacks. He can maximize his utility by purchasing more music downloads and fewer snacks. Purchasing more music downloads will reduce the marginal utility of music downloads, decreasing the marginal utility per dollar, and reducing the number of snacks increases the marginal utility of snacks, increasing the marginal utility per dollar; the net impact will be to increase total utility.
Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility?
The demand for automobile workers increases resulting in higher wages and employment. An increase in the demand for a product (such as automobiles) increases the demand for the factor (such as automobile workers) that is used to produce it. An increase in the demand for automobiles would raise the price and output of automobiles. As automobile-producing firms expand output to take advantage of the higher demand for automobiles, the demand for automobile workers would increase, raising both the wages and the number of automobile workers employed.
Suppose the demand for automobiles increases. Which of the following explains what happens in the labor market for automobile workers?
increase by 8 percent The price elasticity of supply measures the responsiveness of quantity supplied to a given change in the price. It is calculated as the ratio of the percentage change in quantity supplied to the percentage change in price. Given the value of the elasticity and the percentage change in the price of gasoline, the percentage change in quantity can be obtained by multiplying the elasticity of supply by the percentage change in the price. That is, 0.4 times 20 percent, which is equal to 8 percent. Thus, the quantity supplied will increase by 8 percent.
Suppose the price elasticity of supply for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, the quantity supplied of gasoline will
The consumers in Aronow pay a price of $0.60 per kg of bananas. Imports are equal to 40,000 kg of bananas. The tax collected by the government is $4,000. The tax collected by the government is equal to the tariff times the amount of imports, $4000* 40,000. Therefore, the tariff must be $.10. Given the global price is $.50, the price paid by domestic consumers is the global price plus the tariff, which is $0.50+$0.10=$0.60.
Suppose the small country of Aronow imports 40,000 kg of bananas. The global price of bananas is $0.50 per kgkg. The government of Aronow collects tariff revenues of $4,000 from banana imports. Which of the following is true?
The PPC illustrates increasing opportunity cost. Producing the first 10 sweet rolls requires giving up 20 doughnuts. Producing the next 10 sweet rolls requires giving up 30 doughnuts, and so on. Ever-increasing amounts of doughnuts have to be given up to increase the production of sweet rolls. Thus, the opportunity cost is increasing.
The above data describes a bakery's daily production possibilities curve for doughnuts and sweet rolls. Which of the following is true about the PPC?
Both Art and Zeb will lower prices. In Nash equilibrium, both Art and Zeb will charge lower prices. The combination of strategies is Nash because neither party has an incentive to change strategy unilaterally to move to any other combination.
The above payoff matrix illustrates the daily profit for two restaurant owners, Art and Zeb. Each owner has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Art, and the second entry in each cell indicates the profits for Zeb. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Which of the following is a Nash equilibrium?
Both Amy's and Sam's will lower prices. Setting lower prices is a dominant strategy for both Amy's and Sam's.
The above payoff matrix illustrates the daily profit for two restaurants, Amy's and Sam's. Each restaurant has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Amy's, and the second entry in each cell indicates the profits for Sam's. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Based on the information and assuming Amy's and Sam's do not cooperate, which action will each pursue?
The dominant strategy for Zeb's is to charge the same prices. Independent of Art's choice, the profit for Zeb's is always greatest when Zeb's charges the same price.
The above payoff matrix illustrates the daily profits for two restaurants. Each restaurant has the choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Art's, and the second entry in each cell indicates the profits for Zeb's. Each restaurant independently and simultaneously chooses its action and has complete information of the payoff matrix. Based on the information, does either firm have a dominant strategy?
$15 Marginal factor cost is the change in total factor cost when adding an additional unit. The total factor cost of hiring five workers is $55, while hiring four workers costs $40. Thus, the marginal factor cost of adding a fifth worker is $15.
The data in the table describe the supply schedule for labor in a monopsonistic labor market. The marginal factor cost of the fifth worker is
SRATC3 The minimum efficient scale occurs on SRATC3, which contains the lowest point of all five short-run cost curves, and it occurs at the minimum point on the LRATC curve.
The firm's minimum efficient scale occurs on
Marginal revenue is $8 for each unit of output. Marginal cost of producing the fifth unit is $7. Since marginal revenue ($8) is greater than marginal cost ($7), then increasing output increases profit as long as the marginal cost of producing the next unit is less than its marginal revenue, but the marginal cost of the sixth unit is $9 (which is greater than $8), and so producing six units will not maximize the firm's economic profit. Therefore, total profit is maximized at 5 units of output, where the difference between total revenue and total cost is $11.
The firm's profit maximizing quantity is
Q2 Diminishing returns begin at the point where marginal cost is minimized because the next unit of output will be produced at a higher cost, which results from diminishing returns.
The graph above shows per unit cost information for firm X. At what quantity of output do diminishing returns begin for firm X?
The country would import sandalwood, and its total economic surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases. The country would benefit by importing sandalwood from the world market at a price of $600. The consumer surplus before trade is given by area FF and the producer surplus is given by area G+H for a total economic surplus of F+G+H. With trade, the total economic surplus would increase by area J+K, with the consumer surplus increasing by area G+J+K, which is more than the decrease in producer surplus, which is area G. Area G is transferred from producers to consumers. Thus, the total economic surplus with trade is given by the sum of all the areas: F+G+H+J+K
The graph above shows the domestic market for sandalwood in equilibrium at a price of $800$800 per kilogram in the absence of international trade. Now assume the country begins to engage in international trade, and sandalwood is selling at a price of $600$600 per kilogram in the world market. Which of the following would most likely result?
increase production to quantity Q2Q2, where price is equal to marginal cost The profit-maximizing perfectly competitive firm should produce where P (or MR)= MCP (or MR)= MC, at Q2Q2. The firm will have a loss, since PP is less than ATCATC. The firm should continue to produce, since P >AVCP >AVC and the loss will be less than fixed costs.
The graph above shows the short-run cost curves for a perfectly competitive firm. Assume that the market price is P0P0 and the firm is producing at quantity Q0Q0. To maximize profit, the firm should
employ Qa workers and pay a wage of W1 The quantity of labor QaQa corresponds to where the marginal revenue product of labor (MRPL)(MRPL) equals the marginal factor cost (MFC)(MFC), and the wage W1W1 is determined by the supply curve. A firm will pay the lowest wage it can pay to attract the desired quantity of labor.
The graph represents a monopsonistic labor market and shows the marginal factor cost (MFC), the marginal revenue product (MRPL), and the supply of labor (SL). Assuming the firm sells its output in a perfectly competitive commodity market, the firm will
$8 Marginal revenue is the change in total revenue divided by the change in total output. The change in total revenue is $8, and the change in output is 1 unit of output. Therefore, the marginal revenue is $8 divided by 1 unit of output, which is equal to $8.
The marginal revenue of the third unit of output is
4 The marginal utility per dollar spent on the fourth apple is (220−180) / $0.50= 80. This is the last apple that has a marginal utility per dollar spent that is greater than 75.
The marginal utility per dollar spent on the last orange consumed is 75. If the price of an apple is $0.50, how many apples would Johnny have to consume before he considers purchasing another orange?
The producer surplus is $250, because the total surplus less what consumers receive must go to producers. Total economic surplus = consumer surplus + producer surplus. Since the total economic surplus is $650 and consumer surplus is 400, the producer surplus is $650−$400=$250
The market for tomatoes is in equilibrium at the price of $10, and a quantity of 50 tomatoes. If the consumer surplus is $400 and the total economic surplus is $650, what is the producer surplus in the tomato market and why?
summing the quantities each producer sells at each possible price The supply curve describes the relationship between prices and quantities supplied for each producer in the market. The market supply curve is obtained by horizontally summing the individual supply curves (that is, by adding the quantities supplied at each possible price by each producer in the market).
The market supply curve for a product is derived from the individual firm supply curves by
7 units Marginal product is the change in total product that occurs as a result of an additional unit of labor. As the table indicates, output increases from 20 to 27 as a result of adding the third worker. Therefore, the marginal product for the third worker is 7 units.
The table above shows a firm's short-run production function using labor as the only variable input. The marginal product of the third worker is
Consumer surplus is $50; producer surplus is $50 The information in the table can be used to draw the supply and demand curves for oranges to find the consumer's surplus and the producer's surplus. The equilibrium price is $10, and the equilibrium quantity is 10. Consumer surplus is measured by the area of the triangle below the demand curve but above the equilibrium price for the quantities between zero and the equilibrium quantity. The area of the triangle representing consumer surplus is CS =(20−10)×10 / 2= $50. Producer surplus is the area above the supply curve but below the equilibrium price for the quantities between zero and the equilibrium quantity. The area of the triangle representing producer surplus is PS= (10−0)×10 / 2= $50$50. The same calculation can be performed without drawing the graph based on the recognition that the supply and demand curves are linear, the X intercept is 20, and the Y intercept is 20.
The table above shows the supply and demand schedules in the orange market. Assume that the demand and supply curves are linear.
P5 P5 is determined on the demand curve above the quantity where marginal revenue equals marginal cost. The quantity (output) is determined by the intersection of marginal revenue and marginal cost.
What price will the firm charge?
resources are scarce The basic economic problem is how to allocate scarce resources to meet unlimited human wants.
Which of the following best explains why individuals and societies must make choices when presented with alternatives?
If the price of a normal good decreases, the purchasing power of a consumer's income increases and therefore consumers will be willing and able to purchase more of the good. The price decrease of a normal good increases the purchasing power of consumer income and allows the consumer to buy more of the good.
Which of the following correctly describes the income effect associated with the law of demand?
Free-Market A free-market economy relies on individuals responding to market price signals to allocate resources to the production of goods that are most valued in the market. That is, resources flow to the most valued activity as indicated by prices.
Which of the following economic systems primarily relies on prices for allocating resources and goods?
Price is greater than marginal cost. Imperfectly competitive markets face a downward-sloping demand curve. Firms operating at the profit-maximizing output charge a price that is greater than marginal cost, unlike efficient firms that operate at the point where the marginal cost equals price. Any price other than where marginal cost equals price prevents mutually beneficial transactions from taking place and results in a reduction in total economic surplus relative to the competitive equilibrium.
Which of the following explains why imperfectly competitive markets are inefficient?
At a higher price, producers are willing to sell more to increase their profits. All other things remaining constant, an increase in price of a good increases profitability, incentivizing sellers to increase the quantity supplied. Thus, as price increases the quantity supplied increases, implying that the supply curve is upward sloping.
Which of the following explains why the supply curve is upward sloping?
The demand for airline pilots depends on the demand for air travel. Pilots can be considered a factor of production in the airline industry. When demand for a product or service (such as air travel) increases, it can lead to an increase in the demand for factors (such as pilots) used to produce that product or service.
Which of the following illustrates how factor demand is related to product demand?
$1.00 and 20 units The marginal external cost is the vertical distance between the MSC and the MPC at each quantity of output, which is equal to $1.00. The socially optimal quantity occurs where the MSC equals the MSB, which is 20 units.
Which of the following indicate the marginal external cost and the socially optimal quantity?
Solar energy Solar energy is nonrival. It can be enjoyed jointly by all, and one person's enjoyment of the sun will not reduce its availability to others; it can be used by anyone without affecting another's use.
Which of the following is an example of a nonrival resource?
Immunizations that prevent the spread of diseases With a positive externality, the marginal social benefit exceeds the marginal private benefit at all levels of output of a good or a service consumed. Being vaccinated against contagious diseases protects not only the individuals vaccinated, but also those who are not vaccinated. Thus, the marginal social benefit of immunizations exceeds the marginal private benefit.
Which of the following is an example of a positive externality?
Implicit costs Implicit costs are part of opportunity costs, reflecting the values of the resources — such as time, financial capital, and property — contributed by the owners of the firm. Implicit costs do not constitute out-of-pocket payments. They are not included in calculating accounting profit.
Which of the following is ignored when calculating accounting profit?
Airplanes Airplanes are capital goods used to produce transportation services; therefore, they are a factor of production. Airplanes are also scarce.
Which of the following is the best example of a scarce factor of production?
Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output. Economies of scale exist in the long run when increasing firm size results in lower average total cost. Increasing returns to scale refers to the relationship between inputs and output, meaning that output changes by more than a proportional increase in inputs.
Which of the following is true about economies of scale and increasing returns to scale?
Good J is an inferior good. Whether a good is inferior or normal is based on the sign of the income elasticity - with a positive sign indicating that the good is a normal good and a negative sign indicating that the good is an inferior good. The income elasticity of good J is negative (−0.5); therefore, good J is an inferior good.
Which of the following is true about good J?
The supply curve is inelastic because the percentage change in the price is greater than the percentage change in the quantity supplied. Recognizing percentage changes is what matters for elasticity. The supply is inelastic. It can be determined by comparing the relative changes in price and quantity. Price increases by 100 percent, and the quantity supplied increases by 20 percent. Thus, 20 divided by 100 is equal to 0.2, which is inelastic.
Which of the following is true about the supply curve between the given points?
Firms must lower their product prices to sell additional units. Firms in an imperfectly competitive market face a downward-sloping demand curve. Therefore, to sell a larger quantity, firms must reduce their prices on all the units they sell.
Which of the following is true in imperfectly competitive markets?
The average total cost decreases throughout the entire effective demand. For a natural monopoly, economies of scale exist throughout the effective demand so average total cost must decrease throughout the effective demand.
Which of the following is true of a natural monopoly?
Marginal product is equal to zero. When marginal product equals zero, total product is maximized because the change in total product is zero. Because marginal product is diminishing, adding additional units of variable input beyond this point will result in negative marginal product and a decline in total product.
Which of the following is true when total product is at its maximum?
Imposing a binding price floor A binding price floor raises the legal price, giving an incentive to sellers to produce and sell greater quantity. The binding price floor results in a surplus at the binding price.
Which of the following policies would result in an increase in the quantity supplied of a good in a market?
Q3 to Q5 From Q3 to Q5 the LRATC is increasing as output increases, so this range of output illustrates diseconomies of scale.
Which of the following ranges of output illustrates diseconomies of scale?
The elasticity of demand decreases when moving from point X to point Y. The price elasticity of demand decreases as price falls and quantity rises between point XX and YY when moving down along the demand curve. That is, the demand becomes more inelastic along the linear demand curve as price decreases.
Which of the following statements is true about the demand curve above?
A decrease in the price of the product that the labor is used to produce A decrease in the product price will decrease the demand for factors used to produce that product. If the price of a product declines, producers of that product will demand fewer workers to produce that product. In other words, the demand curve of laborers to produce the product will shift to the left.
Which of the following will cause a decrease in the demand for labor?
Creating or discovering new resources Reaching point F requires economic growth, which can result from the discovery of new resources, increases in the labor force, increases in capital stock, or technological progress.
Which of the following will enable an economy to reach point F on the diagram above?
There will be a temporary shortage at the original equilibrium price. A shift of the demand curve to the right will create a shortage at the original equilibrium price, which will be eliminated by a rising price to reach a new equilibrium.
Which of the following will initially result from an increase in the market demand for a good?
The quantity supplied would increase at each possible price for the good. A decrease in input prices lowers the cost of production and shifts the supply curve to the right. As a result, more of the good will be offered for sale at each possible price for the good.
Which of the following will occur as a result of a decrease in the prices of the inputs used to produce a good?
The quantity of labor supplied will increase. An increase in the wage rate causes a movement up along a given labor supply curve, resulting in an increase in the quantity of labor supplied. There is a positive relationship between the wage rate and the quantity of labor supplied.
Which of the following will occur in a given labor market when the wage rate rises?
An increase in the preference for leisure A growing preference for leisure reduces the supply of labor, which shifts the supply of labor curve to the left, as more individuals choose leisure over work.
Which of the following will result in a decrease in the supply of labor?
Country A would import 20 units of coffee, and Country B would export 10. At a global price of $3, the domestic quantity demanded in Country A is 30, and the domestic quantity supplied in Country A is 10. Therefore, country A would import 20 units of coffee. At a world price of $3, the domestic quantity demanded in Country B is 5, and the domestic supply in Country B is 15. Therefore, Country B would export the extra 10 units.
Which of the following would be true given the price in the world market is $3 ?
The ability to easily reallocate inputs to production of good X Elasticity is a measure of responsiveness of quantity supplied to changes in price. The ability to reallocate resources easily allows producers to respond to changes in price quickly. One of the determinants of the elasticity of supply is the time period it takes to respond to changes in market conditions. The ability to easily reallocate inputs lessens the time period to adjust and respond. Thus, supply becomes more elastic.
Which of the following would cause the supply of good X to become more elastic?
A 10%10% increase in the price of good Y Goods J and Y are substitutes in consumption since the cross-price elasticity with respect to good Y is positive. Therefore, a 10% increase in the price of good Y will shift the demand for good J to the right by 20%(change in price of good Y × cross-price elasticity with respect to good Y =10%×2). This is the largest increase among the answer choices.
Which of the following would result in the greatest rightward shift of the demand curve for good J?
