Applied Econ Ch 1-4
Suppose you have recently graduated and have been offered a salary position at a reputable accounting firm of $125,000 (including all benefits) per year. After much consideration, you turn down the offer to start your own accounting firm. You pay yourself $75,000 (including all benefits) a year. Which of the following represents the opportunity cost of your time?
$125,000
A florist paid $1,200 for 500 glass vases. The florist has used 300 of the glass vases and is holding the remaining 200 vases in inventory. The current market price for the 200 pieces of hardware is $600. What is the opportunity cost of holding the 200 vases in inventory?
$600
The figure shows the quantity of iron ore demanded at various prices. The maximum price a demander is willing to pay for the 300 thousandth ton of iron ore is ____ per ton.
$80
If a 10 percent increase in price leads to a 5 percent decrease in the quantity demanded, the price elasticity of demand equals
0.50
If a 4 percent increase in the price of golf clubs leads to a 3 percent increase in the demand for tennis rackets, then the cross elasticity of demand is ____ and golf clubs and tennis rackets are ____.
0.75; substitutes
The table on the right shows the marginal benefit and marginal cost of an action. Using marginal analysis, managers should undertake
3 units of the action because that is the action that sets the marginal benefit equal to the marginal cost.
Suppose the price elasticity of demand for gasoline is 0.5. Then a 10 percent increase in the price of gasoline leads to a ____ decrease in the quantity of gasoline demanded.
5 percent
If the 95 percent confidence interval for an estimated coefficient runs from 1.0 to 3.2, then there is a ____ probability that the true value of the coefficient ____.
95 percent; lies inside of the range from 1.0 to 3.2
All of the following can affect a firm's total revenue except which one?
Accounting costs
How does an advance in technology affect the supply curve?
An advance in technology shifts the supply curve to the right.
Average total cost (ATC) equals i. total cost (TC) divided by output (Q) or TCQ. ii. the sum of average fixed cost (AFC) and average variable cost (AVC) or AFC + AVC.
Both i and ii are correct.
If a manager chooses the amount of an action that sets the marginal benefit of the action equal to its marginal cost, then i. all the units for which the marginal benefit exceed the marginal cost are undertaken. ii. none of the units for which the marginal benefit is less than the marginal cost are undertaken.
Both i and ii are correct.
The marginal cost curve goes through the minimum point of the i. average total cost curve. ii. average variable cost curve. iii. average fixed cost curve.
Both i and ii are correct.
Which of the following factors does not shift the supply curve of a product?
Consumers' income
Which type of firm is legally required to setup a double−entry booking system to record its business transactions?
Corporation
Under which form(s) of business organization are owners not responsible for the company's debt if the company goes bankrupt?
Corporation and limited liability company
Which form(s) of business organization have their profits taxed twice?
Only corporations
For the demand function Qd = a−b × P, regression analysis is used to estimate ____. i. the price, P ii. the coefficients, a and b
Only ii is correct.
____ become(s) constantly smaller as output increases.
Only the average fixed cost (AFC)
In the demand function, Qd = a - b × P, ____ is (are) the dependent variable(s) and ____ is the independent variable.
Qd; P
At the 50th unit of action, the marginal benefit is equal to $20 and the marginal cost is equal to $25. Which of the following is true?
The 50th unit of action should not be undertaken.
________ is an example of an implicit cost.
The wear and tear on a firm's machinery
According to the law of demand, ____ increases the quantity of tires demanded.
a fall in the price of car tires
An increase in the price of dry cleaning results in
a movement up along the dry cleaning supply curve.
The income elasticity of demand for dining out is positive. Dining out is therefore
a normal good
In Venezuela, residents must stand in long lines to buy diapers in drug stores but can buy them at a much higher price from venders selling them at busy street corners. The most likely explanation for this situation is
a price ceiling that has been set below the equilibrium price.
A movement upward along the demand curve for tangerines is the result of ____.
an increase in the price of tangerines
In the demand function Qd = r - s × P, the coefficient(s)
are r and s.
Which average cost curve is not U-shaped?
average fixed cost curve
An increase in the wage rate shifts the
average variable cost curve and marginal cost curve upward.
If the marginal ________ of an action exceeds its marginal ________ then the action ________ be performed.
benefit; cost; should
According to the definition of a firm, the American Cancer Society
can be considered a firm.
A production function shows that to increase the quantity produced, the firm
can increase its use of at least one input or adopt new technology.
A firm produces output using only labor and capital. MPL is the marginal product of labor and W is the cost of a unit of labor. MPL/W measures the
change in output from a one dollar change in spending on labor
You are a manager for Callaway Golf Company. You know that you are producing your golf clubs at the lowest average total cost (ATC) and are producing at a point on your long-run average cost (LAC) curve. Consequently, the firm is producing at a point where it has
constant returns to scale.
In a regression estimating the demand function for corn, the estimated coefficient on the income variable is positive. This result means that
corn is a normal good.
For two goods that are substitutes, the
cross elasticity of demand is positive
Marginal analysis recognizes that
decisions have both marginal benefits and marginal costs
Each hour a store remains open it incurs a marginal cost. If the marginal benefit of staying open does not change but the marginal cost doubles, then the manager will ____ the hours the store remains open.
decrease
If the marginal benefit curve is linear and downward sloping and the marginal cost curve is linear and upward sloping, an increase in the marginal cost that causes an upward shift of the curve will ________ the profit−maximizing number of units undertaken.
decrease
In a regression estimating the demand function for Dell tablets, the estimated coefficient on income is positive. As a manager for Dell, if you think the economy will fall into a business cycle recession during which income falls, you predict that the demand for your tablets will ____.
decrease
Accounting cost and opportunity cost differ when it comes to measuring ____.
depreciation.
If your firm can decrease its average total cost (ATC) by decreasing its production, then it is definitely producing at a point with
diseconomies of scale.
The defining feature of a demand curve is that it is ____.
downward sloping
Over the range for which the long-run average cost (LAC) curve is downward sloping, the firm is definitely producing at points with
economies of scale.
For about a decade, Procter & Gamble (P&G) increased the number of different types of beauty products it sold. But then the executives started to divest many of these products by selling them to other companies. The executives initially thought P&G would have ____ and then they believed that P&G had ____.
economies of scope; diseconomies of scope
You are a manager for Royal Caribbean Cruises. You realize that (a) there are many substitutes for your cruises, which makes the demand for cruises ____, and (b) the families that buy your cruises spend a large fraction of their income on the cruises, which makes the demand for cruises ____.
elastic; elastic
At the equilibrium price, the equilibrium quantity is
equal to the quantity supplied and to the quantity demanded.
The 95 percent confidence level for the t-statistic is 1.96. If the estimated coefficient is 3.0 and its standard error is 1.0, then the null hypothesis that the true coefficient is
equal to zero can be rejected.
Suppose a downward-sloping, linear demand curve has a slope of −4 dollars per unit. Moving downward along this demand curve, the price elasticity of demand
falls in value.
White bread contains a lot of simple carbohydrates, so if more people limit their intake of simple carbohydrates, the equilibrium price of a loaf of white bread ____ and the equilibrium quantity ____.
falls; decreases
If pineapples and mangos are substitutes, then in a regression estimating the demand function for pineapples, the coefficient on the price of mangos will be negative.
false
If you are producing at a point on your long-run average cost (LAC) curve with economies of scale, then if you increase your production you expect your average costs will fall in the short run but rise in the long run.
false
In a perfectly competitive market, the consumer surplus is equal to the total surplus.
false
Producing more than the efficient quantity of a product never creates a deadweight loss for society.
false
The equilibrium price is determined using only the demand function, and the equilibrium quantity is determined using only the supply function.
false
The larger the t-statistic, the more likely the true coefficient is equal to zero.
false
The long-run average cost (LAC) curve
first falls and eventually rises as the quantity is increased.
As more capital is used, the marginal product of capital
first increases and then ultimately decreases
Managerial economics
helps executives manage their firms more efficiently.
An ____ cost is defined as a cost that does not involve an outflow of cash.
implicit
If the marginal benefit curve is linear and downward sloping and the marginal cost curve is linear and upward sloping, a decrease in the marginal cost that causes a downward shift of the curve will ________ the profit−maximizing number of units undertaken.
increase
Increasing marginal returns to labor is the result of
increased specialization of labor.
According to the law of supply, a rise in the price of a product
increases the quantity supplied
To maximize total profit, managers want to produce the quantity in which marginal benefit ________ marginal cost.
is equal to
If the equilibrium price of ammonia is $600 per metric ton and the actual price is $560 per metric ton, the quantity demanded ____ the quantity supplied.
is greater than
Analyzing sales data, you discover that a fall in your price decreases your total revenue. Therefore, you know that the demand for your product ____.
is inelastic
In a supply function, the coefficient on the price of the product
is positive.
An increase in the price of a substitute in production shifts the supply curve to the ____; an increase in the price of a complement in production shifts the supply curve to the ____.
left;right
A price ceiling creates a shortage when it is set
lower than the equilibrium price
If both the supply and demand increase, then the equilibrium price ____ and the equilibrium quantity ____.
might rise, fall, or not change; increases
According to the law of supply, supply curves ____ upward sloping and ____ linear.
must be; might be
In the short run, when a firm produces no output, the firm's fixed cost is ____ and its total cost is ____.
not zero; not zero
An ____ cost is defined as the return from the best-alternative use of a resource.
opportunity
The price elasticity of demand is equal to the absolute value of the
percentage change in the quantity demanded divided by the percentage change in the price.
If a demand curve is vertical, then the demand is ____ and the price elasticity of demand equals ____.
perfectly inelastic, zero
A minimum wage is an example of
price floor
An increase in the ____ shifts the supply curve of raisins to the left.
price of grapes, an input used to produce raisins
A firm owned by one person with unlimited liability is a
proprietorship.
A ________ only exists for the life of the owner, while a ________ has perpetual life.
proprietorship; corporation
The substitution effect means that an increase in the price of beef ____.
raises its price relative to the price of chicken, which is a substitute for beef
Gasoline and diesel fuel are complements in production, so a fall in the price of gasoline ____ the price of diesel fuel and ____ the quantity of diesel fuel.
raises; decreases
An increase in demand combined with a decrease in supply ____ the price and ____ the quantity.
raises; might increase, decrease, or not change
If jet fuel rises in price, the price of an airline ticket ____ and the quantity of travel by air ____.
rises; decreases
If the cost of the corn fed to steers increases, then the price of beef ____ and the equilibrium quantity ____.
rises; decreases
At the equilibrium price, the quantity demanded is equal to the equilibrium quantity.
true
When the demand and supply functions include factors in addition to the price of the product, the equilibrium price is determined by equating the demand function to the supply function, that is, Qd = Qs.
true
The long-run average cost curve
shows the lowest average total cost (ATC) of producing each quantity.
Economic models
simplify the real world by ignoring minor details.
A price floor set above the equilibrium price creates
surplus
At any price higher than the equilibrium price, there is a ____ and the price will ____.
surplus; fall
Marginal cost (MC) is equal to ____.
the change in the total cost (ΔTC) divided by the change in output (ΔQ) or
You know that both the demand and supply of wheat have increased. You observe that the price rises. You can conclude that
the demand for wheat increased more than the supply of wheat.
If the demand function for a product includes both the price of the product and households' income while the supply function includes both the price and the cost of producing the product, then
the equilibrium price will change if either cost or income changes.
The price elasticity of demand is smaller
the fewer substitutes for the product.
If a firm has constant returns to scale, then
the firm must increase its use of all inputs to increase its production.
If the marginal product of labor (MPL) increases when more labor is employed, then
the marginal cost (MC) decreases when output increases.
A price ceiling is a government regulation that sets
the maximum legal price
The law of demand refers to the relationship between ____ and the quantity demanded of the good or service.
the price of a good or service
The law of supply refers to the relationship between
the price of a good or service and the quantity supplied of that good or service.
The demand curve of a good or service shifts to the left when
the price of a substitute good falls.
Two of your managers complain that: "We wish we had another factory to meet the demand for our product!" These managers mean that
they wish that enough time had passed so that the company reached the long run
If the long-run average cost (LAC) curve has a horizontal range, then
the long-run marginal cost (LMC) equals the long-run average cost for this range of output.
You are a manager of Redland Brick. If the price elasticity of demand for your bricks is 2.5, then if you raise the price of bricks by 4 percent, the quantity of your bricks demanded decreases by 10 percent.
true
You manage a firm that produces output using only labor and capital. The marginal product of labor is 10 units of output per worker, the cost of a worker is $200 per worker, the marginal product of capital is 30 units of output per unit of capital, and the cost of a unit of capital is $400. To minimize the cost of producing the desired quantity of output, you should
use more capital and less labor.
A firm produces output using only labor and capital. MPL is the marginal product of labor, W is the cost of a unit of labor, MPK is the marginal product of capital, and R is the cost of a unit of capital. If MPLW>MPKR to minimize the cost of producing the desired quantity of output, the firm should
use more labor and less capital.
In the short run, labor is a ____ input and capital is a ____ input.
variable, fixed
In the long run, labor is a ____ input and capital is a ____ input.
variable,variable
If people switch their drinking habits from soda to energy drinks, then the quantity of soda ___ and the quantity of energy drinks.
decreases; increases
If the price elasticity of demand is 2.0, then demand is ____. If the price elasticity of demand is 0.5, then demand is ____.
elastic; inelastic
If the supply of corn increases, then the equilibrium price of a ton of corn ____ and the equilibrium quantity ____.
falls; increases
Older people use more pharmaceutical drugs than younger people. As the number of older people in the United States increases, the demand for pharmaceutical drugs ____, thereby causing the price of these drugs to ____.
increases; rise
In a business cycle recession, income falls, and in a business cycle expansion, income rises. Consequently, in a recession the demand for ____ goods increases, and in an expansion the demand for ____ goods decreases.
inferior; inferior
An increase in the expected future price shifts the supply curve to the ____; a decrease in the expected future price shifts the supply curve to the ____.
left; right
A technological advance in the production of computer chips ____ the price of these chips and ____ quantity.
lowers; increases
Demand increases when the price of a substitute ____ and when the price of a complement ____.
rises, falls
Travel by airline is a normal good, and people's incomes increase. Consequently, the equilibrium price of an airline ticket ____ and the equilibrium quantity ____.
rises; increases
f the demand for iron ore increases, then the equilibrium price of a ton of iron ore ____ and the equilibrium quantity ____.
rises; increases
If the supply of oil decreases and demand for oil increases, then the equilibrium price of oil ____ and the equilibrium quantity ____.
rises; might increase, decrease, or not change
The cost of producing chickens rises and simultaneously more people decide that eating chicken is healthy. Consequently, the equilibrium price of chicken ____ and the equilibrium quantity ____.
rises; might increase, decrease, or not change
If consumers respond ____ to a change in price, then demand is ____.
weakly; inelastic