Assignment 7 & 8 Economics

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. Given the information in the table above, what is the call center's marginal cost when it goes from making 6 to 16 calls an hour?

$2 Marginal cost is the change in total cost divided by the corresponding change in output as output changes from one level to another. The total cost of making 6 calls an hour is $65, and the total cost of making 16 calls an hour is $85. Thus, as the call center goes from making 6 to 16 calls an hour, marginal cost is $2 [= ($85 − $65)/(16 − 6)].

Suppose that when a perfectly competitive firm produces 1,000 units of output, its total variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the market price of each unit of output is $1.70, then the firm should:

shut down. This firm should shut down. Even though P=MC at 1,000 units of output, the firm's total revenue, $1,700, is less than the firm's total variable cost, $1,900.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services.

supply John's opportunity cost of cleaning another window is his reservation price, the minimum amount you would have to pay him to get him to clean another window.

Higher education is a ______ and assigned textbooks are ______.

want; wants

Refer to the accompanying table. If the price of Good A is $5 and the price of Good B is $4, then the rational spending rule is satisfied when the consumer purchases ______ units of Good A and ______ units of Good B.

1; 3 The rational spending rule maintains that a consumer's total utility is maximized if the ratio of marginal utility to price is the same for all goods the consumer purchases. Here, the rational spending rule is satisfied when the consumer purchases 1 unit of Good A and 3 units of Good B because the ratio of marginal utility to price would be 6 for both goods. That is, MUA/PA = 30/5 = 6, and MUB/PB = 24/4 = 6.

Taylor's marginal utility from watching movies and from eating out (in utils) is shown in the accompanying table. Taylor spends exactly $100 every month on these two forms of entertainment; the price of each movie is $10 and the price of each dinner is $20. Taylor's optimal combination of movies and eating out is:

2 movies and 4 dinners. If Taylor consumes 2 movies and 4 dinners, her marginal utility per dollar for each good is the same. Her marginal utility per dollar for movies is 5 (= 50/$10) and for eating out it is also 5 (= 100/$20).

Jamie's marginal utility from muffins and from doughnuts (in utils) is shown in the accompanying table. Jamie spends a total of $8 on muffins and/or doughnuts every morning. The price of each muffin is $2 and the price of each doughnut is $1. If Jamie consumes 2 doughnuts a day, then what is her marginal utility per dollar spent on the second doughnut?

20 As shown in the chart, Jamie's marginal utility from the second doughnut is 20 and the price of each doughnut is $1, so her marginal utility per dollar spent on the second doughnut is 20.

Suppose Ben owns a small company that makes kites. The market for kites is perfectly competitive, and kites sell for $25 each. Ben's total production costs vary depending on the number of kites he makes each day, as shown in the accompanying table. When Ben makes 2 kites per day, what is his average variable cost?

$13 Ben's fixed cost per day is $100, so when his total cost is $126, his variable cost is $26, and his average variable cost is $26/2 = $13.

Marginal cost is calculated as:

the change in total cost divided by the change in output.

The term marginal utility denotes the amount by which ______ changes when consumption changes by ______ unit(s).

total utility; 1 Marginal utility is the change in total utility gained from consuming an additional unit of a good.

Angela is currently playing five games of pool and bowling three games. At this level of consumption, her marginal utility from a game of pool is 10 and her marginal utility from bowling a game is 6. If both pool and bowling cost $1 a game, Angela should:

bowl less and play pool more. Angela's marginal utility per dollar spent on pool (10) is greater than her marginal utility per dollar spent on bowling (6). Thus, according to the rational spending rule, she should reallocate her spending away from bowling and towards pool.

Refer to the accompanying table. The marginal utility of consuming apples is:

decreasing after the first apple. The marginal utility of the 2nd apple is 15, the marginal utility of 3rd apple is 10, the marginal utility of the 4th apple is 5 and the marginal utility of the 5th apple is -5, so marginal utility is decreasing after the first apple.

Refer to the accompanying figure. For Jeff, the consumption of movies reflects the law of:

diminishing marginal utility. As Jeff consumes (or, watches) more movies, his marginal utility decreases, consistent with the law of diminishing marginal utility.

Refer to the accompanying figure. What is the equilibrium price of bananas in this market?

$5/pound At a price of $5 per pound, the quantity demanded equals the quantity supplied, so this is the equilibrium price.

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 100 pizzas a day, its fixed cost is ______ and its total cost is ______.

$500; $1,350 At 100 pizzas a day, fixed cost is $500 and variable cost is $850, so total cost is $1,350.

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. What is the total cost of making 6 calls an hour?

$65 To make 6 calls an hour requires 1 telephone and 6 workers. The cost of the telephone is $5, and the cost of hiring 6 workers is $60, so the total cost is $65.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. What is John's opportunity cost of cleaning windows for an hour?

$7 Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.

Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs he makes each day, as shown in the accompanying table. The marginal cost if the 4th mug per day is ______.

$7 When Chris goes from making 3 to 4 mugs per day, his total cost increases from $25 to $32, so the marginal cost of the 4th mug is $7 (= $32 − $25).

For two goods, A and B, the rational spending rule is expressed as:

(MUA/PA) = (MUB/PB). The formula (MUA/PA) = (MUB/PB) indicates that the marginal utility per dollar spent is the same for the two goods, which is what is required for the rational spending rule to be satisfied.

A firm's profit equals:

(P − ATC) × Q [(price minus average total cost) times the quantity sold]. Average profit per unit is P − ATC. To get total profit, you multiply that by the quantity sold, Q.

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Suppose that at the original income of $30, the price of a loaf of bread increased to $3 and the price of a jar of peanut butter decreased to $2. Dusty can buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

10; 15 If Dusty spent the entire $30 on bread, he could buy 10 loaves ($30/$3 = 10) and if he spent the entire $30 on peanut butter, he could buy 15 jars ($30/$2 = 15).

Refer to the accompanying figures. If Mallory and Rick are the only two consumers in this market and the price of soda is $0.25 per can, then what will be the market demand for soda per month?

130 cans If the price of soda is $0.25 per can, then Mallory will want to buy 70 cans per month and Rick will want to buy 60 cans per month, so market demand will be 130 cans per month.

Refer to the accompanying table. To increase output from 33 to 66 units requires ______ extra employee(s) per day; to increase output from 66 to 99 units requires ______ extra employee(s) per day.

1; 2 Going from 1 to 2 employees per day increases output from 33 to 66 units of output per day. Going from 2 to 4 employees per day increases output from 66 to 99 units per day.

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. If Dusty's income rises to $45, Dusty can now buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

30; 15 If Dusty spent all of his income on bread, he could buy 30 loaves ($45/$1.50 = 30) and if he spent all of his income on peanut butter, he could buy 15 jars ($45/$3 = 15).

The accompanying figure shows the demand curve for a product that can be sold only in whole-number amounts. What is the maximum price that any buyer would be willing to pay for the first unit?

40 The graph reveals that maximum price any buyer would be willing to pay for the first unit is $40.

Refer to the accompanying table. The marginal utility of the 3rd dinner is:

60 The total utility of two dinners is 175 (100 from the first dinner and 75 from the second dinner) and the total utility of the three dinners is 235, so the marginal utility of the third dinner is 60 (since the third dinner increases total utility from 175 to 235).

Laura's total utility from consuming 8, 9, and 10 bonbons is 35, 42, and 45, respectively. Her marginal utility from the 9th bonbon is _____.

7 Marginal utility is the additional utility gained from consuming an additional unit of a good. Here, total utility increases by 7 units (from 35 to 42) when consumption increases from 8 to 9, so the marginal utility of the 9th bonbon is 7.

Which of the following is NOT true of a perfectly competitive firm?

It seeks to maximize revenue. Firms (in any market) maximize profit, not revenue.

Joe is shopping for a new computer. A computer can be delivered to Joe's home for $1,200. Alternatively, Joe can pick up the same computer at the warehouse for $1,000. How should Joe buy the computer?

Joe should drive to the warehouse if his cost of driving to the warehouse is less than $200. Joe should drive to the warehouse if the cost of doing so is less than the added $200 cost of having it delivered.

If a consumer reallocates his or her spending away from Good B and towards Good A, then the consumer's total utility will increase if:

MUA/PA > MUB/PB. If MUA/PA > MUB/PB, then the loss in utility from spending a dollar less on Good B will be more than compensated for by the increase in utility from spending a dollar more on Good A.

Which of the following is the most likely to be a variable factor of production at a university?

The number of librarians The number of librarians is easier to alter than any of the other factors listed, so it is the most likely to be a variable factor of production.

Blair has vast riches and consumes thousands of dollars' worth of consumer goods each week, yet she is never satisfied. Why not?

People's wants are unlimited. People's wants are unlimited, so even for someone with vast riches, their wants can never be satisfied.

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

The Cost-Benefit Principle According to the Cost-Benefit Principle, a firm should produce another unit of output as long as the extra benefit of producing another unit is greater than the extra cost. This is just another way of saying that the firm should increase output whenever price is greater than marginal cost (and it should stop when price is equal to marginal cost).

Refer to the accompanying table. The law of diminishing marginal utility:

applies to both Good A and Good B. As indicated by the numbers in the chart, the marginal utility of each good falls as more of it is consumed, which characterizes the law of diminishing marginal utility.

Suppose a profit-maximizing firm in a perfectly competitive market is collecting $1,999 in total revenues. If the total cost of its fixed factors of production falls from $500 to $400, the firm will:

earn greater profits or smaller losses. A decrease in fixed costs decreases total cost but does not affect marginal cost. Thus, the firm will earn a greater profit (or smaller loss), but their output will not change.

Sven likes to water ski, but can only water ski during the one week each year when he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Sven skied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. Sven's vacation convinced him that:

even for activities he really enjoys, diminishing marginal utility eventually sets in. The fact that Sven's total utility from each extra day's skiing increased by smaller amounts indicates that he received less additional (or, marginal) utility from extra hours of skiing.

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce. Since firms in perfectly competitive markets have no control over the market price, their most important challenge is deciding how much to produce at a given price.

Suppose that each week Henry buys 12 peaches and 3 apples at his local farmer's market. Both kinds of fruit cost $1 each. From this we can infer that:

if Henry is maximizing his utility, then his marginal utility from the 12th peach he buys must equal his marginal utility from the 3rd apple he buys. According to the rational spending rule, at a consumer's optimal consumption bundle the ratio of marginal utility to price must be the same for all goods. Thus, if peaches and apples both cost $1 each, then Henry is maximizing his utility if his marginal utility from the 12th peach he buys is equal to his marginal utility from the 3rd apple he buys.

Sven likes to water ski, but can only water ski during the one week each year when he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Sven skied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. Sven's total utility ______ with each hour that he skied.

increased

Suppose the market for shoes consists of three consumers. The accompanying table shows the quantity demanded at various prices for each consumer: At $100 per pair, market demand:

is the same as Leigh's demand. At $100 per pair, only Leigh wants to buy shoes, so the market demand is the same as Leigh's demand.

A variable factor of production:

is variable in both the short run and the long run. Variable factors are those that can be changed at any time.

If Terry's total utility is maximized when he owns 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs.

less than If his total utility is maximized at 10 pairs of shoes, then each additional pair of shoes must add to his total utility (at least for the first 10 pairs), so the total utility from 7 pairs must be less than the total utility from 8 pairs.

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then at its profit-maximizing level of output, this firm will earn a ______ of ______.

loss; $300 Since $9 is less than the minimum of the AVC curve, this firm should shut down when the price is $9. As a result, the firm's total revenue will be zero, and the firm will earn a loss equal to its fixed cost. To find this firm's fixed cost, note that FC = TC − VC = (ATC − AVC) × Q. In addition, note that when the firm produces 60 units of output, its fixed cost is $300 = ($16 − $11) × 60. Since fixed cost doesn't depend on the level of output, when the firm shuts down it will earn a loss of $300.

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______.

marginal; average total; minimum

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. You got ______ utility from eating the first pie than from eating the third pie.

more

For two goods, coffee and scones, suppose that MU(coffee)/P(coffee) = 4 and MU(scones)/P(scones) = 3. To maximize your total utility from these two goods, you should purchase:

more coffee and fewer scones. Since the ratio of marginal utility to price (i.e., marginal utility per dollar spent) is higher for coffee than for scones, the consumer should buy more coffee and fewer scones. The utility gained from spending an additional dollar on coffee will exceed the utility lost from spending a dollar less on scones; hence, total utility will rise.

The absolute price of a good in dollar terms is the good's:

nominal price. A good's nominal price is the absolute price of the good in dollar terms.

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. The curve labeled A is upward sloping because:

of diminishing returns to Moe's variable factors of production. Curve A is the marginal cost curve. When the law of diminishing returns applies, marginal cost goes up as the firm expands output beyond some point.

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic In a perfectly competitive market, an individual firm can sell as much as it wishes at the market price, implying that the demand curve is perfectly elastic.

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______.

profit; $170 Revenue is $5 times 100, or $500. Total labor costs are $130 (= 13 ×$10) and rent is $200, so total costs are $330. Thus, profit is $500 - $330 = $170.

Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should:

purchase less than 20 units of good X and more than 25 units of good Y. Since MUX/PX = 18 and MUY/PY = 19, to comply with the rational spending rule, Cathy should reallocate her spending away from good X and towards good Y.

Alex wants to maximize his utility. At his current level of consumption, Alex's marginal utility from an additional cup of coffee is 15 utils, and his marginal utility from an additional can of soda is 11 utils. If the price of a cup of coffee is $3 and the price of a can of soda is $2, Alex should:

reallocate his spending away from coffee and towards soda. Since Alex's marginal utility per dollar spent on coffee is 15/3 = 5 utils, while his marginal utility per dollar spent on soda is 11/2 = 5.5 utils, Alex should reallocate his spending away from coffee and towards soda to maximize his utility.

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

resources; satisfaction Utility maximization is the process of allocating one's resources to obtain the greatest possible satisfaction (or, utility).

When the price of a good falls, marginal utility per dollar spent on that good ______, prompting consumers to purchase ______ of that good.

rises; more If the price of a good falls, then the ratio (MU/P) rises, and since the consumer is receiving more marginal utility per dollar spent on the good, this will induce the consumer to buy more of it.

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it's clear that this firm:

should not shut down if its total variable cost is less than $750. A firm will only shut down if its total revenue is less than its total variable cost. If this firm produces 500 units of output and the price of each unit is $1.50, then we know this firm's total revenue is $750. Thus, this firm should not shut down if its total variable cost is less than $750.

Consumer surplus measures:

the difference between the most a buyer would be willing to pay for a product and the price actually paid. Consumer surplus is defined as the difference between a buyer's reservation price for a product and the price actually paid.

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's total revenue at its profit-maximizing level of output is ______.

$2,400 At P = $30 and Q = 80, total revenue (P × Q) is $2,400 ($30 × 80 = $2,400).

Refer to the accompanying figure. The total utility of consuming 4 pizzas a week is:

90 From the graph, we can see that 4 pizzas per week yields a total utility of 90.

Which of the following would be considered a factor of production in the provision of bus service?

Bus drivers A factor of production is an input used in the production of a good or service. Bus drivers are used to produce bus service.

Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this year, Casey did not plant any vegetables and went to work at a bank instead. Which of the following best explains Casey's career change?

Casey's opportunity costs of gardening exceeded Casey's opportunity costs of working at the bank. The opportunity cost of gardening is the benefit of working at the bank. Casey will work at the bank if the benefit of working at the bank is greater than her opportunity cost of working at the bank.

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:

MUc/Pc will fall. Correct We typically expect goods to satisfy the law of diminishing marginal utility. That is, as our consumption increases, the additional utility gained from consuming an additional unit of a good will fall. Thus, as Pablo's consumption of coffee increases, we would expect MUc/Pc to fall.

Refer to the accompanying figure. At quantities less than 50 doughnuts per day:

average cost is declining because marginal cost is less than average cost. If the added (or, marginal) cost of producing an additional unit of output is less than average cost, then average cost will fall as output increases.

Joaquin's marginal utility from an additional slice of pumpkin pie is 4 utils and his marginal utility from an additional slice of pecan pie is 6 utils. If a slice of pumpkin pie costs $2.50, and a slice of pecan pie costs $3.00, then Joaquin:

should reallocate his spending towards pecan pie and away from pumpkin pie. Since Joaquin's marginal utility per dollar spent on pumpkin pie is 4/2.5 = 1.6 utils, while his marginal utility per dollar of pecan pie is 6/3 = 2 utils, Joaquin should reallocate his spending towards pecan pie and away from pumpkin pie to maximize his utility.