Econ 202 hayes final

Which product is most likely to be the most price elastic?

Automobiles

Which of the following will not hold true for a competitive firm in long-run equilibrium?

P equals AFC.

A purely competitive seller is

a "price taker."

Which of the following will not cause the demand for product K to change?

a change in the price of product K

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?

an increase in supply

The MR = MC rule

applies both to pure monopoly and pure competition.

A person should consume more of something when its marginal

benefit exceeds its marginal cost.

The socially optimal amount of pollution abatement occurs where society's marginal

benefit of abatement equals its marginal cost of abatement.

If an economy is operating inside its production possibilities curve for consumer goods and capital goods, it

can produce more of both consumer goods and capital goods by using resources that are currently idle.

Marginal cost can be defined as the

change in total cost resulting from one more unit of production.

Broadly defined, technological advance

comprises new and improved goods and services and/or new and improved ways of producing or distributing them.

The demand for a product is inelastic with respect to price if

consumers are largely unresponsive to a per unit price change.

The theory of consumer behavior assumes that

consumers behave rationally, attempting to maximize their satisfaction.

With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will

decrease equilibrium price and increase equilibrium quantity.

If firms are losing money in a purely competitive industry, then the long-run adjustments in this situation will cause the market supply to

decrease, and consequently the representative firm's profits will increase.

The wide imitation and spread of an innovation is called

diffusion

As the firm in the diagram expands from plant size #3 to plant size #5, it experiences

diseconomies of scale.

The primary force encouraging the entry of new firms into a purely competitive industry is

economic profits earned by firms already in the industry.

The corporate decision on type and level of R&D activity is difficult because

expected returns lie in the future and are highly uncertain.

In the diagram, (1) is the

expected-rate-of-return curve, and (2) is the interest-rate cost-of-funds curve.

The marginal benefit to a firm from its R&D expenditures is depicted by its

expected-rate-of-return curve.

To the economist, total cost includes

explicit and implicit costs.

Economic resources are also called

factors of production

Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect

firms to leave the industry, market supply to fall, and product price to rise.

A price floor means that

government is imposing a minimum legal price that is typically above the equilibrium price.

A perfectly inelastic demand curve

graphs as a line parallel to the vertical axis.

To economists, the main difference between the short run and the long run is that

in the long run all resources are variable, while in the short run at least one resource is fixed.

If the price of product X rises, then the resulting decline in the amount purchased will

increase the marginal utility of the last unit consumed of this good.

Broadly defined, competition involves

independently acting buyers and sellers and freedom to enter or leave markets.

U.S. firms collectively devote the largest portion of their total R&D spending to

innovation and diffusion.

Which of the following correctly orders, highest to lowest, the relative magnitudes of U.S. spending by businesses on components of R&D?

innovation, invention, basic research

A profit-maximizing firm should not undertake an R&D project for which the

interest-rate cost of funds exceeds the expected rate of return.

The first discovery (as distinct from first commercial application) of a product or process is called

invention

A market

is an institution that brings together buyers and sellers.

The modern view of technological advance is that it

is an internal element of capitalism, occurring in response to profit incentives.

The nondiscriminating monopolist's demand curve

is less elastic than a purely competitive firm's demand curve.

As it relates to the R&D decision, the interest-rate cost-of-funds curve

is the marginal cost element in the MB = MC decision framework.

If a firm decides to produce no output in the short run, its costs will be

its fixed costs.

The total product curve graphically shows how much

output the firm can produce with various quantities of its variable input.

One major barrier to entry under pure monopoly arises from

ownership of essential resources.

The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is

price

If the supply of a product decreases and the demand for that product simultaneously increases, then equilibrium

price must rise, but equilibrium quantity may rise, fall, or remain unchanged.

Long-run competitive equilibrium

results in zero economic profits.

Which of the following defines marginal utility?

the additional satisfaction from consuming one more unit of a product

Marginal product is

the change in total output attributable to the employment of one more worker.

The diagram portrays

the equilibrium position of a competitive firm in the long run.

Graphically, the market demand curve is

the horizontal sum of individual demand curves.

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes

the law of diminishing returns.

According to the concept of diminishing marginal utility, consumers will purchase more of a good when the price falls because

the marginal benefit of additional units of the good now outweigh the marginal cost.

If there is a shortage of product X, and the price is free to change,

the price of the product will rise.

If there are external benefits associated with the consumption of a good or service,

the private demand curve will underestimate the true demand curve.

The MR = MC rule applies

to firms in all types of industries.

The negative slope of the production possibilities curve is a graphical way of indicating that

to produce more of one product, we must do with less of another.

The theory that R&D expenditures as a percentage of firms' sales first rise, reach a peak, and then fall with increases in industry concentration is called the inverted-U theory of R&D.

true

Refer to the diagram. At the profit-maximizing level of output, total revenue will be

0AJE.

Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be

0F and 0C, respectively.

Refer to the data. The value for X is

15

Which of the following statements is correct?

Economic profits induce firms to enter an industry; losses encourage firms to leave.

A price floor in a competitive market will result in persistent shortages of a product.

FALSE

If the elasticity coefficient of supply is 0.7, supply is elastic.

FALSE

Which of the following is not characteristic of the demand for a commodity that is elastic?

Total revenue increases if price is increased.

When the percentage change in price is greater than the resulting percentage change in quantity demanded,

an increase in price will increase total revenue

In the provided diagram, the profit-maximizing output

is n

The basic formula for the price elasticity of demand coefficient is

percentage change in quantity demanded/percentage change in price.

A production possibilities curve illustrates

scarcity

In deciding whether to study for an economics quiz or go to a concert, one is confronted by the idea(s) of

scarcity and opportunity costs.

An improvement in production technology will

shift the supply curve to the right

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should

tax producers so that the market supply curve shifts leftward.

In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. For a purely competitive firm,

the demand and marginal revenue curves will coincide.

According to the marginal-cost-marginal-benefit rule,

the optimal project size is the one for which MB = MC.

In moving along a demand curve, which of the following is not held constant?

the price of the product itself.

Economies and diseconomies of scale explain

why the firm's long-run average total cost curve is U-shaped

Which of the following distinguishes the short run from the long run in pure competition?

Firms can enter and exit the market in the long run but not in the short run.

Because successive units of a good produce less and less additional satisfaction, the price must fall to encourage a buyer to purchase more units of the good. This statement is most consistent with which explanation for the law of demand?

diminishing marginal utility

The MR = MC rule can be restated for a purely competitive seller as P = MC because

each additional unit of output adds exactly its price to total revenue.

If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is

equal to its marginal cost.

Refer to the diagrams. Diagram (A) represents

equilibrium price and quantity in a purely competitive industry.

A government subsidy to the producers of a product

increases product supply.

To maximize utility, a consumer should allocate money income so that the

marginal utility obtained from the last dollar spent on each product is the same.

"Essential" water is cheaper than "nonessential" diamonds because

the supply of water is great relative to demand and the supply of diamonds is small relative to demand.

Productive efficiency refers to

the use of the least-cost method of production.

At the equilibrium price,

there are no pressures on price to either rise or fall.

One of the advantages of being first to develop a new product is the opportunity to develop brand-name recognition.

true

Which is a major criticism of a monopoly as a source of allocative inefficiency?

A monopolist fails to expand output to the level where the consumers' valuation of an additional unit is just equal to its opportunity cost.

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. This figure suggests that there is (are)

external costs in the production of this product.

Refer to the diagram. If price falls from $10 to $2, total revenue

falls from A + B to B + C, and demand is inelastic.

A firm's economic profit is usually higher than its accounting profit.

false

A pure monopolist will maximize profits by producing at that output where price and marginal cost are equal.

false

Pure monopoly is the best market structure for encouraging R&D and innovation.

false

In many large U.S. cities, taxicab companies operate as near monopolies because of

licenses.

Supply-side market failures occur when

supply curves don't reflect the full cost of producing a good or service

Marginal revenue is the addition to total revenue resulting from the sale of one more unit of output.

true

The law of diminishing returns explains why short-run marginal cost curves are upsloping.

true

The limited money income of consumers results in a so-called budget constraint.

true

The marginal cost to a firm of R&D expenditures is the market interest rate the firm must pay to obtain the needed financing. Group starts

true

When the total product is at its maximum level, the marginal product is zero.

true

An important economic problem associated with pure monopoly is that, at the profit-maximizing outputs, resources are

underallocated because price exceeds marginal cost.

In a free-market economy, a product which entails a positive externality will be

underproduced

For which product is the income elasticity of demand most likely to be negative?

used clothing

in the short run, a purely competitive firm that seeks to maximize profit will produce

where total revenue exceeds total cost by the maximum amount.

Where total utility is at a maximum, marginal utility is

zero

Pure monopoly refers to

a single firm producing a product for which there are no close substitutes.

A firm's supply curve is upsloping because

beyond some point the production costs of additional units of output will rise.

The law of diminishing marginal utility states that

beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer.

The price elasticity of demand coefficient measures

buyer responsiveness to price changes

Refer to the diagram for a pure monopolist. Monopoly price will be

c

If MR > MC for a competitive firm, it should reduce its level of output in order to make MR equal to MC.

false

In the accompanying diagrams, both firms are selling their products in purely competitive markets.

false

The consumer demand curve for a product is downsloping because marginal utility is constant when price declines.

false

When a consumer shifts purchases from X to Y, the marginal utility of X falls and the marginal utility of Y rises.

false

The MR = MC rule applies

in both the short run and the long run.

The marginal revenue curve of a purely competitive firm

is horizontal at the market price.

The nondiscriminating pure monopolist's demand curve

is the industry demand curve.

The utility of a good or service

is the satisfaction or pleasure one gets from consuming it.

One reason that the quantity demanded of a good increases when its price falls is that the

lower price increases the real incomes of buyers, enabling them to buy more.

The equilibrium price and quantity in a market usually produce allocative efficiency because

marginal benefit and marginal cost are equal at that point.

In the short run, the individual competitive firm's supply curve is that segment of the

marginal cost curve lying above the average variable cost curve.

As it relates to R&D, a firm's expected-rate-of-return-curve, r,

slopes downward because the firm arrays, highest to lowest, the rates of return on R&D activities.

If the percentage change in quantity demanded is less than the percentage change in price, then demand is said to be elastic.

FALSE

In the price range where demand is elastic, if the seller of the good raises its price, then total revenues will increase.

FALSE

Macroeconomics explains the behavior of individual households and business firms; microeconomics is concerned with the behavior of aggregates or the economy as a whole.

FALSE

Normative statements are expressions of facts.

FALSE

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

FALSE

Surpluses drive market prices up; shortages drive them down.

FALSE

The budget line shows the various incomes that an individual can earn from different jobs.

FALSE

The smaller the number of good substitutes for a product, the greater will be the price elasticity of demand for it.

FALSE

The study of economics is not useful for consumers, because economic analysis focuses only on businesses and the economy.

FALSE

Two goods are considered to be related goods by many buyers: if the price of one increases, buyers buy more of the other. This indicates that the two goods are complements.

FALSE

Refer to the diagram. With MB1 and MC1, society's optimal amount of pollution abatement is

Q1.

Which of the following is an example of market failure?

negative externalities, positive externalities, public goods

A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its

total variable costs.

As long as its total revenues are greater than its total costs, a firm will earn positive economic profits.

true

If this diagram represents a typical firm in the industry and the firm is producing at the profit-maximizing level of output in the short run, then in the long run we would expect more firms to enter the market.

true

In the accompanying diagram, at output C, production will result in an economic profit.

true

In the long run for a purely competitive market, firms will earn only normal profits.

true

Refer to the diagrams, in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the first unit of this public good is

$18

Equilibrium price will be

$2

The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is

8 units of utility.

Which of the following is the best example of a supply-side market failure?

A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.

Which of the following is a short-run adjustment?

A local bakery hires two additional bakers.

Refer to the diagram. Total revenue at price P1 is indicated by area(s)

A+B

Refer to the accompanying graph. If the market price for the product falls, then which of the curves would shift? (quiz 8)

D

An increase in immigration would shift the production possibilities curve to the left.

FALSE

An increase in quantity supplied might be caused by an increase in production costs.

FALSE

A government tax per unit of output reduces supply.

TRUE

An increase in consumer incomes will cause a decrease in the demand for an inferior good.

TRUE

Choices entail marginal costs because resources are scarce.

TRUE

The greater the ease of shifting resources from product X to product Y in the production process, the greater is the elasticity of supply of product Y.

TRUE

The production possibilities curve shows various combinations of two products that an economy can produce when achieving full employment.

TRUE

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

TRUE

Which of the following is not a barrier to entry?

X-inefficiency

Line (1) in the diagram reflects the long-run supply curve for

an increasing-cost industry.

Nonrivalry and nonexcludability are the main characteristics of

public goods.

The law of diminishing marginal utility suggests that the total utility that a consumer derives from a product will increase slower and slower as more of the product is consumed.

true

The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue (quiz 9)

$400

At what price will the firm shown in the accompanying graph make just a normal profit? (quiz 8)

$7

Variable costs are costs that change directly with output.

true

Refer to the diagram. To maximize profits or minimize losses, this firm should produce

E units and charge price A.

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

When a firm does more of something, it gets better at it. This learning-by-doing is

a source of economies of scale.

Refer to the diagram. A price of $60 in this market will result in

a surplus of 100 units.

Fixed cost is

any cost that does not change when the firm changes its output.

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then

new firms will enter this market.

Pure monopolists may obtain economic profits in the long run because

of barriers to entry.

The Latin term "ceteris paribus" means

other things equal.

A firm can sell as much as it wants at a constant price. Demand is thus

perfectly elastic

The demand schedule or curve confronted by the individual, purely competitive firm is

perfectly elastic.

For economists, the word "utility" means

pleasure or satisfaction.

Marginal utility can be

positive, negative, or zero.

The law of demand states that, other things equal,

price and quantity demanded are inversely related

The supply curve shows the relationship between

price and quantity supplied

Resources are efficiently allocated when production occurs where

price is equal to marginal cost.

Market failure is said to occur whenever

private markets do not allocate resources in the most economically desirable way.

The law of supply indicates that, other things equal,

producers will offer more of a product at high prices than at low prices.

A consumer who has a limited budget will maximize utility or satisfaction when the

ratios of the marginal utility of each product purchased divided by its price are equal.

At the point where the demand and supply curves for a product intersect,

the quantity that consumers want to purchase and the amount producers choose to sell are the same.