Econ 2030 Exam 2

- equilibrium quantity: Q*=0 - Profit<0; the best alternative is better than what we are doing - in short run, firm faces choice -- Q*>0 (open) or Q*=0(close)

case 3: ATC>P>=AVC

- equilibrium quantity: Q*=0; close down shop Profit<0

case 4: P<AVC

lower opportunity cost in making something

comparative advantage

- economic profit=0 - good situation - acct profit what your doing=acct profit from what your not doing - equilibrium

normal

experiences an increase in demand along with increases in the income level

normal good

MR>MC; profit is increasing; produce more MR<MC; profit is decreasing; produce less MR=MC; maximum

profit maximizing rule

producing goods that have higher comparative advantage (lower opportunity cost)

specializtion

Suppose the rational and chic Amber saw a beautiful pair of Christian Louboutin loafers priced at $995 and she bought them. Suppose further that her consumer surplus from the purchase was $200. It can be concluded with certainty that her reservation price for buying the loafers was... - $0 - $200 - $795 - $995 - $1195

$1195

Suppose, at a given point in time, Snappy Snack Shack operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production, Snappy's average total cost of producing snacks in $1.70, average variable cost is $1.25, and marginal cost is $1.60. A. In the situation above, the price of snacks is __ in the short run. - $0.45 - $1.25 - $1.60 - $1.70 - $2.85 B. Over time in the situation above, the number of firms selling snacks will __, everything else held constant. - increase - decrease - remain unchanged C. Over time in the situation above profits in the snack market will __, everything else held constant. - increase - decrease - remain unchanged

A. $1.60 B. decrease C. increase

At the beginning of January 2016, Austin decided to convert his steakhouse, from which he has been earning a steady annual profit of $50,000 into a vegan bistro. Austin earned total revenues of $500,000 and an accounting profit of $125,000 from running the bistro in 2016. A. In the situation above, Austin's explicit costs from running the bistro in 2016 was... - $50,000 - $125,000 - $175,000 - $325,000 - $375,000 B. In the situation above, Austin's economic profit from running the bistro in 2016 was... - $-75,000 - $75,000 - $125,000 - $175,000 - $375,000

A. $375,000 B. $75,000

Suppose Danielle is considering opening her own beauty salon. She anticipates the following costs per year: Furniture: $20,000Equipment: $30,000Rent: $36,000Coloring products: $40,000Styling products: $43,000 Danielle is withdrawing $50,000 from her savings account that pays 2 percent interest per year to purchase furniture and equipment and is quitting her current job that pays $40,000. She expects that the total revenues from the new business in the first year will be $200,000. what is Danielle's a. explicit cost? b. implicit cost? c. accounting profit? d. economic profit?

A. Beauty salon B. saving (1k) + working (40k) a. ex=20k+30k+36k+40k+43=$169k b. im=40k+1k=$41k c. acct=200k-169k=$31k d. econ=200k-169k-41=$(-)10k

Suppose books are a normal good. Suppose further that national income in increasing. A. In the situation above, producer surplus in the book market will __, everything else held constant. - remain unchanged - increase - be ambiguous - decrease B. In the situation above, economic surplus in the book market will __, everything else held constant. - remain unchanged - increase - be ambiguous - decrease

A. increase B. increase

Suppose the government imposes an excise tax of $10 per unit on bicycles. Suppose further that buyers bear 65 percent of the burden of the tax. A. In the situation above, which of the following can be concluded with certainty? - the demand for bicycles is price elastic - the demand for bicycles is relatively more price elastic than the supply is - the demand for bicycles is price inelastic - the demand for bicycles is relatively more price inelastic than the supply is B. After the tax is imposed, the price the sellers receive for selling a bicycle will be __ than it was before the tax, everything else held constant. - $6.50 lower - $6.50 higher - $10.00 hgiher - $3.50 higher - $3.50 lower

A. the demand for bicycles is relatively more price inelastic than the supply is B. $6.50 lower

When ATC is less than MC at a particular level of output

ATC must be increasing - when ATC is at its min, MC is equal to ATC - when AVC is at its min, MC equals AVC

Suppose Michelle's Mitten Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing mittens is $17, average total cost is $19, and marginal revenue is $18. In the short run, Michelle should -maintain her current level of production since she is earning a positive economic profit. -maintain her current level of production since her economic profit is zero. -maintain her current level of production since she is minimizing her losses. shut down immediately. -increase production since it will increase her economic profit. -decrease production since it will increase her economic profit.

AVC=17 ATC=19 P=MR=MC=18 17<18<19 maintain her current level of production since she is minimizing her losses

- solely variable cost - = change in VC/change in Q(output) - Profit-maximizing rule: Produce Q* where: MR=MC

Marginal (MC)

- produce quantity Q* where MR=MC MR>MC; increase in profits, good, produce more MR<MC; decrease in profits, not good, produce less

Maximizing Rule

- equilibrium Quantity:Q*>0 - profit=0; good; accounting profit is higher and = to the accounting profit of the best alternative

case 2: P=ATC

= benefit-cost

Profit

=FC+VC

Total (TC)

Suppose Mimi's Magic Marker Company operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing magic markers is $0.20, average variable cost is $0.15, and marginal cost is $0.25. At her current level of production, what is... a) the marginal revenue of producing magic markers? b) the price of a magic marker? c) Mimi's profit from selling magic markers? Over time, what will happen to... a) the number of firms selling magic markers? b) the price of magic markers? c) the quantity of magic markers transacted in the market? d) profits of firms operating in the magic marker market?

a. $.25 b. $.25 c. (+) a. increase b. decrease c. increase d. decrease to 0

Suppose, at a given point in time, Snappy Snack Shack operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production, Snappy's average total cost of producing snacks is $1.70, average variable cost is $1.25, and marginal cost is $1.60. At her current level of production, what is... a) Snappy's average fixed cost of producing a snack? b) Snappy's marginal revenue from selling a snack? c) the price of a snack? d) Snappy's profit from selling snacks? In the short run, will Snappy Snack Shack remain open or shut down?

a. $1.70=AFC+$1.25; AFC=$0.45 b. MR=MC=$1.60 c. P=MR=MC=$1.60 d. Profit=(P-ATC) X Q=(1.60-1.70) X Q (negative) e. AVC<P<ATC; 1.25<1.60<1.70; remain open

Suppose Marcy's Medical Machines is a monopolist and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost is $2500, average fixed cost is $900, and marginal revenue is $2800. At her current level of production, what is... a) Marcy's average variable cost of producing a medical machine? b) Marcy's marginal cost of producing a medical machine? c) the price of a medical machine? d) Marcy's profit from selling medical machines? Will Marcy continue to produce medical machines in the long run?

a. $1600 b. $2800 c. P>2800 d. (+) e. remain open

Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing ice cream is $2.50, average total cost is $3.30, and marginal revenue is $3.00. At her current level of production, what is... a) the marginal cost of producing ice cream? b) the price of ice cream? c) Stephanie's profit from selling ice cream? Over time, what will happen to... a) the number of firms selling ice cream? b) the price of ice cream? c) the quantity of ice cream transacted in the market? d) profits of firms operating in the ice cream market?

a. $3.00 b. $3.00 c. (-) a. decrease b. increase c. decrease d. increase to 0

Suppose Al owns a donut shop. He pays his employees $80,000 per year and his inventory costs him $20,000 per year. Prior to running the donut shop, Al worked on a television show and earned $50,000 per year. (Assume these are the only costs he faces.) The total revenue of the store per year is $180,000. what is Al's a. explicit cost? b. implicit cost? c. accounting profit? d. economic profit?

a. ex=80k+20k=$100k b. im=$50k c. acct=180k-100k=$80k d. econ=180k-100k-50k=$30k

higher productivity of making something

absolute advantage

dollars in minus dollars out A>E =TR-explicit

accounting cost

When marginal cost is less than average total cost at a particular level of output, __ cost MUST be __. - marginal; increasing - average fixed; increasing - marginal; decreasing - average total; decreasing - average total; increasing

average total; decreasing

- Marginal: doing one more of something (extra) - MC>average; average goes up - MC<average; average goes down - MC=average; average doesn't change

average/marginal cost relationship

what is recieved

benefit

- equilibrium Quantity: Q*>0 - Profit>0; accounting profit is also >0

case 1: P>ATC

Suppose the price at which a monopolist is selling its output is $10 and the marginal revenue associated with the last unit of output sold is $8. Suppose further that the marginal cost of producing the last unit of output sold is $6. Which of the following actions should the non-price discriminating monopolist take to increase its profits? - decrease output and decrease price - increase output and increase price - increase output and decrease price - decrease output and increase price

decrease output and increase price?

Suppose, at a given point in time, Wanda's Wig Warehouse, a non-price discriminating monopolist, is producing at a level of output where marginal revenue is less than marginal cost. Everything else held constant, Wanda could increase her firm's profits by _____ the quantity of wigs she produces and _____ the price she charges for them.

decreasing; increasing

=TR-explicit(accounting from what your doing)-implicit(accounting profit from what you are not doing) - Economic profit<0 - what is the implication? E<A

economic cost

the sum of all consumer and producer surpluses in an economy

economic surplus

It can be concluded with certainty that a competitive firm economic profits will be _____ zero in the long run.

equal to

the price at which there is no tendency for it to change. when price is lower than the equilibrium price, quantity demanded will be greater than quantity supplied

equilibrium market price

the price of a good or service when the supply of it is equal to the demand for it in the market

equilibrium price

out of pocket costs; actually have to pay for; accounting cost

explicit

Answer true or false to the following statement. If a non-price discriminating monopolist is maximizing its profits, we know that it has equated its marginal cost with the market price.

false

Which of the following is a characteristic of a perfectly competitive market? Firms are price makers in the market. Firms face no barriers to entering the market. There are few firms selling the good in the market. The goods sold in the market are differentiated.

firms face no barriers to entering the market

Suppose a grocery store advertises the following special: "For those having a reward card, this Week ONLY: 10% Off & a Free Bag when you purchase 6 Bottles or more of any 750 ml Wine." With this offer, the store is engaging in _____-degree price discrimination.

first

quantity and people; both

first degree

=FC/Q

fixed (AFC)

- costs that don't change - independent of our level of production (Q) - rent is a FC; doesn't change how many days you stay or not - FC doesn't matter when answering question how much to produce? - it matters for overall profitability

fixed (FC)

1. Profit=(P-ATC) X Q (can't produce - of something) 2. Profit-Maximizing Rue: Produce Quantity Q*; where MR=MC 3. remain in business (Produce Q*>0) if P>= AVC 4. shut down (produce Q*=0) if P<AVC

for all firms

If the price a firm charges for a good is greater than its average total cost of producing it, then the firm is earning an economic profit _____ zero. - greater than - less than - equal to

greater than

It can be concluded with certainty that a monopolist's accounting profits will be _____ zero in the long run.

greater than

It can be concluded with certainty that a monopolist's economic profits will be _____ zero in the long run.

greater than or equal to

Suppose Rachel is the only person in her town who performs weddings and she is producing her profit-maximizing level of output. Suppose further that at this level of production, Rachel's average fixed cost of performing a wedding is $75, her average variable cost is $100, and the marginal revenue from performing a wedding is $175. Everything else held constant, Rachel's profit from performing weddings is __ zero.

greater than?

not in pocket costs accounting profit from the next best alternative - example, if a company operates out of a building it owns, it experiences an implicit cost from the rent it could earn from leasing the building to another company. The building could earn $3,000 a month from a commercial renter, so the company has an implicit cost of $3,000 to add to its economic costs.

implicit

suppose Jeff the Chef's price elasticity of supply of restaurant meals is 2. If the price of restaurant meals increased by 8 percent, then the quantity of restaurant meals Jeff supplied must have __ by __ percent, everything else held constant. - decreased; 16 - increased; 16 - decreased; 6 - decreased, 4 - increased; 4

increased; 16

Suppose Petra's Plantain Plantation sells plantains in a perfectly competitive market. Suppose further that at her current level of production, Petra's marginal cost is $2.00 per kilo. If the market price of plantains is $2.25 per kilo, it can be concluded with certainty that Petra's profits are

increasing

When marginal cost is greater than the average total cost at a particular level of output, average total cost must be - increasing - decreasing - remaining constant ex: avg 1st 3 tests=80 avg 4th test=100 increasing

increasing

The shorter the period of time that a buyer has to make a purchasing decision, everything else held constant, the more price __ demand will be for the good. The __ proportion of a consumer's budget a good makes up, everything else held constant, the more price inelastic demand will be for the good. - inelastic; smaller - elastic; greater - elastic; smaller - inelastic; greater

inelastic; smaller

a good whose demand decreases when consumer income rises (or demand rises when consume income decreases)

inferior good

Mario is a profit-maximizing wholesale meatball distributor who sells his meatballs to all of the finest restaurants in town. Because nobody can make meatballs like Mario, he is the only distributor in town that sells meatballs to restaurants. As a result, the marginal revenue from selling one of Mario's meatballs will be _____ the price he charges for it.

less than

If a __ percent increase in price results in a 3 percent __ in quantity demanded, everything else held constant, then it can be concluded that demand is price elastic. - 3; decrease - greater than 3; decrease - less than 3; decrease - less than 3; increase - greater than 3; increase

less than 3; decrease

- no fixed factors - no constraints preventing changing the output level by changing the capital stock or by entering or leaving an industry

long run

FC=0 TC=VC where FC becomes variable point in time when rent it up

long run

Suppose Brad's price elasticity of demand for restaurant meals in .8. Suppose further that the price of restaurant meals was __ in August than it was in July. Everything else held constant, it can be concluded with certainty that Brad's total spending on restaurant meals in August was lower than it was in July. - lower - higher

lower

the extra cost (change in total cost) of doing one more unit of something

marginal cost

- the change in TC from producing one more unit of the good or service - MC=change in TC/Change in Q

marginal costs

change in TR/change in Q

marginal revenue (MR)

a market state where the supply in the market is equal to the demand in the market

market equilibrium

a. many small buyers and sellers b. homogeneous good: exactly the same c. perfect information (abc go together) d. no barriers to entry/exit

market structure

an individual or company that controls all of the market for a particular good or service

monopolist

P>=AVC - Profit>0; P>ATC -- Seller increase; Price decrease; quantity increase - Profit <0; P<ATC -- Seller decrease; price increase; quantity decrease in long run profit=0

open

what is given up=benefit from the best alternative not chosen

opportunity cost

P=MR

perfect competition

P=MR at all levels of output P=MR=MC at (and only at) the profit-maximizing level of output, Q*

perfect competition

1. firms are price takers 2. demand=price=marginal revenue

perfect information

Suppose a profit-maximizing firm is earning positive economic profits at its current level of output. Everything else held constant, the firm's accounting profits are - positive - negative - normal - ambiguous (uncertain) - A>E

positive

- it matters to answering the question about profit =benefit-cost =TR-TC =(P X Q)-TC =(P X Q)-TC/Q X Q =(P X Q)- ATC X Q =(P-ATC) X Q - true for all firms at all levels of output Profit>ATC (+); better than best alternative Profit<ATC(-)

profit (working definition)

- do something if benefit > equal to opportunity cost - if this is true, then do it - if equal, then either choice is rational - don't purchase if cost is greater or equal to the benefit

rationality

- produce Q*>0 P>=AVC

remain in business

At a given point in time, suppose a monopolist is producing its profit-maximizing level of output and is earning an economic profit equal to zero. Everything else held constant, what will the monopolist do in the long run? - shut down - remain in business

remain in business

Suppose a grocery store advertises the following special: "This Week ONLY: 10% Off & a Free Bag when you purchase 6 Bottles or more of any 750 ml Wine." With this offer, the store is engaging in _____-degree price discrimination.

second

Suppose a parking garage has the following pricing schedule: 0-2 Hours, $5; 2-4 Hours, $10; 4-8 Hours, $15. With this pricing scheme, the garage is engaging in _____-degree price discrimination.

second

quantity; amount; how many?

second degree

- both fixed and variables

short run

FC>0 TC=FC+VC

short run

- Produce Q*=0 P<AVC

shut down

P<ATC

shut down

Which of the following conditions must hold if a firm is to engage in price discrimination? The transaction costs of one consumer selling the product to another consumer must be high. A firm must be a price taker in its market. Different consumers must have similar preferences for the product. A firm must be a monopolist in its market.

the transaction costs of one consumer selling the product to another consumer must be higher

Admission tickets to the New Orleans Museum of Art are $12 for adults and $10 for seniors (65 and over). This pricing scheme is an example of _____-degree price discrimination.

third

people; who you are?

third degree

=TC/Q - costs per unit

total (ATC)

- explicit & implicit

total cost (TC)

=Price(P) X quantity(Q) - benefit from selling

total revenue (TR)

VC/Q

variable (AVC)

- costs that fluctuate

variable (VC)