ECON Clep

Combination: Clothing: Food: A 0 110 B 10 105 C 20 95 D 30 80 E 40 60 F 50 35 G 60 0 If the economy currently is producing at point F, the opportunity cost of __ additional units of clothing is 35 units of food.

10. At point F, if you increased production of clothing by 10 units, the amount of Food you can produce would drop from 35 units to zero. This chart shows how much food and clothing you can possibly produce, so a combination like 50 Clothing and 50 Food is not possible, because when you produce 50 clothing, 35 food is the max you can produce.

A farm can produce 1,000 bushels of wheat per year with 5 workers and _____ bushels with 6 workers. The marginal product of the sixth worker for this farm is 300 bushels.

1,300. Marginal product is the additional product produced by additional input (in this case additional labor).

Suppose that a movie theater knows that it will sell 450 tickets per day if it charges $4.50 per ticket; if the ticket price goes up to $5.50 per ticket, the theater will only sell 350 tickets per day. ____ is the theater's price elasticity of demand for this price range.

1.25. The formula for calculating price elasticity of demand is the proportional change in quantity divided by the proportional change in price: http://www.instantcertonline.com/members2/microecon/elasticity1.gif http://www.instantcertonline.com/members2/microecon/elasticity2.gif http://www.instantcertonline.com/members2/microecon/elasticity3.gif http://www.instantcertonline.com/members2/microecon/elasticity4.gif It is not as complicated as it looks, just take one piece at a time. Make sure you can arrive at the same answer as provided above, using a separate piece of paper, and a calculator if necessary. Also, elasticity is always a positive number, so drop the negative sign off of your answer.

Combination: Clothing: Food: A 0 110 B 10 105 C 20 95 D 30 80 E 40 60 F 50 35 G 60 0 If the economy currently is producing at point B, the opportunity cost of __ additional units of clothing is 10 units of food.

10. If you are currently producing 10 units of clothing (point B), and decide to produce at a rate of 20 units of clothing (point C), the food you produce drops from 105 to 95. You are producing an additional 10 units of clothing at the expense of 10 units of food you could have produced. Also note that a combination of 20 units of clothing and 80 units of food is inefficient, because you would be producing less than possible.

Quantity of Output: Total Cost: (units) ($) 0 20 1 30 2 40 3 55 4 75 5 100 6 130 The marginal cost for the third unit of output is __ dollars.

15. Marginal cost for the third unit of output means, how much extra cost do you incur to produce that third unit? Your total cost is $40 for two units, and $55 for three units. You incur an additional $15 cost going from two units to three, which makes 15 your marginal cost.

Quantity of Output: Total Cost: (units) ($) 0 20 1 30 2 40 3 55 4 75 5 100 6 130 The average variable cost for an output of five units is __ dollars.

16. First, we need to find the total variable costs, then we divide that by 5 units to find the average variable cost. To find total variable cost, you subtract the fixed cost from the total cost. Total cost for 5 units is 100 dollars. Fixed cost is 20 dollars. So $80 / 5 gives you 16 dollars average variable cost. Remember, variable costs are costs that change depending on how many units you produce -- for example, the more units you produce, the more electricity bills, the more hourly wages, etc..

In the United States, deregulation has been seriously advocated since the early ____s.

1980. Deregulation is the removal of government controls from an industry or sector, to allow for a free and efficient marketplace.

Assume that marginal revenue equals rising marginal cost at ___ units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $4 per unit, the firm should produce 200 units.

200. Most of the information in this question is extra, unnecessary details. The rule is, a firm should produce at the level where marginal revenue equals marginal cost. The question clearly stated that this occurs at 200 units, so naturally the firm should produce 200 units.

A monopolist can sell 20 units of output at a price of $50 per unit. To sell 21 units, the monopolist must cut the price of all units to $49. The monopolist's marginal revenue from the twenty-first unit sold is __ dollars.

29. Marginal revenue is the revenue gained by selling an additional unit, so the question is, how much additional revenue do you get from selling 21 units instead of 20? Initially, with 20 units, you make $20 x $50 = $1000. With 21 units, you make $21 x $49 = 1029 ( total revenue in the new case). Therefore the marginal revenue is $1029-$1000 = $29.

In the long run, the market structure with the _______ price will be the monopoly.

Highest. Perfect competition will have the lowest price, and the highest quantity in the long run.

http://www.instantcertonline.com/members2/microecon/2.gif A price of $__ would cause a surplus of 25 units to develop, driving the price down.

80. Looking at the graph, we can see that at $80, the demand would be for 25 units, whereas the supply would be for 50 units. That results in a surplus of 25 units. On the other hand, a price of $20 would result in a demand for 70 units, but a supply of only 20 units, resulting in a shortage of 50 units to develop.

At point A on a production possibilities curve, there are 50 tons of rice and 60 tons of barley. At point B on the same curve, there are 40 tons of rice and __ tons of barley. If the farmer is currently at point A, the opportunity cost of moving to point B is 10 tons of rice.

80. The opportunity cost is what you are getting less of as a result of increasing production of something else. Going from point A to B meant producing an extra 20 tons of barley, but it also meant an opportunity cost of 10 tons of rice.

If a firm has total revenues of $2000, the owner's labor in the firm is valued at $300, and the firm has explicit costs of $___, then economic profit is 900 dollars.

800. Total revenue is the total amount of money made by the company, and doesn't take into account expenses and costs. Once you subtract the owner's labor and the explicit costs (employee wages, equipment costs, materials, etc), you are left with the economic profit.

In the short run, a perfectly competitive firm's supply curve is the portion of the Marginal Cost curve which is above the ___ Curve.

AVC. The portion above the AVC (Average Variable Cost) Curve is the supply curve. This applies to the short run. In the long run, it is the portion above the AC (Average Cost). A couple of things to remember: - In the short run, the supply curve starts above the AVC curve, because the point where MC intersects with AVC is the shutdown point. Below the AVC, the firm produces zero units, and goes out of business. - In the long run, there are no variable costs. There is only an average cost, not an AVC or AFC. The firm's shutdown point in the long run is where the MC intersects with the AC.

The difference between what firms would have been willing to ______ for their products and the price they actually receive is called product surplus.

Accept. Along the same lines, a consumer surplus is the difference between what a consumer is willing to pay for a product, and what he actually pays.

The principle of diminishing marginal utility says that the marginal utility of __________ units consumed decreases.

Additional. For example, the first slice of pie will have a high marginal utility. The second will have less, and the third will have even less, until eventually you hit a number of slices of pie where you're getting zero, or negative marginal utility.

Line _ shows a perfectly equal distribution. http://www.instantcertonline.com/members2/microecon/8.gif

A. Line A is a perfectly straight, 45 degree line, indicating equal distribution. The first 50% of the population earns 50% of the income. On the other hand, in line C, the first 50% of the population only earns 20% of all the income.

A ________ externality occurs if an activity creates costs (harm or discomfort) for uninvolved people.

Negative. For example - cars and factories generate air pollution that affects people's health. Cars entering congested freeways impose time costs on other drivers, as all cars slow down as a result.

An ATC Curve shows _______ costs depending on the number of units produced.

Average. An ATC (Average Total Cost) Curve shows the average costs over a period of time for various levels of production. An ATC Curve is usually shaped like a 'U'. That means up to a certain number of units of production, the average total cost is dropping, but once you pass that point, the average total cost starts rising.

Quantity of Output: Total Cost: (units) ($) 0 20 1 30 2 40 3 55 4 75 5 100 6 130 The _______ fixed cost for an output of 4 units is five dollars.

Average. We know that the fixed cost is $20, because even if you produce 0 units, you still have to pay $20. The fixed cost does not change depending on the number of units. To find the average fixed cost, just divide the fixed cost by the number of units ($20 / 4).

Moral hazard occurs when people alter their behavior from what was ___________ when a transaction was made.

Anticipated. A person who discovers that he or she has a serious illness and then purchases insurance is creating a moral hazard.

In terms of limiting certain types of business activities through _________ laws, the United States is more restrictive than other countries.

Antitrust.

Since the mid-1980s in the United States, _________ policy has followed the rule of reason.

Antitrust. Government policies and programs designed to control the growth of monopoly and enhance competition.

The Sherman Act (1890), Clayton Antitrust Act (1914) and the Federal Trade Commission Act (1914) are major _________ laws in the United States.

Antitrust. These are government policies and programs designed to control the growth of monopolies and enhance competition.

Regressive tax tends to increase income inequality. It is a tax whose rate decreases as the tax ____ changes.

Base. A regressive tax is a tax that tends to take a larger percentage of the incomes of lower income citizens than it takes from the incomes of higher income citizens. Examples: a poll tax, a flat percentage tax on only the first so many dollars of income (like the social security tax) or a sales tax on consumption items of common necessity (like groceries).

The type of decision-making behavior that occurs when firm X's best choice _______ on firm Y's actions, and firm Y's best choice depends on firm X's actions, is called strategic behavior.

Depends. In other words, behavior that occurs when what is best for B depends on what A chooses and what A chooses depends on what B is most likely to do.

If a firm is producing at an output level for which marginal revenue is _____ marginal cost, then the firm could increase profits by decreasing output.

Below. As you increase quantity, marginal revenue decreases, and marginal cost increases. Therefore, decreasing quantity would increase MR, thereby increasing profit. Ideally, a firm should produce at the level where MR equals MC. If they go above or below that level, they are losing profits. http://www.instantcertonline.com/members2/microecon/mrmc.gif

If a shortage develops, then the existing price (current price) is _____ the equilibrium price.

Below. Let's say a product is at the equilibrium point, then a shortage develops. That basically means that the supply curve shifts to the left. Assuming the demand curve has not shifted as well, the equilibrium point (intersection between supply & demand) will be at a higher price: http://www.instantcertonline.com/members2/microecon/supplyshift.gif

A positive externality occurs if an activity creates ________ for uninvolved people.

Benefits. For example - people who get vaccinations against a communicable disease reduce other people's chances of getting the disease. People who improve their property may create benefits for their neighbors by creating a more pleasing neighborhood and increasing property values.

Opportunity costs are foregone opportunities or foregone ________.

Benefits. More specifically, the highest-valued alternative that must be forgone when a choice is made. For example, the opportunity cost of spending $7 on a movie ticket would be the next best use to which you could have put the money, perhaps purchasing a paperback on economics. Another example -- the opportunity cost of spending more money on customer support might be the benefit you could have gotten from spending that on newer office computers.

The term economists use to refer to all types of __________ is firm.

Businesses.

The difference between the accounting definition of costs and the economic definition of costs is -- economists include the opportunity costs of the owner's _______ used in the business and accountants don't.

Capital.

Business firms can acquire _______ through debt and through equity.

Capital. Capital consists of the buildings and machinery that are used to produce output. Be sure not to confuse this definition of capital with the concept of "financial capital," the funds that are used to purchase capital.

The payment one pays for acquiring _______ is called interest.

Capital. Similarly, the payment for land is called rent.

In pure __________, the scarcest resources tend to be employed very conservatively because they tend to have high prices.

Capitalism. And surplus goods are vice - versa.

In the _______ theory of government, government is viewed as acting primarily to provide benefits for special interest groups.

Capture. These are just government actions that benefit some special-interest group that has captured control of regulations, legislation, or governing authority.

Incentives for individual firms to break the agreement account for the instability of _______.

Cartels. For e.g. a cocaine drug cartel. The intended purpose of a cartel is to reap monopoly profits by artificially restricting output and thus driving the price above the level that would prevail if they remained in competition with one another.

Bernard has noticed that every time he washes his car in the morning, it rains that afternoon. He now believes he can cause it to rain by washing his car, so he has decided to sell his services to farmers in drought-stricken areas. This reasoning is mistaken and as such is an example of the interpretation of association as _________.

Causation. The mistaken assumption that because two events seem to occur together, one causes the other.

If an increase in the price of beef causes an increase in the sales of _______ then beef and chicken are substitute goods.

Chicken. Goods that can be used in place of each other (as the price of one rises, the demand for the other rises). As the price of beef rises, more people are substituting chicken for beef, making chicken a substitute good.

The greatest cost of having ________ is most likely the opportunity cost of the time required to care for a child.

Children. The Opportunity Cost is the highest-valued alternative that must be forgone when a choice is made.

Suppose an economy is operating at a point on its production possibilities curve showing clothing and food. If the economy desires to produce additional ________ it must reduce its output of food.

Clothing. The production possibilities curve shows the relationship between one product and another. Here is an example of a production possibilities curve: http://www.instantcertonline.com/members2/microecon/prodcurve.gif In this curve, we can see that as you produce more homes, the amount of food you can produce goes down, and vice versa.

Public goods are non-rival and non-exclusive. They are also called __________ goods.

Collective. Goods whose consumption cannot be limited only to the person who purchased the good, like national defense.

A production possibilities curve shows the ____________ of two products that an economy is capable of producing with its finite resource stock.

Combinations. For example, it may demonstrate the relationship between how much cheese vs how much beef a firm produces. The more beef a company produces, the less cheese it's capable of producing. A production possibilities curve shows this relationship between amount of beef produced and amount of cheese produced.

X-inefficiency is the tendency of firms not faced with ___________ to become inefficient.

Competition. This quantity describes the need to face competition to remain efficient.

The government tries to maintain a ___________ marketplace through antitrust laws.

Competitive. The goal of antitrust laws, such as the Sherman Act, are to prevent firms from engaging in anticompetitive behavior.

If an individual decides to save more, he or she can save more. Therefore, if society as a whole decides to save more, it will be able to save more. This reasoning is faulty and as such is an example of the fallacy of ___________.

Composition. It is the mistaken assumption that what applies in the case of one applies to the case of many.

Holding all else ________, Social Security benefits speed up retirement.

Constant. In this treatment of the equation, we see that due to more benefits after retirement, people retire earlier.

In the context of _______________ theory, utility means satisfaction.

Consumer choice. The benefit or satisfaction a consumer receives upon consuming a good. It is hard to measure, being a subjective concept.

The equilibrium point is where the supply and ______ curves intersect.

Demand. This point indicates the price and quantity a firm will produce in a free market -- assuming there are no artificial price ceilings, cartels, etc.. http://www.instantcertonline.com/members2/microecon/atccurve.gif

Increasing price above the market level results in a pure loss of both consumer and producer surplus known as __________ loss.

Deadweight. When a government artificially raises prices of foreign cars through a quota, or an unregulated monopoly raises prices and lowers quantity, these all result in pure loss known as deadweight loss.

Suppose a manufacturing firm learns that its annual property tax payments will ________. We would depict this in a graph by shifting the average fixed costs curve downward.

Decrease. Both your AFC curve and as a result, your ATC curve, would shift down, because decrease in property tax means lower costs.

A bicycle shop is planning on increasing the price of one of the bicycles it sells. The bicycle shop would hope that the price of complement goods would ________.

Decrease. Complement goods are goods that are used together (as the price of one rises, the demand for the other falls). That means, when the price of the bicycle is raised, the demand for the complement goods will go down. If they want to prevent that, they need to lower the prices of the complement goods, because when prices go down, demand goes up.

If the price floor, which is set above the equilibrium point, is removed, the price will ________.

Decrease. The price floor sets a minimum price. Assuming this price floor is above the equilibrium price, the price will decrease to the equilibrium price as soon as the price floor is removed. In the graph below, the price would drop from Pm to Po. http://www.instantcertonline.com/members2/microecon/pricefloor.gif

The curve that shows average revenue is the ______ curve.

Demand. Conventionally, the demand curve is usually drawn between axes with price plotted along the vertical axis and number of units of the good or service demanded plotted along the horizontal axis.

If the price of barley, an ingredient in beer, increases, the ______ for beer will decrease.

Demand. Generally, the demand curve slopes downwards -- as the price gets lower, demand increases, and vice-versa.

The Law of ___________________ is the situation in which the marginal product of labor is greater than zero and declining as more labor is hired.

Diminishing Returns. For example, adding a sixth worker may get you 300 additional bushels of wheat. A seventh worker may get you 200 additional bushels, and an eight worker may get 100. Or, diminishing returns might not set in until the fiftieth worker -- it all depends on the specific situation.

The AVC curve generally slopes upward because of ___________ returns.

Diminishing. AFC goes down as the number of units produced increases, because the fixed cost does not change. However, AVC starts sloping upward because of diminishing returns and the law of increasing costs.

Price ______________ is charging different customers different prices for the same products.

Discrimination. For instance, if a grocer were to charge you $15 and your neighbor $12 for the same amount of cabbage.

A business knows that it has two sets of customers, one of which has a much more elastic demand than the other. If the business uses price ______________, the set with the more elastic demand should receive a lower price.

Discrimination. The more elastic a customer's demand is, the more fickle he is to a change in price. A customer with a less elastic demand is more tolerant of a change in price or a higher price, so naturally you would charge a lower price to the more elastic customer, and a higher price to the less elastic customer.

____________ of scale result when increases in output lead to increases in unit costs when all resources are variable.

Diseconomies.

The demand curve for children slopes ____, indicating that a decrease in the relative price of children increases the quantity demanded.

Down. This makes sense given the law of demand. The law of demand states that, other things being held constant, the lower the price of a good (or service), the greater the quantity of it that will be demanded by purchasers at any given time.

The demand curve for all firms slopes ________, except for firms in a perfectly competitive market structure. In perfect competition, the demand curve is horizontal.

Downward. In most firms, the demand curve slopes from the upper left of the graph to the lower right. In perfect competition, the firms' demand curve is a straight horizontal line at the market price. This is because the firms do not set the price, they are price takers. http://www.instantcertonline.com/members2/microecon/shortrunsupply.gif As you can see from the graph above, whatever price set by the market, that determines the demand curve, which will just be a horizontal line.

Complements are goods that are related in a way that when the price of one rises, the demand for the other _____.

Drops. Goods that are used together (as the price of one rises, the demand for the other falls). This is the opposite of substitutes, where a rise in price of one, results in a rise in demand for the other. An example of complements are milk and corn flakes. As the price of milk rises, the demand for corn flakes will fall. On the other hand, corn flakes and cheerios would be substitutes -- as the price of corn flakes goes up, the demand for cheerios rises as people switch to cheerios.

Barriers to entry are anything that impedes the ability of firms to enter a market in which existing firms are _______ economic profits.

Earning. These barriers may derive from several causes. Legal or regulatory or other clearly political barriers to entry are historically the most common source of long-lived monopolistic or cartelized conditions in the marketplace.

___________________ refers to the prescription of price and output for a particular industry.

Economic Regulation. Economic regulation of transportation began because large fixed costs limited industry, however, since the 1970s, the transportation industry has been largely deregulated.

The term ___________________ refers to the point where no additional units of output can be produced without decreasing the output of another good.

Economic efficiency. A situation where no one in society can be made better off without making someone else worse off.

_________ of scale are reflected by the downward-sloping portion of an ATC curve.

Economies. An ATC Curve is shaped like a 'U'. Economies of scale refers to the fact that as you mass produce more and more units, your average total cost goes down, however, once you pass a certain point, you start to get diseconomies of scale, where the ATC (average total cost) starts going up.

_________ of Scale occur when mass producing a good results in lower average cost.

Economies. For most goods, the more you produce at once, the lower the average cost of production. For example, it is a lot cheaper per car for Ford to mass produce thousands of cars at once, then it is for a small business to try to produce only a few hundred of the same cars.

A point that lies inside the production possibilities curve indicates that resources are not being fully or ___________ used.

Efficiently. A point on the curve depicts a point where the resources are efficiently used. Anything inside, or under, the PPC curve indicates that there are extra resources which are not being put to use: http://www.instantcertonline.com/members2/microecon/prodcurve.gif

A perfectly _______ demand curve is a horizontal line.

Elastic. http://www.instantcertonline.com/members2/microecon/shortrunsupply.gif A perfectly elastic, or infinitely elastic demand curve is a horizontal line. This means that as long as the firm is selling at the market price, no matter what quantity it supplies, it will sell at that price. If it tries to raise the price even slightly, it will get zero sales. A couple of important things to note: - perfect elasticity occurs in perfect competition. - The demand curve, which is a horizontal line at the market price, is also the MR (Marginal Revenue) curve. This is important, because this means with infinite elasticity, whether its the first unit, or the 50th unit, the MR is the same; it is always equal to the price.

By differentiating their products from those of competitors, firms try to make demand less _______.

Elastic. The more and the closer substitutes there are for a product, the more elastic the demand for that product is. The more elastic the demand is, the greater the effect a change in price will have (i.e. raising the price a little results in big drop in demand). By differentiating its product, a firm is trying to portray it as having no substitute -- thereby making demand less elastic.

When demand is price _______, an increase in price results in a decrease in total revenue.

Elastic. When demand is elastic, it changes quickly relative to price. When you raise the price a little, your quantity drops a lot, meaning less total revenue. When you lower the price a little, your quantity sold increases a lot, meaning more total revenue. When demand is elastic, you're better off decreasing the price, because that increases total revenue.

Mathematically, the price __________ of demand is a straight line.

Elasticity. When the price elasticity of demand is less than 1, demand is said to be inelastic -- meaning that a price change will cause less of a change in quantity demanded. If elasticity is greater than 1, the quantity demanded is relatively elastic, meaning that a price change will cause an even larger change in quantity demanded.

Medicare is a federal program that provides health care for the _______ and those with disabilities.

Elderly. Under Medicare's PPS, hospitals receive a fixed amount for treating patients diagnosed with a given illness, regardless of the length of stay or type of care received.

The Social Security system is financed by a payroll tax on both employees and _________.

Employers. The Social security tax is used to pay for the program. Social Security is the comprehensive federal program of benefits providing workers and their dependents with retirement income, disability income, and other payments.

http://www.instantcertonline.com/members2/microecon/2.gif According to the graph, the ___________ price is 60 dollars.

Equilibrium. The equilibrium point is where the Supply curve and the Demand curve intersect. Based on the equilibrium point, we can see that the equilibrium price is 60 dollars, and the equilibrium quantity is 40.

The long-run ___________ point occurs for a perfectly competitive firm when average total costs are at a minimum.

Equilibrium. The point at which quantity demanded and quantity supplied are equal at a particular price.

Barter occurs when an auto mechanic tunes up an accountant's car in ________ for the accountant's doing the mechanic's income taxes.

Exchange. It is the direct exchange of goods and services without the use of money.

The opportunity cost of a college education is the other goods or opportunities you must sacrifice plus any ________ costs.

Explicit. Opportunity cost consists of implicit costs, which don't involve a money payment or a market transaction, and explicit costs. How much does it cost to go to college for a year? We could add up the direct costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require a money payment.

_____________ are costs or benefits of a transaction that are borne by someone not directly involved in the transaction.

Externalities.

If with the purchase of additional goods, the total utility is _______, then marginal utility is negative.

Falling. A negative marginal utility means that consuming an additional unit lowers your satisfaction or benefit. For example, if you eat enough slices of pie, your marginal utility may hit zero, or it may even go negative as you suffer from each agonizing additional piece of pie you consume.

The Gini ratio provides a measure of the dispersion of ______ income.

Family. A ratio of 0 means all families have the same income; a ratio of one would mean that one family receives all the income.

If the price elasticity of supply is 0.5, it implies that a ten percent increase in the price increases the quantity supplied by ____ percent.

Five. There are several economic principles to keep in mind here -- first of all, we know that when price increases, quantity supplied increases. Secondly, we know that when price elasticity of supply is less than 1, it is inelastic. If supply is inelastic, that means that it changes at a slower rate than price, so if price changes by 10%, then supply changes by less than 10%. The formula for price elasticity of supply is: http://www.instantcertonline.com/members2/microecon/supplyelasticity1.gif The answer we are trying to find is the percentage change in supply, and looking at the equation we can see that multiplying 10 by 0.5 gives us that answer, which is 5.

The short run is a period of time in which a firm uses at least one _____ input.

Fixed. In the long run, all costs are considered variable -- there are no fixed costs. So, the short run would include at least one fixed input, or cost.

As a firm increases volume of production, its average _____ cost gets lower and lower.

Fixed. The AFC (average fixed cost) gets lower as you increase output, because you are dividing the fixed cost, which does not change, over a larger quantity of production. For example, a huge law firm with hundreds of lawyers might save clients money over a smaller law firm because they have low overhead due to a low AFC.

Quantity of Output: Total Cost: (units) ($) 0 20 1 30 2 40 3 55 4 75 5 100 6 130 Given the chart above, the _____ cost is 20 dollars.

Fixed. The fixed cost is 20 dollars, because that's the cost regardless of how many units you produce -- even when you produce zero units, you still pay $20. Examples of fixed costs are office rent, equipment leasing costs, fire insurance, etc..

Von Neumann and Morgenstern observed that economics is much like a game in which the players anticipate one another's moves and that it therefore requires a new kind of mathematics, which they appropriately named ___________.

Game theory. It is a description of oligopolistic behavior as a series of strategic moves and countermoves.

Last year, Emmet purchased 20 pounds of bacon when her income was $20,000. This year, her income was $30,000, and she purchased 25 pounds. Based on this information, bacon is a normal ____.

Good. A normal good is a commodity for which consumption increases when income increases; in other words, if your income goes up, consumption of that good goes up. On the other hand, an inferior good is a commodity for which consumption decreases when income goes up -- i.e. when income goes up, intercity railway transportation goes down as people use automobiles and airplanes instead.

The three ways a business can become a monopoly are 1) a patent, 2) the sole-ownership of a resource, or 3) the ___________giving the business the power to become a monopoly thereby making it illegal for other people to compete in the market with that business.

Government . These are the three ways for a business to gain the power of a monopoly.

In any firm, when marginal revenue is _______ than marginal cost, a firm should expand production.

Greater. In any firm, the profit-maximizing point of production is where marginal revenue equals marginal cost. As you increase quantity, MR goes down, and MC goes up. If your current MR is greater than MC, you should increase quantity until MR = MC. http://www.instantcertonline.com/members2/microecon/mrmc.gif In the graph above, you can see that if we produce at Q1, the line intersects with MR at a higher point than with MC. As you increase quantity, and move to the right, MR goes down, and MC goes up, until you hit Q*, which is the profit-maximizing quantity, where MR=MC.

In monopoly, price is _______ than marginal revenue; in perfect competition, price is equal to marginal revenue.

Greater. In perfect competition, all firms must accept the market price for their product. They are price takers. In monopoly, the firm charges the highest price the consumer will pay. To determine the price to sell at, a firm looks at the price on the demand curve which corresponds to a given quantity. In perfect competition, the demand curve at a certain price is the same as the MR curve at that price: http://www.instantcertonline.com/members2/microecon/shortrunsupply.gif In monopoly, the demand curve is separate from and higher than the MR curve: http://www.instantcertonline.com/members2/microecon/monopolymrmc.gif

Following U.S. Justice Department guidelines, a __________ index of 10,000 would indicate an industry that is considered a monopoly, whereas an index approaching zero would indicate an industry that is considered purely competitive.

Herfindahl. Herfindahl index is a measure of concentration calculated as the sum of the squares of the market share of each firm in an industry.

When judging the anticompetitive effects of a merger between businesses, the government relies primarily on the __________ index.

Herfindahl. The Herfindahl index measures concentration in a market.

Sheila is trying to decide whether to buy a doughnut or a bran muffin for tomorrow's breakfast. The doughnut costs $2 and has a marginal utility of 30. The muffin costs $1 and has a marginal utility of 20. She should buy the muffin because it has a ______ marginal utility per dollar.

Higher. Remember, to calculate marginal utility per dollar, divide the marginal utility by the price (MU / P). For the doughnut, MU / P = 30 / $2. For the muffin, MU / P = 20 / $1. The muffin has a marginal utility per dollar of 20, which is higher than the doughnut's MU per dollar of 15, making the muffin the better buy.

If a firm has no ability to select the price of its product, it has a _____________________ demand curve.

Horizontal individual. In a competitive market, an individual firm has no capacity to influence market conditions. Therefore it has to take market price as given, constant and uniform in nature. In that case, price stays the same, so the demand curve would be a horizontal line.

The President of an Ivy League College just requested an increase in tuition rates in order to earn additional revenue to help defray rising expenses. Apparently the President believes that the demand for an Ivy League education is _________.

Inelastic. If demand is inelastic, that means that demand changes at a slower rate than price. Demand would have to be inelastic for an increase in tuition to mean an increase in total revenue. If it was elastic, then demand would drop so fast when they increase the price that they would lose money, not gain money.

It is possible to produce more of one good without giving up units of another good if society is producing ______ its production possibilities curve.

Inside. This means that more resources are available than are being used. It is not possible to produce outside of the PPC curve, because the PPC curve indicates maximum use of resources.

Surpluses eventually lead to decreases in price and quantity supplied and _________ in quantity demanded.

Increases. When there is a surplus, that means there is more of a product than is in demand. Therefore, the price of the product will drop, and the demand for the product will increase because the price is lower. At the same time, the quantity supplied by the manufacturer will drop to match demand, because it doesn't make sense to produce more than people will buy. Eventually, it will reach an equilibrium point, where the quantity supplied equals the quantity demanded, and the price will stop dropping and be at equilibrium.

A bowed-out production possibilities curve illustrates __________ marginal opportunity costs.

Increasing. For most PPC curves, the marginal opportunity costs do not stay constant. For example, the marginal opportunity cost of going from 5 units of food to 6 units might be 5 units of clothing. On the other hand, the marginal OC of going from 9 units of food to 10 units might be 8 units of clothing. If the marginal opportunity cost stayed constant, the PPC curve would be a straight line, not a curve. http://www.instantcertonline.com/members2/microecon/prodcurve.gif In the PPC curve above, marginal opportunity costs are increasing -- you have to sacrifice more and more houses as you increase food production.

In the United States today, the demand for health care is usually inelastic because the __________ consumer does not pay much of the cost of health care.

Individual. In other words, demand for health care is not greatly affected by changes in price.

When an increase in ______ results in a decrease in demand for a product, that product is said to be a(n) inferior good.

Income. Normally, a change in demand for a product is associated with price. However, when a change in consumers' income affects demand, we need to decide whether the good is normal, or inferior. Consumption of an inferior good goes down when income increases. Consumption of a normal good goes up when income increases.

When a good becomes less expensive, consumers' real incomes increase and consumers purchase more of all goods. This is called the ______ effect of a price change.

Income. The change in quantity demanded that occurs when the purchasing power of income is altered as a result of a price change. In other words, when a good becomes less expensive, a consumer's purchasing power goes up -- he can buy more goods with the same amount of money. The opposite happens when the price goes up. This is the income effect of a price change -- it has a direct effect on demand, since when price goes down, demand goes up.

Total revenue will ________ if price is reduced and demand is elastic.

Increase. If demand is elastic, demand changes at a faster rate than price, so if you drop the price, demand rises so much that you come out ahead in terms of total revenue. On the other hand, if demand is inelastic, that means that even if you drop the price, demand does not change that much, so you end up losing money. Elasticity basically tells you how much does demand change in response to a price change.

The manager of the City Playhouse is contemplating an ________ in ticket prices to help boost revenue. His accountant believes that a rise in ticket prices would reduce the firm's revenue, not increase it. Apparently, the manager believes that demand is inelastic.

Increase. If demand is inelastic, demand is affected relatively little when the price is increased. An example is a U2 concert, where demand is so inelastic that they could increase the cost of a ticket by ten or twenty dollars, and still sell out.

An increase in demand (upward shift of demand curve) results in both the commodity's equilibrium price and quantity ________.

Increase. This can be confusing, because normally when you raise the price for a product, demand drops. However, that is referring to an artificially raised price. When demand goes up on its own, then price goes up, because the supplier can sell each unit for more. At the same time, the manufacturer increases the quantity supplied in response to the increased price. Eventually, a new equilibrium is reached, where the final price and quantity supplied is higher than it originally was before demand went up. The point is, what is being shifted? If demand goes up, the demand curve is shifted to the right, as shown in the graph below. If supply goes up, then the supply curve would be shifted to the right, resulting in a lower price, and hence a higher demand. http://www.instantcertonline.com/members2/microecon/demandshift.gif

Average fixed costs go down as the number of units produced _________.

Increases. Average Fixed costs go down as you produce more and more units. That's because fixed costs stay the same no matter how many units you produce, and average fixed cost is calculated by dividing the fixed cost by the number of units. For example, if your fixed costs are $500, and you produce 5 units, your AFC is $100. If you produce 10 units, your AFC is $50. http://www.instantcertonline.com/members2/microecon/atccurve2.gif

If an increase in the use of a variable resource _________ the total product, the marginal physical product is positive.

Increases. Obviously, if the total product increases, the marginal physical product must be positive. If it was negative, then the total product would go down, not up. A variable resource is like a variable cost, something that changes depending on the number of units you produce. An example of a variable resource is labor -- you need more workers to produce more product.

If the price of a good decreases then the demand for that good _________.

Increases. Price and demand are inversely related. When one goes up, the other goes down. As the price for a product goes up, the number of units demanded goes down.

Many factors can affect the demand for labor. When the wage _________, the demand for labor decreases.

Increases. Remember, a firm decides how much labor it needs by comparing the MRP (marginal revenue product) to the wage. As the wage increases, the point where MRP = W is going to be at a lower quantity of labor. Also, how much labor a firm needs depends on how much output it needs to produce. If demand for a product falls, then it needs less labor. If price for a product falls, it will output less, and the demand for labor will fall.

The market demand curve is obtained by summing __________ demand curves.

Individual. The market demand curve would be the demand curve for an entire market -- i.e. the entire market for computers. For example, to find the market demand curve for the United States market for computers, you might add up the demand curves for the different regions of the United States.

When demand is price _________, an increase in price increases total revenue.

Inelastic. If demand is price inelastic, that means quantity demanded changes slowly compared to the price. This is good if you're raising the price, because a fairly large increase in price results in a relatively small decrease in quantity -- which means the revenue grows. On the other hand, a fairly large decrease in price results in a relatively small increase in quantity -- which means that revenue shrinks. Basically, with inelastic demand, quantity changes slowly relative to the price, so increased price means increased total revenue.

If total revenue rises when price rises, the demand curve is _________.

Inelastic. If the demand curve is price inelastic, that means that the demand changes at a slower rate than the price. As long as demand isn't dropping as fast as the price is rising, your total revenue is going up. In terms of a graph, a very steeply sloping demand curve (that is, almost straight up and down) indicates that a given percentage increase in price will induce only a comparatively smaller percentage decrease in the quantity of the commodity that potential consumers wish to buy ("relatively inelastic demand"); while a very gently sloping demand curve shows that a given percentage increase in price will produce a still larger percentage decrease in quantity demanded ("relatively elastic demand"). Study the two graphs below to understand this concept: http://www.instantcertonline.com/members2/microecon/inelas.gif http://www.instantcertonline.com/members2/microecon/elas.gif As you can see, in the inelastic example, raising the price from $0.50 to $1.50 only reduced the quantity demanded from 5 to 3. In the case of elastic demand, just raising the price $0.25 resulted in a quantity drop from 9 to three.

If a society is operating ______ its production possibilities curve for guns and butter, then some economic resources are unemployed.

Inside. If you are producing under, instead of on, the production possibilities curve (PPC), then some resources are unemployed or unused, and this is considered inefficient. Look at the following PPC curve, for example: http://www.instantcertonline.com/members2/microecon/prodcurve.gif If you produce anywhere *on* the curve, i.e. 37 houses and 2 food, or 20 houses and 5 food, that is maximum use of resources. If you produce somewhere under the curve, i.e. 20 houses and 4 food, then you have extra resources you are not using.

Demand curves slope down because of the _______ relationship between price and quantity.

Inverse. Where the law of demand applies to the particular market under consideration, the demand curve will slope (either gently or steeply) downwards from left to right. This is because usually the demand for a product decreases as the price increases. http://www.instantcertonline.com/members2/microecon/2.gif

Adam Smith, the "Father of Modern Economics," introduced the idea that a free marketplace is "led by an ______________;" by pursuing our own desires we inadvertently satisfy those of others.

Invisible hand. In a free marketplace, by trying to do what's best for ourselves, we ultimately end up doing what is best for society. That is because the only way we can earn income is by providing what other people want. For example, a hardhearted and selfish entrepreneur who builds a great business selling clothes or canning soup may improve the lives of millions of people while a Peace Corps volunteer may help only a few.

A ______ demand curve occurs when other firms follow price cuts but not price increases.

Kinked. Paul M Sweezy suggested "It is pretty well agreed among economists that the ordinary concept of a demand curve is inapplicable to oligopoly". In particular , Sweezy said the assumption that everything else would remain unchanged if the oligopolist changed his price was unrealistic. Below is an example of a kinked demand curve. What is unusual is the gap in the MR curve, shown by the dashed line. Simply put, if the firm lowers price below P* a strong reaction from competitors occurs in the form of industry wide price drops. This causes MR to drop dramatically, causing a gap in the curve. http://www.instantcertonline.com/members2/microecon/kinked.gif

http://www.instantcertonline.com/members2/microecon/3.gif Marginal physical product is zero at labor unit level __ (i.e. L1, L2, L3, or L4).

L3. Physical product measures how much product is produced. Marginal physical product, then, obviously measures how much additional product is made given additional labor. At L3, we are at the highest level of output, or physical product possible, so the marginal physical product is 0 -- adding an extra unit of labor gets you zero additional product.

Compared with a perfectly competitive market structure, a monopoly market structure produces ____ output at a higher price.

Less. A monopolist has market power, the ability to set prices.

http://www.instantcertonline.com/members2/microecon/5.gif http://www.instantcertonline.com/members2/microecon/5.gif If the price facing the firm is P3, the firm's total cost is ____ than its total revenue. (P1, P2, or P3)

Less. We determined that where the MR and the MC intersect for a certain price is the quantity produced, so at P3 that means a quantity of Q5. The MR (marginal revenue)curve tells you your revenue, and the ATC curve tells you your total cost. Looking at the dotted line for Q5, we see that the total cost is way below the total revenue. At Q4, total cost is equal to total revenue, and at Q3, total cost is much higher than the revenue.

A _____ monopoly is a firm that has a monopoly within a limited geographic area.

Local.

In both perfect competition and monopolistic competition, firms receive only a normal profit in the ____ run.

Long. Normal profit is the level of profit just sufficient to persuade firms to stay in the industry, but not high enough to attract new firms. This level of normal profit will vary from one industry to another. Normal profit is equal to zero economic profit. Please note that this is referring to the long run.

________ have a larger price elasticity of demand than do necessities.

Luxuries. A larger price elasticity of demand means that when the price of luxuries change, it has a large effect on demand. On the other hand, necessities have a low price elasticity -- whether the price changes or not, demand will not be affected as much because people still need to buy it.

http://www.instantcertonline.com/members2/microecon/atccurve3.gif In the graph above, the 'A' curve is the __ curve.

MC. The MC (Marginal Cost) curve usually slopes upward, and *always intersects with the ATC curve at its lowest point*. We know which curve is the ATC (Average Total Cost) curve because it is shaped like a 'U'.

The __ curve always crosses the ATC curve at the minimum average total cost.

MC. The point where you are paying the cheapest cost per unit of production. In the following graph, the MC curve (Curve A) intersects with the ATC curve (curve B): http://www.instantcertonline.com/members2/microecon/atccurve3.gif

The study of the economy as a whole is called ______________. As opposed to microeconomics, it deals with the larger picture.

Macroeconomics. For instance, microeconomics may look at an individual firm, whereas macro-economics looks at analysis of aggregate issues like Economic growth, Inflation, and Unemployment.

A monopolist maximizes profit by choosing the output level where marginal revenue equals _____________, and then charging the corresponding price on the demand curve at the quantity produced.

Marginal cost. The goal of a monopoly, just like any other business, is to maximize profit, so it follows the rule of producing at MR = MC. This gives it the quantity to produce. To determine the price to sell at, it looks at the demand curve and figures out what consumers are willing to pay at this level of output: http://www.instantcertonline.com/members2/microecon/monopolymrmc.gif

The point at which the __________________ per dollar spent on each good purchased are equal is called consumer equilibrium.

Marginal utilities. To reach consumer equilibrium, the marginal utility divided by the price (MU / P) for each good should be the same. For example, one consumer gets three times the MU from hamburgers as he does from fries. If hamburger's MU is 3, and the fries MU is 1, then when the fries cost $0.50, each burger must cost $1.50 (3 x 0.50). 3 / $1.50 is equal to 1 / $0.50, so consumer equilibrium is established.

To decide which of two goods is the better buy, a consumer should compare the products' ________________ per dollar.

Marginal utility. If the marginal utility per dollar is higher for one good than the other, that means for every dollar you spend on that one good, you are getting more utility (benefit or satisfaction). For example, let's say you get three MU from one burger, and 1 MU from an order of fries, and the burger costs $6 and the fries costs $1. MU / P is the equation that tells you marginal utility per dollar, so 3 / $6 = 0.5, and 1 / $1 = 1. The fries are the better buy because their marginal utility per dollar is twice as high as the hamburger's.

The amount of one good or service that must be given up to obtain one additional unit of another good or service is called the ________ opportunity cost.

Marginal. For instance, if for every extra car you produce, you must produce three less motorcycles, then the marginal opportunity cost of producing one extra car is three motorcycles. The key thing to remember is, resources (number of workers, raw materials, etc) are scarce -- there is a limited number of products you can make. Making more of one product often means making less of another.

When the ________ value is below the average, the average falls. When it is above the average, the average rises.

Marginal. Marginal value is very similar to marginal utility -- it is the additional value you get from an additional unit of consumption. Obviously if the amount of value you get out of an additional orange is lower than the average value, the average will go down.

________ utility measures the extra utility derived from consuming one more unit of a good or service.

Marginal. When the price of pies increases, the marginal utility per dollar of pies decreases, because MU per dollar is MU / P. As P gets bigger, MU per dollar gets smaller. Also, as you keep eating more and more slices of pie, eventually marginal utility drops to zero. In other words, there comes a point where eating another piece of pie will not give you any additional satisfaction.

The demand curve of the individual firm in perfect competition is a horizontal line at the ____________.

Market price. In perfect competition, the market sets the price. That means the firms in perfect competition must accept the market price, they do not set their own.

When marginal utility is zero, total utility is at its _______.

Maximum. Marginal utility is the extra utility (benefit or satisfaction) derived from consuming one more unit of a good or service. If marginal utility is zero, that means you are at your maximum utility -- consuming more of a product will not increase the utility.

______________ includes the study of how an individual firm decides the price of its product.

Microeconomics. The study of the economic behavior of individual decision-making units such as consumers and business firms.

The _________________ scale is the output level at which the cost per unit is lowest, or the minimum point on the long-run average-cost curve.

Minimum efficient. In other words, it's not possible to produce a good any cheaper than at the minimum efficient scale, because it achieves production of a good at the lowest possible opportunity cost.

Recognize the problem. Develop a _____ of the problem. Test the hypothesis. These are three of the five steps in the scientific method.

Model. A manner of analyzing issues that involves five steps: recognition of the problem, assumptions, model building, predictions, tests of model. The first and most important step in the scientific method is to identify what the problem or question is.

A theory, or _____, is a simplification that is used to explain an event.

Model. Generally speaking, economics is a set of practical models applied to the study of individual and group choice.

Firms in ____________ competition compete primarily through product differentiation.

Monopolistic. By selling products that consumers perceive to be different from one another, firms can make demand less elastic. Not only do firms need to differentiate their product, they must try to convince consumers that their product is better in some way.

In ____________ competition, many firms produce differentiated products.

Monopolistic. In monopolistic competition, a group of firms sell closely related, but not homogenous products. In other words, products are differentiated and none are seen as perfect substitutes by consumers. Almost all retail operations are in this form of market. Starting a business is relatively easily, but staying in business is not: that requires an ability to convince customers that the product is different and better than that of competitors. An example is the services of different hair dressers.

In the long run, a ____________ competitor breaks even.

Monopolistic. In the long run, the typical monopolistically competitive firm makes zero economic profits. This is because just like in a perfectly competitive market, as long as economic profits remain, new firms will enter the market until there is zero economic profit.

____________ competition is a market structure in which many firms are producing a differentiated product and entry is easy.

Monopolistic. These are products that consumers perceive to be different from one another, so they do not see them as perfect substitutes. This allows demand to remain less elastic than in perfect competition.

A good is ____________ if people cannot be excluded from consuming it.

Nonexclusive. Some goods are nonexclusive but rival. An example is a lake from which people cannot be excluded, but people are rivals for the fish in the lake.

If consumers' income goes up, and that ultimately results in price going up for a product, then it must be a(n) ______ good.

Normal. It must be a normal good. Here's how you determine that -- first of all, a change in income directly affects demand for the product. With a normal good, when income goes up, demand goes up. In other words, the demand curve shifts to the right. Assuming supply does not change, the equilibrium price should be higher: http://www.instantcertonline.com/members2/microecon/dshift.gif

In a perfectly competitive industry, in the long run, entry and exit stop only when individual firms earn a ______ profit.

Normal. Normal profit means zero economic profit. At zero economic profit, which means that firms are at the bottom of their ATC curve, there is no entry or exit. When companies are above the minimum point on the ATC curve, new firms enter the market -- they are attracted by the economic profit being made by the current firms. When companies drop below the minimum point on the ATC curve, firms start exiting the market, because they are not making an economic profit.

The number of firms in an _________ must be small enough that firms are interdependent in decision-making.

Oligopoly. An oligopoly is a market dominated by a few producers all of who have some control over the market. Firms here have to consider each other's reaction in deciding their pricing strategy (interdependence).

The defining characteristic of the _________ type of market structure is interdependence among the firms.

Oligopoly. An oligopoly is the only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions. If one firm lowers its price, than it can result in a price war, as other firms change their prices in response.

There are two types of market structures in which freedom of entry for new firms is restricted. These two types are the Monopoly, and the _________.

Oligopoly. Entry into a Monopoly is restricted or completely blocked, whether it's through a patent, or some kind of government protection. Entry into an oligopoly is restricted, and difficult. Entry into perfect competition or monopolistic competition is unlimited.

When a cartel is successful at raising price above marginal cost, individual members have incentives to cheat on the agreement by expanding ______.

Output. In a cartel, the firms agree to limit output. By artificially limiting the quantity supplied, they can raise the price. This price would be above the MC (Marginal Cost). Firms would have the incentive to increase quantity up to the point where MR=MC (the profit-maximizing point) and make more money. Look at the graph below: http://www.instantcertonline.com/members2/microecon/cartel.gif The cartel restricts output to quantity M. To make the maximum possible profit, a company should produce where MC=MR, which is at quantity. An individual firm in a cartel has incentive to cheat on its agreement and increase from q - M to q - cheat

http://www.instantcertonline.com/members2/microecon/6.gif This natural monopoly is unregulated. It will choose to maximize profits at a price and ______ combination indicated by point G.

Output. LRAC and LRMC simply stand for long run average cost and long run marginal cost. Remember, a firm will try to maximize profits by producing at a quantity indicated by MR = MC. LRMC intersects with MR at point J. This means that the firm will produce a quantity of K. Since the monopoly is unregulated, there is no limit to the price it can charge. Moving up to the demand curve for quantity K, we see that it will charge a price of F. In the graph, the intersection of quantity K and price F is point G.

A nation has a comparative advantage in those activities in which it has the lowest ___________ costs.

Opportunity. For instance, Taiwan has a comparative advantage in electronic items.

Marginal cost is defined as the increase in total cost resulting from an increase in one unit of ______.

Output. Output can be services, goods -- whatever product a firm is producing or providing.

Economic growth would be depicted by an _______ shift of the production possibilities curve.

Outward. Economic growth is an increase in real national income, usually measured as the percentage change in gross national product or gross domestic product per year. As the economy grows, naturally the PPC Curve should shift outward to represent the increased capacity for production.

The production-possibility curve shifts _______ when there is a technological advance.

Outward. The advance creates more possibilities in the production of the product. It also leads to an increase in supply for the good. In other words, technological advances increase the capacity for production.

John is purchasing peanuts and soft drinks at the baseball game, and he is in equilibrium. The prices of the last units of peanuts and soft drinks are $2 and $1 respectively. It can be concluded that John liked the last unit of _______ twice as much.

Peanuts. Because he is in equilibrium, we know that the marginal utility per dollar he got for both the peanuts and the soft drinks must be the same. In that case, if he is paying twice as much for the peanuts as the soft drinks, he must be getting twice as much marginal utility (satisfaction) from the peanuts.

Under the ______ rule, actions that could be anticompetitive are intrinsically illegal.

Per se.

A firm that is in _______ competition is called a price taker.

Perfect. A price taker is a company that possesses so little market power that it has no control the price of the good, it must "take" or accept the going market price. Perfect competition results in price takers because there are so many substitutes and little product differentiation. The four types of market structure are perfect competition, monopoly, monopolistic competition, and oligopoly.

The distinctive characteristic of the _______ competition type of market structure is that the product is homogeneous.

Perfect. In perfect competition, the product is homogeneous, or undifferentiated. Products such as cabbages and carrots are homogeneous -- one company's carrots are not going to differ much from the next company's carrots.

Allocative efficiency occurs when price equals marginal cost (P = MC). This only occurs in _________ competitive firms.

Perfectly. Only in Perfectly Competitive firms does Price equal Marginal Cost. In monopolistically competitive firms, oligopolies, and monopolies, price is greater than Marginal Cost. Note that Perfect Competition is also referred to as Pure Competition.

The total ________________ (TPP) is the maximum output that can be produced when successive units of a variable resource are added to fixed amounts of other resources.

Physical product. Total physical product is the total quantity of output produced by a firm for a given quantity of inputs. It's a fancy term for total product.

If a rich man and a poor man are to be given $10,000 provided they can agree on how to share the money (if they fail to agree, they receive nothing), the fair solution would seem to be for each man to take half the total, or $5,000. In such a case the Nash Solution suggests that the threat of reaching no agreement should induce the ____ man to accept a third of the $10,000 and give the rich man two-thirds.

Poor. The Nash solution seeks an outcome in which each player gains the same amount of utility (relative to the nonagreement outcome) and ignores such considerations as past history or the needs of the players.

The ________________ of demand is a measure of the degree to which consumers alter the quantities of a product they purchase in response to changes in the price of that product.

Price elasticity. One factor price elasticity of demand depends on is how readily consumers can switch their purchases from one product to another. For example, for concert tickets for U2, the price elasticity is low -- consumers will not switch to another product. The band could jack up the price, and it would have a relatively small effect on demand. On the other hand, if Burger King doubled the price of its burgers, a lot of customers would go to MacDonalds instead -- price elasticity is high, because there is a lot of competition.

http://www.instantcertonline.com/members2/microecon/7.gif For this monopolistic competitor, the profit-maximizing _____ and output level are indicated by point E.

Price. First, determine the profit maximizing quantity by checking where MR = MC. That is at point F, which indicates quantity G. Next, determine the price by looking at the demand curve at quantity G -- that gives you a price of D. Point E indicates the price and quantity that maximizes the firm's profit.

The total expenditures made on a product by a group of buyers is found by multiplying _____ times quantity bought. Charging different customers different prices for the same product is called price discrimination.

Price. In this case some buyers pay a different price for the same product.

A demand schedule shows the relationship between the quantity demanded of a commodity over a given period of time and the _____ of the commodity.

Price. The demand schedule shows a list or table of the prices and the corresponding quantities demanded of a particular good or service. Below is an example of a supply-demand schedule: http://www.instantcertonline.com/members2/microecon/supdemsched.gif Take away the supply column, and you would have a demand schedule. This schedule illustrates the fact that as the price increases, the supply increases and the demand decreases.

Using _______ firms to perform certain government functions is called contracting out.

Private. Hiring a private firm to provide a product or service for a government entity.

When the Supreme Court rules that it is the intent to abuse monopoly control, not monopoly control alone, that is illegal, it is following the rule of ______.

Reason. This rule states that a business having a monopoly over its field is not in itself a violation of antitrust laws. Under this rule, a company is only in violation of the law if it is actively engaging in anticompetitive behavior. In other words, all monopolies are not illegal. The Rule of Reason replaced the per se rule.

Resources are called factors of __________ or inputs.

Production. Goods used to produce other goods, i.e., land, labor, capital, entrepreneurial ability.

An organization of independent firms whose purpose is to control and limit __________ and increase prices and profits is a cartel.

Production. This they normally accomplish by agreeing on a relatively high common asking price for their product that none of the member firms will be permitted underbid, but sometimes the member firms may simply agree to divide the market geographically and grant each other local monopolies without necessarily enforcing a uniform price structure.

To achieve __________ efficiency, firms must produce goods at the lowest possible cost.

Productive. Economic efficiency requires both productive and allocative efficiency.

Economists' models of the behavior of business firms assume that firms try to maximize ______.

Profit. Adam Smith, the Father of Economics, divided income into three types: profits, wages, and rents. The essential feature of profit is risk: capital is ventured in the hope of a return, and there may be a very great return, or little, or none. There is no guarantee of a profit in any enterprise.

If the tax rate increases along with income, then that tax is a ___________ tax.

Progressive. A progressive tax, like the income tax in the United States, increases as income increases. A proportional tax stays the same as income increases -- an example is a sales tax; in a certain state, every person, regardless of income, pays a 7% sales tax.

The ___________ Payment System (PPS) is the use of a preassigned reimbursement rate by Medicare to reimburse hospitals and physicians.

Prospective. Faced with sharply escalating Medicare costs in the early 1980s, the federal government completely revised the way Medicare pays hospitals for treating elderly patients. The governing agency, the Health Care Financing Administration, switched from a retrospective fee-for-service system to a prospective payment system (PPS). Under PPS, hospitals receive a fixed amount for treating patients diagnosed with a given illness, regardless of the length of stay or type of care received.

If the price of ladies handbags is _______ by 10 percent and the quantity demanded increases by 20 percent demand is elastic.

Reduced. Ignoring the plus or minus sign, an elasticity greater than 1 is referred to as relatively elastic and an elasticity less than 1 is referred to as relatively inelastic. (An elasticity precisely equal to 1 is termed unit elasticity.) Remember, to determine price elasticity of demand, just divide percentage change in quantity by percentage change in price, so 20 / 10 = 2. 2 is greater than 1, so demand is elastic -- demand changes at a greater rate than price.

As price is _______, consumer surplus is increased.

Reduced. This is why quantity demanded goes up as price goes down. Consumer surplus is the difference between what a consumer is willing to pay, and what he ends up paying. On a hot day, a man may be willing to pay $2.00 for a cold beer. If he can get a beer for $0.50, he may see it as a good deal and buy two or three beers.

The firm's long-run ________ price is the minimum point of the average-total-cost curve.

Shutdown. That's the point at which total costs equal the total revenue -- the breakeven point. This is different from the short-run shutdown price, which is the minimum point of the AVC curve. http://www.instantcertonline.com/members2/microecon/shutdown.gif

____________ are an extreme case of goods with positive externalities. For instance, national defense.

Public goods. When a unit of a public good is produced, everyone in the market gets to consume it, whether or not they paid for it. Some examples of public goods are national defense, mosquito abatement, and weather prediction, among others.

The notion that government actions are undertaken to protect the best interests of society is called the _______________ theory of government.

Public interest. According to this theory the government intervenes in business actions to improve the well-being of the general public.

http://www.instantcertonline.com/members2/microecon/5.gif http://www.instantcertonline.com/members2/microecon/5.gif Given the above graph of a firm in perfect competition, if the price facing the firm is P2, then the firm should produce __. (Q1, Q2, Q3, Q4, or Q5)

Q4. There are a couple of things to keep in mind since this is perfect competition-- - the price is set at P2, so the demand curve is a horizontal line at P2, basically the MR2 curve in this case. - the supply curve is the portion of the MC curve which lies above the minimum point on the AVC curve. The rule is, a company should produce at the point where supply and demand intersect; in this case, that would be where MR2 and MC intersect, at quantity 4 (Q4).

If demand increases and supply remains constant, the equilibrium price and ________ will rise.

Quantity. If demand increases (i.e. the demand curve shifts to the right), and supply remains constant (i.e. the supply curve does not change), then the equilibrium price and quantity will both be higher. Remember, if supply increases, that means the entire supply curve shifts to the right. On the other hand, an increase in quantity simply refers to movement along the supply curve -- not a shift of the curve itself. Here is a graph that illustrates increase in demand with constant supply: http://www.instantcertonline.com/members2/microecon/demandshift.gif

The percentage change in the quantity demanded of one product divided by the percentage change in the price of a _______ product is called the cross-price elasticity of demand.

Related. Normally, when you calculate price elasticity of demand, you are just dealing with one good, and you divide percentage change in quantity by percentage change in price for that one good. However, with related goods, you may want to know the Cross-Price elasticity of demand, in which you divide the percentage change in quantity for Item1 by the percentage change in price for Item2.

If the price of a T-shirt is $11 and the price of a pair of designer jeans is $66, the ________ price of designer jeans is six t-shirts.

Relative. The relative price of designer jeans would be 6 t-shirts, because you could buy 6 t-shirts for the price of one pair of designer jeans.

___________ behavior occurs when firms expend resources to acquire monopoly power by hiring lawyers, lobbyists, etc. in an attempt to receive governmentally granted monopoly power.

Rent-seeking. Rent-seeking activities do not benefit society as a whole and divert resources away from productive activity. Examples of rent-seeking -- when U.S. auto makers lobby to obtain quotas on Japanese auto imports; physicians in Florida obtain rules that make it difficult for physicians from other states to practice medicine there.

When a firm creates output that is more valuable than the _________ used to create the output, economists say that the firm is adding value.

Resources.

Out of the following - Land, Automobiles, Capital and Labor-- automobiles is not a category of _________.

Resources. Resources are goods used to produce other goods, i.e., land, labor, capital, entrepreneurial ability. Automobiles are a product.

When the supply curve shifts to the _____, the equilibrium point will be at a higher quantity.

Right. No matter what, we know that if the supply curve shifts to the right, quantity goes up. Price is not as sure of a thing. If the demand curve does not change, then the equilibrium price will be lower, because for the same demand, if there's a bigger supply, then price falls. However, if the demand curve changes as well, the price depends on the specific situation. http://www.instantcertonline.com/members2/microecon/sshift1.gif As you can see in the graph above, when supply increased, the equilibrium quantity increased. The equilibrium price was lowered, since demand did not change. If the demand curve had shifted significantly to the right, though, it is possible that the equilibrium price would have been higher.

Consider a manufacturing firm which uses natural gas to generate its own electricity. The electricity is used to run its manufacturing equipment. If the price of natural gas _____ this would lead to a(n) upward shift in the marginal cost, average variable cost, and average total cost curves.

Rises. AVC, ATC, and MC would all be affected by a change in natural gas prices. This is because if natural gas is running the machines, that makes it a variable cost, because the more units you produce, the more natural gas you use.

Relative to a competitive market with the ____ cost and market demand, a monopolist will produce less output.

Same. A monopolist can control the price to increase its profits, and relative to a competitive market, will go for less output at a higher price.

Social security taxes in the United States are imposed on both workers and employers and both groups are charged the ____ amounts.

Same. This tax is charged on payroll.

________ is part of the central problem of economics in that with limited resources and unlimited wants a choice has to be made.

Scarcity. Virtually all resources are scarce. However, public goods do not exhibit scarcity -- when one household partakes of the commodity's benefits, it does not diminish the benefits received by all other consumers of the commodity.

Rational _____________ explains why people give money to charitable organizations.

Self-interest. Rational self-interest is the term economists use to describe how people make choices.

In the _________, a perfectly competitive firm's supply curve is that portion of the marginal-cost curve above the minimum point on the average-variable-cost curve.

Short-run. The short run under perfect competition is the period during which there is too little time for new firms to enter the industry. As shown in the graph below, the Supply curve is the bold portion of the MC curve above the minimum point on the AVC curve. Keep in mind that the minimum point on the AVC Curve is the shutdown point -- that's why the supply curve starts above it. http://www.instantcertonline.com/members2/microecon/shortrunsupply.gif

The firm's _____-run shutdown price is the minimum point of the AVC curve.

Short. Or, where the MC (Marginal Cost) curve intersects with the AVC curve, since the MC curve always intersects with the AVC curve at its minimum point. The shutdown point indicates the minimum selling price for the firm to stay in business -- otherwise, staying in operation increases losses. The minimum point on the AVC curve indicates the minimum variable cost for producing each unit of product. If the price is below this minimum point, that means each unit sold would not cover the variable cost per unit. As seen in the graph below, the shutdown price is P2, selling at P1 would put the company out of business. Remember, this refers to the short-run, in the long-run, the business needs to make a profit, not just equal its variable costs. http://www.instantcertonline.com/members2/microecon/shutdown.gif

When an effective price ceiling is imposed on a product, the price is kept below the equilibrium price, which results in a ________.

Shortage. When a price ceiling is imposed on a product, that means that there is a limit to how much a firm can charge for the product. This limit is normally lower than the equilibrium price which would have been naturally set by the laws of supply and demand. When this occurs, the demand is greater than the supply, and a shortage results: http://www.instantcertonline.com/members2/microecon/priceceiling.gif As you can see in the graph above, the price ceiling is set at Pc. Pc intersects with the Supply curve at a much lower quantity than the Demand curve. Also, it is much lower than the equilibrium point.

In a perfectly competitive market in the short run, if the price of a firm's product is less than the minimum average variable cost , the firm will ________.

Shutdown. In the short run in a perfectly competitive market, the price must at least be equal to the minimum AVC -- that is considered the short run shutdown point. In the long run, the price must at least be equal to the minimum ATC -- that is the long run shutdown point.

Compared with a perfectly competitive industry, a monopoly firm gets larger profits and generates a _______ consumer surplus.

Smaller. In a perfectly competitive industry, competition is so fierce that companies have to charge a very competitive price, and make little profit. On the other hand, a monopoly has no competition -- it can charge whatever is the maximum a consumer is willing to pay. Consumer surplus is the difference between the maximum a consumer is willing to pay, and what he does end up paying -- when dealing with a monopoly, consumer surplus is small or nonexistent.

People __________ according to their comparative advantage.

Specialize. A comparative advantage is the ability to produce a good or service at a lower opportunity cost than someone else. For example, China has a comparative advantage when it comes to making electronics.

In a(n) oligopoly market structure, a few firms produce either a ____________ or differentiated product, and entry is possible but not easy.

Standardized. Firms are interdependent in an oligopoly. In monopolistic competition and perfect competition, it is easy for a new firm to enter the market. In an oligopoly, entry is difficult, and in a monopoly, it is not possible for a new firm to enter the market -- there is only one firm.

A sequential game occurs when a firm can wait and see what its rival does before deciding on its own ________.

Strategy. A situation in which one firm moves first and then the other firm is able to choose a strategy based on the first firm's choices. An example is chess.

If the demand curve for product X shifts to the right when the price of product Y increases, then X and Y are __________ products.

Substitute. If the demand curve shifts to the right, that means demand has risen. If the demand for X increases as a result of increase in price of product Y, then X and Y are substitute products for each other.

Given two different products, if the price of one good increases when the demand for the other good increases, then the goods are considered __________ goods.

Substitute. Substitute goods are goods that can be used in place of each other (as the price of one rises, the demand for the other rises). For example, if an increase in the price of mercedes benz cars directly results in an increase in demand for BMWs, then BMWs would be considered a substitute good for MBs. This means that when one product gets more expensive, more people turn towards the substitute good to fulfill that same need.

When a good becomes less expensive, it yields more satisfaction per dollar, so consumers buy more of it and less of other goods. This is called the ____________ effect of a price change.

Substitution. It is the tendency of people to purchase less expensive goods that serve the same purpose as a good whose price has risen.

Most common goods are ________ goods, also known as normal goods.

Superior. When income increases, a superior goods' demand increases, and when income decreases, a superior goods' demand decreases. This is exactly the opposite of how demand works with an inferior good.

The ______ schedule shows the relationship between the quantity supplied at each price.

Supply. A list or table of prices and corresponding quantities supplied of a particular good or service. Below is a supply-demand schedule: http://www.instantcertonline.com/members2/microecon/supdemsched.gif Take away the demand column, and you have a supply schedule.

In economics, advances in technology means increased ______.

Supply. For example, advances in factory machinery for producing cars would indicate increased supply, or in other words, the supply curve moves to the right.

The ______ of children reflects the marginal cost of each child.

Supply. Marginal cost is the additional costs of producing one more unit of output.

According to the ______ rule, firms should produce and offer for sale the quantity at which marginal revenue equals marginal cost.

Supply. Marginal revenue is the additional revenue obtained by selling an additional unit of output. As you can see in the graph below, MR goes down, and MC goes up, so if you produce past the point where MR = MC, then your marginal cost will exceed your marginal revenue (i.e. that additional unit of production cost you more than it brought in). http://www.instantcertonline.com/members2/microecon/mrmc.gif

A paper manufacturer can produce notebook paper or wedding invitations. If the selling price of wedding invitations skyrockets, we can expect the ______ of notebook paper to decrease.

Supply. Obviously, the manufacturer will try to produce a product with a higher return; in this case, the manufacturer stands to make more money producing invitations rather than notebook paper.

Consumer _______ is the difference between what a consumer is willing to pay and the market price of a good.

Surplus. A person who has been working in the hot sun may be willing to pay as much as $2.00 for a can of cold soda, but if he can buy it for only $.50, he thinks he has found a good deal and may buy two or three. The difference between the maximum a person would pay and the actual amount that he does pay is consumers' surplus.

If the U.S. government were to artificially maintain the selling price of beef above the equilibrium level, then there would be a _______.

Surplus. At the equilibrium price, supply equals demand. But when you artificially raise the price above the equilibrium price, the supply and demand curves do not shift into equilibrium. There is a difference between how many units people are willing to buy at that artificial price (the demand curve), and the quantity that will be supplied at that price (supply curve). As you can see in the graph, when price is raised, supply goes up as demand goes down. That results in a surplus -- more goods being produced than people are willing to buy at that price. Remember, this is referring to when a price is artificially raised (i.e. by government regulation). Artificially raising the price means neither supply nor demand has changed -- the equilibrium point never changed. On the other hand, if supply goes down or demand goes up, that will result in an increased price naturally, due to a higher equilibrium point.

If an effective price floor is introduced, this results in a _______.

Surplus. When a price floor is introduced, that means the price for a product cannot go any lower than a certain price -- usually above the equilibrium price. An example of a price floor is a minimum wage law. When a price floor is imposed, the supply exceeds the demand, resulting in a surplus. http://www.instantcertonline.com/members2/microecon/pricefloor.gif

Since 1900, changes in __________ have greatly reduced the costs of growing wheat. The population also has increased. If you know that the changes in technology had a greater effect than the increase in population, then since 1900 the price of wheat has decreased and the quantity of wheat has increased.

Technology. In fact economics defines technology as ways of combining resources to produce output. Increase in technology equates to an increase in quantity supplied, and an increase in population equates to an increase in quantity demanded. If the supply increases faster than the demand, then obviously the price will drop.

Harvey produces 100 glasses of lemonade with average total cost of 50 cents per glass and average variable cost of 40 cents per glass. Harvey's total fixed cost is ___ dollars.

Ten. Since Harvey produces 100 glasses of lemonade with average total cost (ATC) of 50 cents per glass we know that his total cost is just ATC x Q or .50 x 100 = $50. We also know that his average variable cost (AVC) is 40 cents per glass so his total variable cost is just AVC x Q or .40 x 100 = $40. Finally we know that total fixed cost is just total cost - total variable cost or $50-$40=$10.

Analysis that does not impose the _____ judgments of one individual on the decision of others is called positive analysis.

Value. Positive analysis is the use of theories and models to predict the impact of a choice. For example: What will be the impact of an import quota on foreign cars? What will be the impact of an increase in the gasoline excise tax?

If, for a particular consumer, the MU ( marginal utility) of burgers is three times as large as the MU of fries, then the consumer will be in equilibrium if the price of burgers is _____ times the price of fries.

Three. If the MU for burgers is 3 times that of fries, that means the consumer gets 3 times the satisfaction or benefit from eating burgers that he does from eating fries. In economic terms, if the MU is 3 times bigger, the consumer would be willing to pay 3 times more.

Suppose that Stephanie is willing to pay $3.50 for her first order of tortilla chips and salsa, $2.50 for a second order of chips and salsa, and $1.50 for a third order of chips and salsa. If Stephanie is able to purchase all three orders of chips and salsa for $1.50 each, she can realize a consumer surplus of _____ dollars.

Three. Stephanie was willing to pay a total of $7.50 for all three orders of chips and salsa, but she was able to purchase them for a total of $4.50. This difference in what she was willing to pay, and what she actually ended up paying, equals the consumer surplus.

Assume that one laborer can produce 8 units of output, two laborers 19 units, three laborers 24 units, and four laborers 28 units. Diminishing returns sets in when the firm hires the _____ worker.

Third. Diminishing returns refers to the fact that once you hit a certain point, each additional unit gives you less and less return for your money. In this case, we see that the second worker results in 11 more units of production. The third laborer only results in 5 additional units, and the fourth laborer only 4 additional units. The returns started diminishing with the third laborer.

http://www.instantcertonline.com/members2/microecon/x.gif _____ Cost for this firm if it produces 20 units of output is 300 dollars.

Total. This graph provides us with an ATC curve, which shows us the average total cost at each quantity of output. It shows us that at 20 units, the ATC is 15. So if you want to find the Total Cost, just multiply 15 by the number of units, which is 20.

If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, it can be concluded that the indicated price reduction will increase the firm's _____ revenue.

Total. Total revenue is simply asking how much money total comes in from sales. It does not take into account expenses, costs, etc.. In this case, all you have to do is figure out how much money they make at each price amount. At $10, they make $30,000 ($10 x 3,000). When the price is reduced to $8, they make $40,000. Obviously, total revenue has increased. If you want to figure this out the complicated way, and practice thinking in terms of elasticity of demand: http://www.instantcertonline.com/members2/microecon/elasticity3.gif http://www.instantcertonline.com/members2/microecon/elasticity5.gif The elasticity comes out to 2.25, which is greater than 1, so that means demand is elastic. When demand is elastic, quantity changes faster than the price. When you lower the price, the quantity sold increases so fast that total revenue increases. When you raise the price, quantity sold decreases so quickly total revenue decreases.

Relative to the amount workers and their employers paid in social security taxes during working years, the average retired worker receives more than _____ as much money back in social security benefits, even when accumulated interest is included.

Twice. This encourages early retirement.

A graph that shows the degree to which income is distributed _________ within a society is called a(n) Lorenz curve.

Unequally.

Scarcity means there is not enough of an item to satisfy everyone who wants it. Note that this technical economic definition differs greatly from the notion of scarcity as "_______ rarity" that predominates in most ordinary language.

Unusual. In economics - the shortage that exists when less of something is available than is wanted at a zero price. Virtually all resources are scarce, meaning that there are not enough of them to satisfy all the desires of all people.

Average ________ costs generally go up as the number of units produced are increased.

Variable. Average Variable Costs generally go up -- that's why eventually you hit a point on the ATC (Average Total Cost) Curve where you average costs go up -- your AFC (average fixed costs) are going down, your AVC (average variable costs) are going up, and eventually the AVC overcomes the AFC: http://www.instantcertonline.com/members2/microecon/atccurve2.gif

Total costs are the sum of total fixed costs and total ________ costs.

Variable. Expenses that must be paid no matter how many goods or services are offered for sale are called fixed costs -- these include things such as the rent for your office, fire insurance, and the lease on a delivery truck. Variable costs change with the number of products offered for sale. Examples are wages of workers, electricity for running machines, and raw materials. Fixed costs stay the same, variable costs go up as you decide to increase production.

When either the supply or the demand curve is perfectly inelastic, that means it will be a straight ________ line.

Vertical. If supply is perfectly inelastic, that means no matter the price, the quantity supplied stays the same. Likewise, if demand is perfectly inelastic, no matter the price, the quantity demanded stays the same.

"There should be a higher tax on cigarettes, alcohol and other '____' items to discourage people from buying them." is a Normative statement.

Vice. Normative analysis is analysis of "what ought to be?" For example: Consider the equity and efficiency trade-off of an increase in the gasoline excise tax versus import restriction on foreign oil.

A firm should continue to hire labor up to the point where the MRP of labor equals the ____.

Wage. MRP stands for marginal revenue product, and is the additional revenue from adding one unit of labor -- in other words, how much more money comes in from hiring an additional worker. Obviously, if the additional revenue gained from hiring another worker is less than the wages you have to pay him, then you do not hire another worker. Wage is sometimes referred to as marginal expenditure (ME), so a firm should hire labor until MRP = W, or MRP = ME.

The payments to the owners of land, labor, capital, and entrepreneurship are, respectively - rent, _____, interest, and profits.

Wages. The term "profit" is used somewhat more narrowly by economists than the way it is used by the Internal Revenue Service or even by most businessmen and accountants. Adam Smith divided income into three types: profits, wages, and rents. The essential feature of profit is risk: capital is ventured in the hope of a return, and there may be a very great return, or little, or none.

The simplest game of any theoretical interest is the finite two-person ________ game of perfect information. Examples of such games include chess, checkers, and the Japanese game go.

Zero-sum. Such games have a predetermined outcome (assuming rational play), and each player can, by choosing the right strategy, obtain an amount at least equal to this outcome no matter what the other player does. This predetermined outcome is called the value of the game.

A good is non-rival if for any given level of production, the marginal cost of providing it to an additional consumer is ____.

Zero. Some goods are exclusive but non-rival. An example is a bridge other than at rush hour.

In the long run, competitive firms have an economic profit of ____.

Zero. Zero economic profit is also known as normal profit. It is important that you understand the reason for this: - In competitive markets, as long as firms are making an economic profit, new firms will enter. -New firms will keep on entering the market until it is so competitive that economic profit is zero. - The only way a firm will have economic profit in the long run is if there are barriers to entry to protect economic profits. That is why a monopoly actually makes economic profits in the long run -- no firms can enter the market!