ECON EXAM 2 REVIEW
What is the relationship between a perfectly competitive firm's marginal marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
Is demand price elastic or price inelastic?
Elastic, because the percentage change in quantity demanded is greater than the percentage chance in price.
What determinant is the most important? (1) __________ is the most important determinant.
(1) The availability of close substitutes
A study of the consumption of beverages in Chile found that for soda "a price increase of 10% is associated with a reduction in consumption of 13.7%" Given this information, the price elasticity of demand for soda in Chile is
-1.37
Why would a firm produce in the short run while experiencing losses?
A firm would not shut down if by producing its total revenue would be greater than its total variable costs.
List the errors in the graph to the right (where AFC is average fixed cost, AVC is average variable cost, ATC is average total cost, and MC is marginal cost).
AFC should be MC, ATC should be AVC, and AVC should be ATC.
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
ATC = TC/Q; MC = △TC/△Q
Which of the following best explains why firms don't maximize revenue rather than profit? If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a (1) __________ quantity of output.
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized. (1) larger
How is price elasticity of demand measured?
By dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.
Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic? At what price is total revenue maximized?
Demand is elastic at all prices above $7.00 and inelastic at all prices below $7.00. Total revenue is maximized when price equals $7.00
A student argues: "To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
Which of the graphs above represents a typical average total cost curve?
Graph B.
What is the difference between the short run and the long run? Is the amount of time that separates the short run from the long run the same for every firm? (1) ______
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its input and adopt new technology. (1) NO
A student examines the graph to the right and argues, "I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profits." Is the student's argument correct or incorrect?
Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.
After the Sears department store chain emerged from bankruptcy, its CEO Edward Lampert was quoted as saying: "Our goal is to continue to shrink the size of our stores." Is Lampert's remark referring to Sears's economic short run or its economic long run? Briefly explain.
Long run, because changing the size of stores takes a significant amount of time.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit = (P x Q)-(ATC x Q), where P is price, Q is output, and ATC is average total cost.
If you start at point A on D1, what is the percentage change in quantity demanded when price falls from $30 to $20? Use the midpoint formula to calculate this percentage change.
Quantity demanded rises by 55 percent.
What is the difference between technology and technological change?
Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs.
Consider the market for a new DVD movie, where the price is initially $10 and 40 copies are sold per day at a superstore, as indicated in the figure to the right. The superstore is considering lowering the price to $6. What is the price elasticity of demand between these two prices?
The price elasticity of demand is -0.36
Which of the following is a characteristic of perfectly competitive markets?
The products sold by all firms in the market will be identical.
Suppose a pizza parlor has the following production costs: $5.00 in labor per pizza, $3.00 in ingredients per pizza, $0.80 in electricity per pizza, $4,000 in restaurant rent per month, and $200 in insurance per month. Assume the pizza parlor produces 3,000 pizzas per month. What is the variable cost of production (per month)? The variable cost of production is $_______ What is the fixed cost of production (per month)? The fixed cost of production is $_______
The variable cost of production is $26,400 The fixed cost of production is $4,200
Farmer Jones grows sugar. The total revenue, marginal revenue, total cost, and marginal cost of producing various quantities of sugar (bushels in 1000s) are presented in the table below. Suppose the market for sugar is perfectly competitive. To maximize profits, farmer Jones should produce ____ thousand bushels of sugar. At that level of output, farmer Jones will earn profit of $______.
To maximize profits, farmer Jones should produce 4 thousand bushels of sugar. At that level of output, farmer Jones will earn profit of $708.
Suppose the figure to the right illustrates the monthly demand for imported rugs at a local rug gallery. Suppose the price of rugs increases from $6,000 to $7,000. Total revenue before the price change is $________ Total revenue after the price change is $_________ The change in total revenue is $________ The demand for imported rugs at this rug gallery is
Total revenue before the price change is $240,000 Total revenue after the price change is $140,000 The change in total revenue is $-100,000 (1) elastic over the given price range.
Suppose a local bank increases the fee they charge for their bank accounts by 20 percent. In response, the demand for their bank accounts decreases from 50,000 to 25,000. What is price elasticity of demand for this bank's accounts?
Using the midpoint formula, the price elasticity of demand is -3.33
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
IS it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is,
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
What is the law of diminishing returns? The law of diminishing returns states that Does it apply in the long run? (1) _______
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. NO
What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget
Suppose a firm's average total cost curve is decreasing with output. What can be said of its marginal cost curve? The firm's marginal cost curve must be
below the average total cost curve.
Suppose gasoline has few close substitutes available. If so, then an increase in the price of gasoline will likely
decrease the quantity of gasoline demanded by a relatively small amount.
The publisher of a magazine gives his staff the information in the table below. He tells them, "Our costs are currently $150,000 more than our revenues each month, I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue being exactly equal to our cost." In order for the publisher's analysis to be correct,
demand is perfectly inelastic
Amazon allows authors who self-publish their e-books to set the prices they charge. One author was quoted as saying: "I am able to drop prices and, by sheer volume of sales, increase my income." The demand for this author's books was price
elastic because a decrease in price resulted in higher revenue.
Explain why it is true that for a firm in a perfectly competitive market that P=MR=AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
Is the demand for agricultural products elastic or inelastic? Why? The demand for agricultural products is
inelastic because such products represent a small share in the consumer's budget.
In general, the demand for a good will be ______ elastic the ______ the share of the good in the average consumer's budget.
less; smaller
Compare the demand for water with the demand for wine. The demand for wine is likely
relatively more inelastic because water is a necessity.
What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
Refer to the graph of costs for a perfectly competitive firm below. Which of the following best represents profit per unit of output? Which of the following best represents total profit?
the distance between points A and B. the shaded rectangle.
Refer to the table below. Which of the following costs are implicit costs? Which of the following are sometimes called accounting costs?
the forgone salary and interest explicit costs
What is the product function? The product function is the relationship between
the inputs employed by a firm and the maximum output it can produce with those inputs.
Consider the market for Post raisin bran cereal. The demand for this product would become more elastic if it
were more of a luxury.
