ECON Midterm

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Implicit costs are

"payments" for self employed resources

TP

total quantity produced

economic profit

total revenue less economic costs

If price is cut and demand is inelastic then

total revenue will fall

complementary good

used together with another good

Price elasticity is higher

when close substitutes are available

MC>ATC

ATC is rising

Law of Supply

As price rises the less the consumer will buy

Refer to the above graph showing the marginal product (MPL) and the average product of labor (APL). At what quantity of labor employed does diminishing marginal returns set in?

B at the peak of MPL

Refer to the above diagram. If price falls from P1 to P2, total revenue will become area

B+D

Black markets are associated with

ceiling prices and the resulting product shortages

Flow 3 represents

goods and services

price elasticity is higher

in the long run than in the short run

Arrows 3 and 4 represent

incomes and consumer expenditures respectively

If the current output of shoes is Q1 then

society would consider additional units of shoes to be more valuable than alternative uses of those resources

marginal cost curve

supply curve tells us the extra cost incurred by a producer in producing one more unit of a good/service

Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market

demand has increased and equilibrium price has decreased

If something is addictive, then

demand is perfectly inelastic

unit elasticity

demand or supply with a price elasticity coefficient that is equal to one

The relationship between quantity supplied and price is blank and the relationship between quantity demanded and price is blank .

direct, inverse

The total-revenue test for elasticity

does not apply to supply because price and quantity are directly related

If marginal cost is below average variable cost

Both average total cost and average variable cost are decreasing

As it relates to production possibilities analysis. the law of increasing opportunity cost is reflected in curve

C

At which quantity of labor employed is marginal product equal to average product?

C intersection of APL and MPL

Normal Goods

Products for which demand varies directly with money income

If economic profits in an industry are zero and implicit costs are greater than zero then

accounting profits are greater then zero

If the demand for farm products is price inelastic, a good harvest will cause farm revenues to

decrease

If the price of the good decreases from $6.30 to $5.70 consumer expenditure would

decrease if demand were D2 only

REfer to above information. Over the $11-$9 price range, demand is

elastic

Economic profits are

equal to the difference between accounting profits and implicit costs

Sup[pose that point y represents the optimal combination of civilian goods and defense goods. We can conclude that at y the marginal benefit of defense goods

equals the marginal cost of defense goods

The law of diminishing returns implies

eventually, the more hours you spend studying per day, the less you will learn with each added hour

Cash expenditures a firm makes to pay for resources are called

explicit costs

supply determinants

factor prices, technology, taxes and subsidies, prices of other goods, price expectations, the number of sellers in the market

price elasticity is higher

for luxuries than for necessities

inferior goods

goods for which demand varies inversely with money income

Income elasticity has a range of

greater than or less than zero

The larger the positive cross elasticity coefficient of demand between products X and Y, the

greater their substitutability

Refer to the above data. The price elasticity of demand is relatively elastic

in the $6-$4 price range

With a downsloping demand curve and an upsloping supply curve for a product, placing an excise tax on this product will

increase equilibrium price and decrease equilibrium quantitiy

economies of scale occur when

increasing production allows greater specialization: workers are more efficient when focusing on a narrow task common when Q is low

Tennis rackets and ballpoint pens are

independent goods

If the University Chamber Music Society decides to raise ticket prices to provide more funds to finance concerts, the society is assuming that the demand for tickets is

inelastic

Markets provide

information, incentives, prices

Price floors and ceiling prices

interfere with the rationing function of prices

Average variable cost

is U shaped curve

Change in demand

is a shift of the entire demand curve to the right or to the left

Price ceilings

is the maximum legal price a seller may charge for a product or service

If government set a maximum price of $45 in the above market

it would create neither a shortage nor a surplus

When a firm is experiencing diseconomies of scale

its average total costs will decline if it reduces its scale of operations

Average product

labour productivity, is output per unit of labour input

law of diminishing returns

law of diminishing marginal product assumes that technology is fixed so that techniques of production do not change. It states that as successive units of a variable factor are added to a fixed factor, beyond some point the extra or marginal product that can be attributed to each additional unit of the variable factor will decline

As long as marginal cost is rising

marginal cost will fall

The change in total costs when output changes is called

marginal costs

After the point of diminishing marginal returns

marginal product falls

Curve (2) in above diagram is a purely competitive firm's

marginal revenue curve

If consumer incomes increase, the demand for product X

may shift either to the right or left

Supply curves tend to be

more elastic in the long run because there is time for firms to enter or leave the industry

change in quantity supplied

movement from one point to another on a fixed supply curve

Change in quantity demanded

movement from one point to another point (from one price-quantity combination to another) increase or decrease of price

When variable inputs are added to a fixed input

output increases, output can increase at an increasing rate, output can increase at a decreasing rate

allocative efficiency

p=mc

productive efficiency

p=min atc

Short Run

period of time too short to change plant capacity but long enough to use the fixed plant capacity more or less intensively

change in buyer tastes

physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for traditional phones

The long run is often referred to as the

planning horizon

When demand is unit elastic

price and revenue are not related

When demand is inelastic

price and revenue move in the same direction

If demand is elastic

price elasticity of demand is greater than 1. revenue will fall

if demand is inelastic then

price elasticity of demand is<1. revenue will rise

In the above market, economists would call a government-set minimum of $50 a

price floor

Elastic demand

product or resource demand with a price elasticity coefficient that is greater than one

perfectly elastic demand

quantity demanded can be any amount at a particular price

perfectly inelastic demand

quantity demanded does not respond to change in price

If the supply and demand curves for a product both decreases, then equilibrium

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

The supply curve of antique reproductions is

relatively elastic

Refer to the above diagram. In the P1p2 price range demand is

relatively elastice

The fundamental economic problem faced by individuals is

scarcity

The period of time over which there is at least on fixed input is the

short run

A production function

shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good

If the current output of shoes is Q3 then

society should produce fewer shoes to achieve the optimal allocation of resources

Compared to coffee, we would expect the cross elasticity of demand for

tea to be positive , but negative for cream

According to the law of diminishing marginal returns

the additional output generated by additional units of an input will diminish

When average variable cost is at a minimum

the average product of labor is at a maximum

If the average value is falling

the average value must be below the average value

the flatter the curve

the bigger the elasticity

increase in demand

the decision by consumers to buy larger quantities of a product at each possible price

If demand is perfectly elastic, then

the demand curve is horizontal line

Assume that product X has a negative cross elasticity with respect to shoes. If the price of shoes rises

the demand for product X will decrease

marginal benefit

the extra cost associated with producing one more unit of a good

marginal cost

the extra cost associated with producing one more unite of a good.

Marginal product

the extra output associated with adding a unit of variable input in this case labour to the production process

the greater thr proportion of income spent

the greater the price elasticity of demand for it

The more easily sellers can change the quantity they produce,

the greater the price elasticity of supply

Graphically the market demand curve is

the horizontal sum of individual demand curve

The shape of the cost curves may be traced back to

the law of diminishing marginal returns

If the average value is rising

the marginal value must be above the average value

explicit costs

the monotary payments it makes to those who supply labour services materials fuel transportation services and the like. Such montey payments are for the use of resources owned by others

implicit costs

the opportunity costs of using its self owned self employed resources. To the firm, implicit costs are the money payments that self-employed inputs could have earned in their best alternative use.

In general elasticities measure

the percentage change in the quantity demanded resulting from a fixed percentage change in some attribute

equilibrium price

the price where the intentions of buyers and sellers match

equilibrium quantity

the quantity demanded and quantity supplied at the equilibrium price in a competitive market

Which of the following will not produce an outward shift of the production possibilities curve?

the reduction of unemployment

MC<ATC

ATC is falling

The fixed cost of the firm is $500. The firm's total variable cost is indicated in the table. Refer to the above table and information.The marginal cost of the sixth unit of output is

$1600,3600-2000=1600

Refer to the above diagram and assume that price increases from $2 to $10. The coefficient of price elasticity of demand (midpoint formula) relating to this change in price is about:

.25 and demand is inelastic

If average variable cost is $74 and total fixed cost is $100 at 5 units output, then average total cost at this output level is:

100/5=20 74+20=94 94

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The implicit costs of Harvey's firm in the first year were:

100000*.10=10000 10000+5000+45000=60000

Jon Brooks quit his job in a bicycle shop, where he earned $15,000 per year, to become a graduate student in economics. At the university he attended, he spent $2,000 on books, $1,000 on cough medicine, and earned $12,000 as an economics teaching-assistant. What were Jon's economic costs while attending college?

15000+2000+1000= 18000

Which plant size would produce at least cost for the 3000-4000 level of output?

2

Assume that the only variable resource used to produce output is labor. Refer to the above table. With diminishing marginal returns, if the firm hires seven units of labor, which of the following numbers would most probably be the total product?

37 the production is reduced at a half rate 36-34=2, 2/2=1 36+1=37

In the long run the firm should use plant size ATC -3 for what level of output?

4000-4500

The supply of product X is elastic if the price of X rises by

5 percent and quantity supplied rises by 7 percent

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The explicit costs of Harvey's firm in the first year were:

55*11000= 605000

Assume that the only variable resource used to produce output is labor. Refer to the above table. When the firm hires four units of labor. The average product of labor is

7.5 units= 30/4

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The economic profits of Harvey's firm in the first year were:

825000-60000-605000= 160000

complements, cross price elasticity

<0

substitutes, cross pric elasticity

>0

Which is the most likely to be a long-run adjustment for a firm that manufactures cars on an assembly line basis?

A change in production to redesigned and retooled facility

change in the number of buyers

A decline in the birthrate reduces the demand for children's toys

A luxury good has

a very high income elasticity

Which of the following is true

Diminishing marginal returns means that in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs

If a firm's revenues just cover all its opportunity costs, then

Economic profit is zero

price elasticity formula

Ed= %change in quantity demanded of product X/ % change in price of product X

Suppose that TC=550 TVC=500 and MC=100. If the firm produces 10 units of output

MC>AVC

At the average point where diminishing marginal returns of an input sets in; the

Marginal product starts to decrease

In the short run

Output is raised or reduced by changing the levels of variable inputs

Which of the following goods will most likely suffer a decline in demand during a recession?

Plasma screen and LCD TVs (+4.2)

Refer to the above graph. Is hows the total product (TP) curve. At which point does diminishing marginal return set in

Point B Increase gradually begins to slow down

Refer to the above graph. Is hows the total product (TP) curve. At which point is the marginal product zero?

Point C the peak

Refer to the above graph. Is hows the total product (TP) curve. At which point is marginal product smallest?

Point D the last point

Change in consumer expectations

Political instability in South America creates an expectation of higher future prices of coffee beans, thereby increasing today's demand for coffee beans

inelastic demand

Product or resource demand with a price elasticity coefficient that is less than one

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The total revenues of Harvey's firm in the first year were:

Revenue = 11,000*75= 825000

Suppose that the price of peanuts falls from $3 to $2 per bushel and hat as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus

The demand for peanuts is inelastic

Assume that the only variable resource used to produce output is labor. Refer to the above table. With which unit of labor is the marginal product equal to the average product?

Third unit of labor 24/3=8 and 24-16=8

Assume that the only variable resource used to produce output is labor. Refer to the above table. Diminishing marginal returns set in with the addition of the

Third unit of labor where production still increases but a a lower rate

Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11 and .29 for products W,X, Y, Z respectively. A 1 percent decrease in price will increase total revenue in the case of:

W and

The above diagram suggests: (vertical line)

X and Y are independent goods

A purely competitive seller is

a " price taker"

price floors

a minimum price fixed by the government

Change in the prices of related goods

a reduction in airfares reduces the demand for bus transportation; a decline in th eprice of DVD players increases the demand for DVD movies

changer in income

a rise in income increases the demand for such normal goods as restaurant meals, sports tickets, and MP3 players while reducing the demand for such inferior goods as cabbage, turnips, and inexpensive wine

Economists use the term demand to refer to

a schedule of various combinations of market prices and amounts demanded

Supply

a schedule or curve that shows the amount of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period

A price of $60 in this market will result in

a surplus of 100 units

opportunity cost

a value equal tot he quantity of other products that cannot be produced when resources are instead used to make a particular product

REfer to the above diagram, in which S1 and D1 represents the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in demand may have been casued by

an increase in income if the product is a normal good

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

an increase in supply

MR=MC

at the profit maximizing Q

where marginal product is less than the average product

average product declines

Where marginal product exceeds average product

average product rises

Being the first mover means

being the first firm to offer a product in a particular market

VAriable costs can be controlled or altered in the short run

by changing production levels

A perfectly inelastic demand schedule

can be represented by a line parallel to the vertical axis

substitute good

can be used in place of another good

A perfectly elastic demand curve implies that the firm

can sell as much output as it chooses at the exisiting price

change in supply

change in the entire schedule and a shift of the entire curve

Trade between countries is based on

comparative advantage

The slope of a straight line can be determined by

comparing the absolute vertical change to the absolute horizontal change between two points on the line

diseconomies of scale are due to

coordination problems in large organizations : management becomes stretched and can't control costs common when Q is high

Inferior goods may also be referred ro as

countercyclical goods

Marginal costs

cuts average variable cost and average total cost at their lowest point

the steeper the curve

the smaller the elasticity

Total Revenue TR

the total amount a seller receives from the sale of a product in a particular time period P X Q

total product

the total quantity or total output of a particular good or service produced

Fixed costs

they are incurred in the short run and must be paid regardless of output level.

People trade because

they make themselves better off

Property rights need to be secure

to promote economic development

Which of the following goods will least likely suffer a decline in demand during a recession

toothpaste

Curve 4 in the above diagram is a purely competitive firm's

total cost curve

Curve 1 in the above diagram is a purely competitive firms

total economic profit curve


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