ECONOMICS 1810 MIDTERM

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Match each of the following as greater than or less than 0: The cross-price elasticity of demand for a pair of substitutes.

Greater than 0

Match each of the following as greater than or less than 0: The income elasticity of a normal good.

Greater than 0

Match each of the following as greater than or less than 0: The price elasticity of supply.

Greater than 0

Identify the type of merger: A merger between two TV manufacturers.

Horizontal merger

If a perfectly competitive firm is producing an output level that generates marginal cost greater than the market price, then profit __________ as the firm ___________ production.

Inccreases, Decreases

Suppose that for a monopoly average total cost is $35, marginal cost is $30, and marginal revenue is $35 with a selling price of $40. To maximize profits, the monopoly should

Increase output but decrease price

Fill in the blanks: If the price elasticity of demand is equal to -0.5, then a 10 percent decrease in price will cause the quantity demanded to _________ by _________ percent

Increase, 5

Identify whether each of the following is labor, capital, or a natural resource: Your economics professor

Labor

Match each of the following as greater than or less than 0: The cross-price elasticity of demand for a pair of complements.

Less than 0

Assuming two factors of production, labor (L) and capital (K), a firm will minimize the cost of producing a given level of output when which of the following is true?

MP(labor)/P(labor) = MP(capital)/P(capital)

Identify examples of microeconomics and macroeconomics: How the government responded to the recent recession

Macroeconomics

Identify examples of microeconomics and macroeconomics: Last month's U.S. inflation rate

Macroeconomics

A firm's supply curve slopes upward as its

Marginal cost curve slopes upward

A monopoly maximizes profits by producing the output level at which

Marginal revenue equals marginal cost

An economy with free exchange of goods and services

Market economy

For a firm in a perfectly competitive market, marginal revenue is always equal to

Market price

Identify examples of microeconomics and macroeconomics: Sales volumes of Walmart stores

Microeconomics

Identify examples of microeconomics and macroeconomics: The rising prices of textbooks

Microeconomics

A market economy in which government also plays a role in allocating resources

Mixed economy

Indicate the type of market for each of the following: A large number of buyers, but one seller

Monopoly

Indicate the type of market for each of the following: Economic profit exists in the long run.

Monopoly

Indicate the type of market for each of the following: Price is greater than marginal cost

Monopoly

Identify whether each of the following is labor, capital, or a natural resource: A beach in Florida

Natural Resource

Identify whether each of the following is labor, capital, or a natural resource: Untapped oil deposits in Texas

Natural Resource

A market in which a single producer can produce large quantities efficiently because of its extensive economies of scale is called a

Natural monopoly

Identify normative or positive statements: "Everyone in the country should be covered by national health insurance."

Normative

Identify normative or positive statements: "The current rate of unemployment of 5 percent is too high."

Normative

Stephanie buys one coffee each morning, regardless of the price. we can conclude that Stephanie's demand for coffee is

PERFECTLY INELASTIC = vertical demand curve

Indicate the type of market for each of the following: Price equals marginal cost

Perfect competition

For a horizontal demand curve, demand is

Perfectly elastic

Identify normative or positive statements: "A high rate of economic growth creates more jobs."

Positive

Identify normative or positive statements: "Smokers are more likely to be extraverts than nonsmokers."

Positive

In the long run, if price is greater than average total cost in an industry, then

Some new firms enter the industry

Which curve passes through the minimum point of the average total cost curve?

The marginal cost curve

Along a linear demand curve, total revenue is greatest where demand is

Unit elastic

Indicate each of the following inputs as variable cost and/or fixed cost: Exist in the short run

Variable and Fixed costs

Determine whether each of the following examples are fixed costs or variable costs: Fuel cost to operate a truck

Variable cost

Determine whether each of the following examples are fixed costs or variable costs: Wages for factory workers

Variable cost

Indicate each of the following inputs as variable cost and/or fixed cost: Labor

Variable cost

Identify the type of merger: A merger between a smartphone manufacturer and a smartphone app developer.

Vertical merger

Identify the type of merger: An online retailer purchases a truck delivery company.

Vertical merger

Price elasticity of demand measures

a buyer's responsiveness to a change in price.

A price ceiling is

a government price control that sets the maximum allowable price and tends to cause a shortage.

Suppose that the demand for good X is price inelastic, then a 10 percent increase in the price of good X will result in

a less than 10 percent decrease in the quantity demanded.

Economies of scale occur when an increase in inputs causes

a more-than-proportionate increase in output.

In economics, the term supply refers to

a set of combinations of price per unit and quantity supplied per period, all other things equal.

Economic profit equals

accounting profit - implicit cost.

If an external benefit occurs in a perfectly competitive market, firms produced an

amount less than the efficient quantity.

When the expansion of an industry leads to higher input prices, that industry is characterized by

an upward sloping long-run supply curve.

Average Total Cost=

average fixed cost + average variable cost

Average total cost is equal to marginal cost when

average total cost is at its minimum.

In a market capitalist economy, the what, how, and for whom problems are determined by

both consumers and firms

All other things equal, if the demand curve shifts to the right

both the equilibrium price and the equilibrium quantity will rise.

Economic models are

built using relevant observations, assumptions, and abstractions.

Arc price elasticity of demand is

calculating percentage changes relative to the average value of each variable between two points.

As a firm increases its use of capital relative to labor, it becomes more

capital intensive

The three types of factors of production are

capital, labor, and natural resources.

Marginal cost=

change in total cost / change in quantity

A firm has market power when it can

change its price without losing all its market share.

In a competitive industry, a firm's demand curve is

horizontal

Formula for : Income elasticity of demand

% change in quantity demanded / % change in income

Formula for: Price elasticity of demand

% change in quantity demanded / % change in price

Match each of the following price elasticity of demand with its numerical value: Perfectly Inelastic

0

If the quantity supplied increases by 2 percent when price increases by 10 percent, then the price elasticity of supply is

0.2

Determine whether each of the following examples are fixed costs or variable costs: Price paid for a piece of land

Fixed cost

Determine whether each of the following examples are fixed costs or variable costs: Rent for an office

Fixed cost

Indicate each of the following inputs as variable cost and/or fixed cost: Capital in the short run

Fixed cost

Indicate each of the following inputs as variable cost and/or fixed cost: Do not change with production

Fixed cost

A persistent shortage will likely occur in a market if the government

imposes a price ceiling

Fixed costs exist

in the short run but not in the long run.

If a large storm in Florida destroyed a lot of orange crops, we would expect the equilibrium price of oranges to

increase and the quantity of oranges sold to decrease.

A market price floor for cotton

increases the cotton price paid by consumers.

Microeconomics deals with

individual units in the economy.

Fill in the blanks: Suppose that a 5 percent increase in the price of good X causes a 2.5 percent decrease in the quantity demanded of good X and 10 percent increase in quantity supplied of good X. For good X, demand is _________, and supply is _________.

inelastic, elastic

Match each of the following price elasticity of demand with its numerical value: Perfectly Elastic

infinity

Steven has two hours to complete an assignment in economics or to watch a movie. For Steven, the opportunity cost of spending the two hours watching a movie

is a lower score in the economics assignment

A public park

is subject to the free-rider problem.

Water is considered a scarce good rather than a free good because

it has alternative uses

If a firm adopts a technology that can increase production without increasing labor or other resource inputs, then

it will reach a point that was previously unattainable.

A competitive firm's supply curve is

its marginal cost curve

Fill in the blanks: Compared to the demand curve of a competitive firm, a monopoly's demand curve is ___________ elastic because its demand is __________ the market demand.

less, the same as

The economic way of thinking deals with

making choices by comparing marginal costs and marginal benefits.

The sum of producer surplus and consumer surplus is maximized when

marginal benefit and marginal cost are equal.

A cost-benefit analysis of a public policy involves evaluating the

marginal cost and marginal benefit of the policy.

If a firm is experiencing diminishing returns to labor,

marginal cost must be increasing

The difference between the full marginal cost and the marginal external cost is

marginal private cost

Diminishing returns occur when the

marginal product of an input is falling.

A firm maximizes its profits when

marginal revenue equals marginal cost

All other things equal, when firms enter a perfectly competitive market,

market supply increases and market price decreases.

A simplified representation of a particular problem is a

model

Gains from trade occurs as a result of

more goods and services can be obtained at lower opportunity costs.

Trade can be beneficial to an economy because

more goods and services can be obtained at lower opportunity costs.

Statements that make value judgments are

normative

A production function relates

output to inputs

A production function relates

output to variable inputs

A free-rider problem occurs when

people who do not pay for a good benefit from the good.

Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is positive, demand is _____________

price elastic

A given change in gasoline supply will result in a larger change in the equilibrium price of gasoline if the

price elasticity of demand for gasoline is lower.

An economy has a comparative advantage in the production of a good if it can

produce the good at a lower opportunity cost than another economy.

A product with an inelastic supply means that

producers are relatively insensitive to a change in the price of the product.

To maximize profits, a monopoly

produces less output than a competitive firm

In economics, firms are assumed to maximize

profits

Deadweight loss is

the loss of producer and consumer surplus at an inefficient production level.

Christy has a comparative advantage over Joel in making pizzas relative to making hotdogs. This means that

the opportunity cost of making pizzas is lower for Christy than for Joel.

Suppose demand is unit elastic,

the percentage change in quantity demanded is equal to the percentage change in price.

The price elasticity of supply is a measure of how sensitive producers are to a change in

the price of a good or service

The term quantity demanded refers to

the quantity buyers are willing and able to buy at a particular price during a particular period.

Market equilibrium occurs when

the quantity supplied equals the quantity demanded

A surplus occurs when

the quantity supplied exceeds the quantity demanded at the current price level.

All other things equal, if the price of apples increases

the quantity supplied of apples will increase.

Factors of production are

the resources the economy has available to produce goods and services.

When a competitive market is at equilibrium,

the sum of consumer surplus and producer surplus is maximized.

If an economy produces only smartphones and laptops, then the opportunity cost of producing more smartphones is

the value of forgone laptop production

Profits are

total revenue minus total costs.

Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is 0, Demand is ______________.

unit price elastic

Fill in the blanks: Economists assume that consumers seek to maximize __________ and firms seek to maximize ____________.

utility, profits

The opportunity cost of a choice is the

value of the next best alternative not chosen

The fundamental economic questions every economic system must answer are

what, how, and for whom

Macroeconomics deals with

the analysis of the aggregate values in the economy.

Scarcity is a situation in which

the available resources are not enough to satisfy the wants of the people.

Marginal cost equals

the change in total cost given a one-unit change in output.

For a given shift in supply, the less elastic demand is, then

the greater the change in price.

Match each of the following price elasticity of demand with its numerical value: Inelastic

<1

Match each of the following price elasticity of demand with its numerical value: Elastic

>1

Which of the following is a characteristic of a natural monopoly? (Check all correct answers) A. Average total cost declines over the entire range of production B. Relatively high marginal cost C. Relatively high sunk costs D. Diseconomies of scale

A and C

Which of the following is true for a perfectly competitive firm in the long run? (Check all correct answers) A. Price equals minimum average total cost. B. Profits are maximized. C. Price equals marginal cost. D. Economic profits are positive.

A and C

Match each of the following changes with its results: A decrease in demand

A decrease in both equilibrium price and equilibrium quantity

Match each of the following changes with its results: An increase in supply.

A decrease in equilibrium price but an increase in equilibrium quantity

The U.S. Justice Department is likely to challenge a merger in an industry with

A high degree of concentration

The key elements of a market capitalist economy include (Check all correct answers) A. free exchanges of goods and services. B. private ownership of resources. C. freely determined prices. D. government support of market supply.

A,B,C

Which of the following leads to a rightward shift of the demand curve? A. An expectation of an increase in the good's price in the future B. A decrease in the number of consumers C. An increase in the good's own price D. A decrease in the price of a substitute

A. An expectation of an increase in the good's price in the future

Good A has a high price elasticity of demand; it is most likely that A. good A has many substitutes. B. good A is not related to any other goods. C. good A has many producers. D. good A has many complements.

A. good A has many substitutes.

Indicate whether each of the following is an assumption of perfect competition (T/F): Large barriers to enter the market

False

A competitive market is efficient under the following conditions EXCEPT A. income is distributed inequitably across households. B. property rights are transferable. C. the sum of producer surplus and consumer surplus is maximized. D. the marginal benefit of the last item consumed is equal to the marginal cost for the last item produced.

A. income is distributed inequitably across households.

Which of the following is true of a monopoly? (Check all correct answers.) A. There are no close substitutes for its product. B. High barriers to entry exist. C. The firm is a price taker. D. The firm has market power.

ABD

Which of the following is (are) correct about firms? (Check all correct answers) A. Firms seek to minimize costs given its factors of production. B. Firms seek to maximize the prices of goods and services they produce. C. Firms are organizations that produce goods and services. D. Firms seek to maximize profits.

ACD

Which of the following is a source of monopoly power? (Check all correct answers) A. Sunk costs B. Diseconomies of scale in production C. Restricted ownership of production inputs D. Barriers to entry

ACD

Which of the following is an element of a competitive equilibrium model? (Check all correct answers) A. Firms maximize profits B. Government controls market prices C. The "invisible hand" coordinates the market D. Consumers maximize utility

ACD

Which of the following is an example of a positive statement? A. the rate of unemployment is 4 percent. B. a high rate of economic growth is good for the country. C. baseball players should not be paid higher salaries than the president of the United States. D. everyone in the country needs to be covered by national health insurance.

ANSWER: A. the rate of unemployment is 4 percent.

Ceteris paribus means

All other things unchanged

Match each of the following changes with its results: An increase in demand.

An increase in both equilibrium price and equilibrium quantity

Match each of the following changes with its results: An increase in both demand and supply.

An increase in equilibrium quantity

A government action that is designed to promote competition among firms is called

Antitrust policy

When marginal cost is greater than average cost,

Average cost is rising

Which of the following is at its minimum point when a perfectly competitive market is at the long-run equilibrium?

Average total cost

Select which one(s) of these is subject to the free rider problem: A. Public school lunches B. National defense C. Over-the-air radio broadcasts D. Postal services

B and C

Which of the following is NOT held constant when constructing a supply curve for good A? A. Number of firms producing good A B. Price of good A C. Technology for producing good A D. Price of inputs for producing good A

B. Price of good A

Indicate the type of market for each of the following: Firm produces where marginal revenue equals marginal cost

Both perfect competition and monopoly

Identify whether each of the following is labor, capital, or a natural resource: A department store

Capital

A system in which resources are owned by private individuals who have the power to make decisions about their use

Capitalism

An economy in which the government has most broad power to allocate the use of factors of production

Command economy

Identify the following characteristics of property rights: Resources for which no property rights have been defined

Common property

Which of the following causes a rightward shift of the supply curve? A. A decrease in the number of producers B. An increase in the price of the good being sold C. A government tax on production D. A decrease in the cost of production

D. A decrease in the cost of production

Fill in the blanks: Assume a monopoly firm produces where P = MC. The firm's profit increases when it __________ the output level and __________ its price. The firm's profit decreases when it __________ the output level and _____________ its price.

Decreases, increases Increases, decreases

Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: All firms earn zero economic profits

Does not shift

Which of the following will most likely to be produced by a natural monopoly?

Electricity

Identify the following characteristics of property rights: Allows its owners to prevent others from using a resource

Exclusive

Identify the outcomes of the presence of an external cost or external benefit: Efficient output level > Equilibrium output level

External benefit

Identify the outcomes of the presence of an external cost or external benefit: Marginal private benefit < Full marginal benefit

External benefit

Indicate whether each of the following examples involves an external cost or external benefit: A flower bed in your house's front yard

External benefit

Indicate whether each of the following examples involves an external cost or external benefit: Flu shots

External benefit

Identify the outcomes of the presence of an external cost or external benefit: Efficient output level < Equilibrium output level

External cost

Identify the outcomes of the presence of an external cost or external benefit: Marginal private cost < Full marginal cost

External cost

Indicate whether each of the following examples involves an external cost or external benefit: A coal-fired power plant

External cost

Indicate whether each of the following examples involves an external cost or external benefit: Cigarette smoking

External cost

Indicate whether each of the following is an assumption of perfect competition (T/F): Each firm faces a downward-sloping demand curve

False

Identify the characteristics of price controls: A reduction in the quality of goods and services.

Price Ceiling

Identify the characteristics of price controls: A shortage will likely occur in the market.

Price Ceiling

A minimum price set above the equilibrium price is a

Price Floor

Identify the characteristics of price controls: A surplus will likely occur in the market.

Price Floor

Identify the characteristics of price controls: The government regulated price is higher than the market equilibrium price

Price Floor

Indicate price elasticity of demand for each of the following marginal revenues: When marginal revenue is negative, demand is ___________

Price inelastic

Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: Some firms incur economic losses.

Shifts to the left

Indicate any change in the supply curve of a perfectly competitive industry under each of the following conditions: Some firms earn positive economic profits

Shifts to the right

Today most firms in the United States are

Sole proprietorship's

Identify the following characteristics of property rights: Can be sold or leased to someone else

Transferable

Indicate whether each of the following is an assumption of perfect competition (T/F): A large number of buyers

True

Indicate whether each of the following is an assumption of perfect competition (T/F): A large number of firms

True

Indicate whether each of the following is an assumption of perfect competition (T/F): Buyers and sellers have complete information about prices

True

Evaluating the costs and benefits of a policy is called

cost-benefit analysis

When hiring one additional worker raises output by less than the last worker hired, the firm experiences

decreasing returns

The short-run average total cost curve gets its U-shape as a result of

diminishing marginal returns

In a competitive market, if firms earn economic profits in the short run, then economic profits in the long run will

disappear because the market supply curve will shift to the right.

Market failure occurs when private decisions

do not result in an efficient allocation of scare resources.

In the absence of market failures, market competition results in

efficiency.

A perfectly competitive firm reaches its long-run equilibrium when market price

equals the minimum of ATC

A market price support policy aims at assisting the farm industry by

establishing price floors in farm output markets.

Suppose you observe that the sun rises every morning at the six o'clock business report. If you conclude that the six o'clock business report makes the sun rise, you are committing the fallacy of

false cause

Average fixed cost =

fixed cost/quantity

If an economy is producing a combination of goods that places it on the production possibilities curve, then it has

full employment

An individual seller in a perfectly competitive market

has control over the quantity it sells but no control over the price.

Average product of labor=

quantity produced / labor input

The concept of comparative advantage is based upon

relative opportunity costs

The law of increasing opportunity costs is a result of the fact that

resources are not equally productive in all output categories.

The problem of determining what goods and services society should produce exists because

resources are scarce

Price controls

result in inefficient outcomes.

Total revenue will decrease if price

rises and demand is elastic.

If long-run industry supply has a positive slope, firms will likely experience

rising production costs as the industry expands.

Fill in the blanks: Fixed cost occurs in the _____________. As output increases, fixed costs are _________ and average fixed cost ___________.

short run, constant, declines

An industry in which production costs decrease as output rises (a decreasing-cost industry) causes the long-run supply curve to

slope downward

Economics is a

social science that deals with making choices among alternatives.

Property rights are defined as a set of rules that

specify the ways in which an owner can use a resource.

When an external cost exists in the production of a good, the appropriate policy is to

tax production of that good in an amount equal to the external cost.


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