Micro Econ Exam 2

Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000?

0.80

The law of diminishing returns states that beyond some point, the:

Marginal physical product of a variable input diminishes as more of that input is used.

A completely elastic demand curve has an elasticity coefficient of:

infinity

A consumer maximizes total utility from a given amount of income when the:

marginal utility per dollar spent on each good is the same.

In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be

$2,500.

If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price elasticity of demand in absolute value is

2. The formula for the price elasticity of demand is the absolute value (drop the negative sign) of the percentage change in quantity demanded divided by the percentage change in price. 20%/10%=2.

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is:

2.5

For product X, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

3.5 percent for each 1 percent decrease in price, ceteris paribus. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore a 1 percent decrease in price will cause a 3.5 percent increase in quantity demanded.

If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to

3.5. The income elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in income. When demand falls from 23 million to 20 million or 14 percent using the midpoint formula, the income elasticity of demand is roughly 14/4 or 3.5.

AFC can be found at any quantity of output by taking the difference between

ATC and AVC.

The marginal cost curve intersects the minimum of which of the following cost curves?

ATC. The MC curve will always intersect both the ATC and AVC curves at their lowest points.

Hideki is the owner/operator of Hideki's Flower Shop. Last year he earned $100,000 in total revenue. His explicit costs were $60,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the course of the year he received three offers to work for other flower shops with the highest offer being $60,000 per year. Calculate Hideki's accounting and economic profit.

Accounting profit = $40,000; economic profit = negative $20,000.

If demand is elastic, then

An increase in price will reduce total revenue. Total revenue equals price times quantity. With elastic demand, an increase in price will cause a large fall in quantity demanded that is greater than the price increase. The result is that total revenue will fall as the price rises if demand is elastic.

If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that

Both goods are substitute goods because the cross-price elasticity is +2. The formula for cross-price elasticity is the percentage change in the quantity demanded for Pepsi, divided by the percentage change in the price of Coke. So +10%/+5% = +2, and the two goods are substitutes.

The average fixed cost (AFC) curve

Declines as long as output increases. The numerator (fixed costs) is constant and the denominator (quantity) increases as output expands; therefore any increase in output will lower average fixed cost.

Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus:

Fall by 3.5 percent.

T/F? If marginal utility is falling, then total utility must also be falling.

False

T/F? If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is elastic.

False

T/F? If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase in football ticket prices would be expected to cause a 45 percent increase in quantity demanded.

False

T/F? The price elasticity of demand for a product tends to be smaller (i.e. less elastic), if the product has a large number of substitutes.

False

T/F? Suppose the income elasticity of demand for salmon filet is 2.4, then if income increases by 4 percent, the number of salmon filet demanded will rise by 6 percent

False - 4*2.4 - Rises by 9.6%

T/F? Short-run implies that all factors of production are fixed.

False - As long as there is one that is fixed, short-run implies

T/F? If two goods are substitutes, then the cross price elasticity of demand must be greater than one.

False - Greater than zero - Less than 0, complimentary goods

T/F? When diminishing returns begins, total physical output begins to decline.

False - The marginal declines.

T/F? If marginal utility is rising, then total utility must be falling.

False As long as marginal utility is positive, total utility must be increasing from consuming a good.

T/F? The law of diminishing marginal utility does not apply to goods that a person really enjoys.

False Even people who love popcorn, for instance, don't eat endless quantities of it because at some point the satisfaction derived from one more box will decrease.

T/F? The cross-price elasticity sign for substitute goods is negative.

False The sign on the cross-price elasticity for substitute goods is positive. For example, if the price of Coke falls, the quantity demanded for Pepsi will fall. That is a negative change divided by a negative change, which equals a positive number. The cross-price elasticity formula is the percentage change in the quantity demanded for Pepsi divided by the percentage change in the price of Coke.

T/F? If the marginal utility per dollar spent for candy bars is higher than the marginal utility per dollar spent for popcorn, you should buy more popcorn and fewer candy bars in order to maximize utility.

False To maximize utility, the consumer should choose the goods that deliver the most marginal utility per dollar.

In the short run, when a firm produces zero output, total cost equals

Fixed costs. Fixed costs must be paid even if no output is produced. Variable costs start at zero; therefore when a firm produces zero, total costs are equal to fixed costs.

A demand curve that is completely elastic is

Horizontal. If demand were perfectly elastic, the demand curve would be horizontal. In that case, any increase in price would cause quantity demanded to fall to zero.

The cross price elasticity between two products has been measured at 2.0. If the price of the first product is increased by 8%, demand for the second product will _____ and the two goods must be _________.

Increase by 16%; substitute goods

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to

Lower his price to increase revenue. If the elasticity of demand is 3.5 (in absolute value), it indicates that demand is very elastic. Consumers have a lot of substitutes available. Therefore Sam should lower his price to increase total revenue because the quantity demanded will increase.

If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,

New cars are a normal good, and the income elasticity is +2.0. The formula for income elasticity is the percentage change in quantity demanded for new cars divided by the percentage change in income. So 10%/5%= +2, which indicates that new cars are a normal good; the demand for them rises when incomes increase.

A good is normal if the sign on the income elasticity formula is

Positive. The income elasticity formula is the percentage change in quantity demanded for good X, divided by the percentage change in income. For normal goods, as income rises (+), the quantity demanded for good X will rise (+). The sign on the formula then will be positive for normal goods.

Ceteris paribus, as the number of substitutes for a good increases, the

Price elasticity of demand should become larger. The greater the availability of substitutes, the higher the price elasticity of demand. For example, the high elasticity of demand for fish reflects the fact that consumers can always eat chicken, beef, or pork if fish prices rise.

Total revenue is

Quantity sold times price. A firm's total revenue is equal to price times quantity sold. It is the company's income from sales. Total profit is equal to total revenue minus cost of production.

Utility refers to the:

Satisfaction obtained from a good or service.

The period in which at least one input is fixed in quantity is the:

Short run

The period in which at least one input is fixed in quantity is the

Short run. The short run is the period in which the quantity (and quality) of some inputs can't be changed, or in other words inputs are fixed.

Marginal utility for a good is computed as:

The change in total utility divided by the change in quantity.

Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because:

The marginal utility of the fourth plate would be zero or even negative.

An increase in production in the short run definitely results in an increase in

Total costs. Total cost rises as output increases because additional variable costs must be incurred.

T/F? AVC = ATC - AFC

True

T/F? If current marginal utility per dollar spent for CDs is lower than marginal utility per dollar for movie tickets, then you should buy fewer CDs and/or more movie tickets in order to maximize your utility.

True

T/F? If the marginal cost curve intersects the average variable cost curve, the average variable cost must be at its minimum.

True

T/F? An individual's consumer surplus is the difference between the maximum price that she or he is willing to pay and the actual price.

True Consumers benefit when they are willing to pay more than the actual price. That difference is called the consumer surplus.

T/F? Marginal utility represents the additional satisfaction obtained from one more unit of a good or service.

True Marginal utility does represent the additional satisfaction from one more unit of a good, and it is found by dividing the change in total utility by the change in quantity.

T/F? If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two goods are complementary.

True The formula for cross-price elasticity is the percentage change in quantity demanded for new cars divided by the percentage change in gasoline prices. For complementary goods, the sign on the cross-price elasticity formula will be negative.

T/F? If the price elasticity of demand is 0.4, a 5 percent increase in price will quantity demanded to fall by 2 percent.

True The formula for the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price: .4 = x/.05 = .02 or 2 percent.

Variable inputs are defined as any resource that:

can be changed as output changes.

If price is reduced and demand is price inelastic, then total revenue will:

decrease

If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as:

elastic

If a college raises tuition, what happens to total revenue? If demand is _____ - total revenue decreases If demand is ______ - total revenue is constant If demand is _____ - total revenue increases

elastic unitary inelastic

Price elasticity of demand refers to

how sensitive buyers are to a change in price.

If MC > AVC, AVC is ____ If MC < AVC, AVC is ____ If MC = AVC, AVC is at its minimum

rising lower

The marginal physical product is the difference in

total output associated with one additional unit of input.