Micro Economics test 2

A university administration's decision to raise tuition in order to increase revenue will be successful if:

demand is inelastic.

Marginal cost eventually increases as output increases due to the effect of _____.

diminishing marginal product of inputs

If a firm triples all of its inputs and its output doubles, it is said to be experiencing:

diseconomies of scale.

Perfectly competitive firms are price takers because:

each firm is too small compared to the market to be able to affect price.

If a pizza joint earns only a normal profit this year, its:

economic profit is zero.

Doubling the circumference of an oil pipeline more than doubles the volume of oil that can be pumped through. This strategy is chosen only by large firms because it results in _____.

economies of scale

If the price of Pepsi-Cola increases from 50 cents to 60 cents per can and the quantity demanded decreases from 100 cans to 50 cans, then the demand for Pepsi-Cola is:

elastic.

Table 5.4 shows the price and quantity combinations for a product. The demand for the good is_____, and an increase in the price of the product from $40 to $60 per unit will _____ total revenue.

elastic; decrease

In the long run, the entry of new firms in a competitive industry:

eliminates economic profits.

If a firm shuts down in the short run and produces no output, its total cost will be:

equal to the fixed cost.

A good that is defined broadly has:

fewer substitutes and a less elastic demand.

Table 7.4 shows labor, total product, and marginal product for a firm. In the table below, marginal returns begin to diminish with the hiring of the _____ worker.

fifth

The total revenue curve that corresponds to a downward-sloping linear demand curve:

first rises, then falls.

Total cost is calculated as _____.

fixed cost plus variable cost

A firm in a perfectly competitive market:

has to accept the market price for its product.

The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. The table given below shows cost for one representative firm and the demand schedule for one representative consumer. The demand curve facing a single firm will be a:

horizontal line at a price of $100.

If supply is perfectly elastic, the supply curve is:

horizontal.

The demand curve for a good that has many perfect substitutes is likely to be:

horizontal.

A firm's opportunity costs of using resources provided by the firm's owners are called _____.

implicit costs

The opportunity cost of a resource:

includes both explicit and implicit cost.

Luxury goods are:

income elastic.

In order to prove that macaroni is an inferior good, we could test the _____ of macaroni and get a _____.

income elasticity; negative number.

Claude's Copper Clappers sells clappers for $40 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $39, average variable cost is $25, and average total cost is $45. To improve his profit or loss situation, Claude should:

increase output.

If people have more time to adjust to a price change, the price elasticity of demand for that good is likely to:

increase.

The demand for flour is:

inelastic because there are few substitutes for flour and it represents a small percentage of a consumer's budget.

Figure 5.3 shows a linear demand curve. Between points C and D, the demand is:

inelastic.

Wheat farmers in Kansas would benefit from a devastating crop failure in North Dakota (another major wheat-producing state) if the U.S. demand for wheat is:

inelastic.

Opportunity cost usually:

is involved in calculating economic profit.

A firm said to be is productively efficient if, _____.

it produces its output at the lowest possible cost

Diseconomies of scale are pictured on a graph by the upward-sloping portion of the _____.

long-run average cost curve

The minimum efficient scale for a firm is the:

lowest rate of output at which long-run average cost is at a minimum.

Goods with an income elasticity of demand greater than 1 are called:

luxuries.

A firm enters into a consent decree to avoid an even greater legal setback. If the terms of the consent decree effectively double the firm's fixed costs, then:

marginal cost remains unchanged.

The slope of the total revenue curve for a perfectly competitive firm equals:

marginal revenue.

Inferior goods have an income elasticity of demand that is:

negative.

If Harry's Blueberries, a perfectly competitive firm, shuts down in the short run, Harry must pay:

only the fixed cost of production.

Perfectly competitive firms respond to changing market conditions by varying their:

output.

19. The long-run supply curve for a constant-cost perfectly competitive industry is _____.

perfectly elastic

The demand curve for the output of a perfectly competitive firm is _____.

perfectly elastic

The supply of paintings by Van Gogh is most likely to be:

perfectly inelastic because supply is limited.

42. At the point where diminishing marginal returns set in, the slope of the total product curve is _____.

positive and decreasing

Demand is unit elastic whenever

price elasticity has an absolute value of 1.

For a perfectly competitive firm, ____.

price equals marginal revenue at all output levels

Resources are efficiently allocated when production occurs at that point at which:

price is equal to marginal cost.

A perfectly competitive firm's profit per unit of output equals:

price minus average total cost.

To achieve the minimum efficient scale in the long run, a firm must:

produce at minimum long-run average cost.

Firms achieve productive efficiency by:

producing at their minimum long-run average cost.

Another word for elasticity is _____.

responsiveness

Suppose a perfectly competitive firm and industry is in long-run equilibrium. A rightward shift of the market demand curve is likely to:

shift the demand curve facing the firm upward and increase quantity supplied in the market.

The long-run market supply curve for an increasing-cost, perfectly competitive industry _____.

slopes upward

Suppose Bob leaves his $50,000-a-year job as a financial advisor to P.E.T.S. and starts his own business selling pet-care products. In the first year, his accounting profit is $70,000. Based on this level of success, Bob should:

stay with his new firm because his economic profit is positive.

The percentage change in the demand for film divided by the percentage change in the price of cameras indicates:

the cross-price elasticity of demand between film and cameras.

If General Electric finds that doubling both its plant size and the amount of associated inputs does not double its output level, then:

the firm is experiencing diseconomies of scale.

If an increase in the price of peanut butter causes a decline in the demand for jelly, then:

the goods are complements.

If the cross-price elasticity of demand is −3, then:

the goods are complements.

Marginal product is defined as:

the increase in revenue that occurs when an additional unit of a resource is added.

The additional output obtained by adding another unit of labor to the production process is called _____.

the marginal product of labor

A perfectly competitive firm's short-run supply curve is the same as:

the portion of its marginal cost curve above the minimum average variable cost.

If you were to put the following effects of a decrease in demand into the sequence in which they occur, which would be the last one?

A short-run loss forces some firms out of business in the long run.

Table 7.1 shows revenue and cost information for Sally's small business. Sally owns a small business that she operates in a building she owns. Given the information in the table below, Sally's economic profit is equal to _____.

$35,000

If total cost at Quantity = 0 is $100 and total cost at Quantity = 10 is $500, then average variable cost at Quantity = 10 is _____.

$40

The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. The table given below shows cost for one representative firm and the demand schedule for one representative consumer. The equilibrium price in this market is _____.

$100

Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such necessities as utilities, corned beef, and pickles are $35,000 annually. _____ is the explicit cost per year of operating the deli.

$45,000

Suppose a soccer coach has been making $25,000 per year but gives up his coaching job in order to make soccer shoes. If his revenue from the sale of these shoes is $50,000 and his materials cost $20,000, then his economic profit is equal to _____.

$5,000

Figure 5.1 shows the demand curve for a firm. In the figure below, the total revenue at point a is _____.

$50

Table 7.1 shows revenue and cost information for Sally's small business. Sally owns a small business that she operates in a building she owns. Given the information in the table below, Sally's accounting profit is equal to _____.

$65,000

Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest. This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The economic profit earned by Ernie was _____.

$9,500

Figure 5.10 shows two upward-sloping linear supply curves that pass through the origin. The price elasticity of supply between $10 and $20 on the supply curve S is _____.

1

If the price elasticity of demand is −0.5, then a:

1 percent decrease in price leads to a 0.5 percent increase in quantity demanded.

Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____ is the average product of the fourth unit of labor?

20 pairs of shoes

Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____ is the marginal product of the third unit of labor.

25 pairs of shoes

Table 5.5 shows the quantity supplied and the quantity demanded for restaurant meals at different prices. Use the information in the table below to calculate the price elasticity of supply for restaurant meals.

3/5

John moved his office from a building he was renting downtown to the carriage house he owns behind his house. How will his profit change?

Accounting profit will rise.

Which of the following is most likely to be an increasing-cost industry?

An industry that is a major buyer in the markets for the inputs it uses

Which of the following is true of a perfectly competitive market?

Each seller supplies only a small fraction of the total amount in a market.

5. If the marginal product of an input is negative, the total product must also be negative.

False

A firm that minimizes average cost will not survive in the long run.

False

A normal good is defined as a product for which quantity demanded increases as price decreases.

False

A perfectly competitive firm has a horizontal supply curve in the short run.

False

As consumers have a longer time period to respond, the demand for a product typically becomes more inelastic.

False

Cross-price elasticity measures the responsiveness of the price of good A to a change in the price of good B.

False

If a firm is producing at its minimum efficient scale, increasing its output slightly will always lead to diseconomies of scale.

False

If a firm's accounting profit is positive, its economic profit must also be positive.

False

If demand is elastic, a decrease in price leads to a decrease in total revenue.

False

If marginal product is negative, total product must be negative.

False

In short-run equilibrium, a perfectly competitive firm can never earn an economic profit.

False

Long-run average costs are the same as long-run total costs.

False

Marginal revenue is the change in total revenue from using one more unit of an input in the short run.

False

Perfectly competitive firms are sometimes called price makers because they have significant control over product price.

False

The availability of substitutes makes the demand for a good less elastic.

False

The short-run average fixed cost curve is a horizontal line.

False

Which of the following is likely to be present in a perfectly competitive market?

Firms producing identical products

Which of the following best approximates a perfectly competitive market structure?

Foreign exchange markets

For which of the following is demand most likely to be perfectly inelastic?

Insulin.

Which of the following is true of the MC curve?

It intersects both the ATC and the AVC curves at their minimums.

Which of the following is true of marginal cost when marginal returns are increasing?

It is positive and decreasing.

If a firm is producing at an output level where the total revenue curve intersects the total cost curve, which of the following is true of the firm?

Its profit is zero.

For which of the following goods is the value of income elasticity most likely to be negative?

Macaroni and cheese.

Which of the following is true in the short run at the output level where average total cost is at its minimum?

Marginal cost equals average total cost.

Which of the following is true for a perfectly competitive firm in long-run equilibrium?

Marginal revenue (MR) = Marginal cost (MC) = Average total cost (ATC)

Suppose a perfectly competitive increasing-cost industry is in long-run equilibrium when market demand increases. Which of the following statements is true in this case?

Some resource suppliers to the industry will earn higher income.

Suppose a perfectly competitive, increasing-cost industry is in long-run equilibrium when market demand increases. What is likely to happen to a typical firm in the long run?

The equilibrium price will be higher in the long run.

Which of the following are implicit costs for a typical firm?

The opportunity costs of the capital owned and used by the firm

If a firm is experiencing diminishing marginal returns to labor, then which of the following statements is true?

The positive effect of specialization in production is being offset by the negative effect of crowding of inputs.

One group of people uses New York City subways only during rush hour to travel to and from work. Another group uses them only in midday for leisure activity. If New York City wants to increase transit fares with the smallest possible reduction in revenue, for which group should it increase the fare?

The rush-hour group because its demand for subway service is less elastic than that of the midday group.

A perfectly competitive firm is allocatively efficient because price is identical to marginal cost at every quantity.

True

An increasing-cost industry is one in which per-unit cost increases as output expands in the long run.

True

Both the income elasticity of demand and the cross-price elasticity of demand coefficients can take on negative, zero, or positive values.

True

If a firm is experiencing diminishing marginal returns, its marginal product is declining.

True

If all the savings of an owner are invested in his consulting company, an increase in the interest rate increases his implicit costs.

True

In a perfectly competitive, increasing-cost industry, if price and quantity increase, demand must have increased.

True

In the long run, all of a firm's inputs are variable.

True

It is possible for a firm to enjoy a short-run producer surplus while suffering a short-run economic loss.

True

Mobility of resources ensures productive efficiency in a perfectly competitive market.

True

Substitutes are pairs of goods that have a positive cross-price elasticity of demand.

True

The larger the proportion of a consumer's budget that is spent on a product, the more the consumer will demand a substitute.

True

The marginal cost curve intersects the minimum point of the average variable cost curve.

True

Total revenue is the same for every price-quantity combination along a unit-elastic demand curve.

True

When the cross-price elasticity of demand between two products is positive, the two goods are said to be substitutes.

True

A good that takes up a very large percentage of a consumer's budget will tend to have:

an elastic demand.

A perfectly elastic demand curve is:

an upward-sloping straight line.

Unlike implicit costs, explicit costs:

are actual cash payments.

The law of diminishing marginal returns states that:

as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable input eventually diminishes.

Consider the following figure that shows the demand and the cost curves of a perfectly competitive firm. The firm will earn zero economic profit _____.

at a price of P2

The marginal cost curve intersects the average total cost (ATC) curve:

at the ATC curve's minimum point.

Figure 7.1 shows the U-shaped cost curves for a producer. In the figure below, curve B represents _____.

average variable cost

Figure 5.4 shows a downward-sloping linear demand curve. In the figure below, demand is unit elastic:

between points d and e.

If price is less than minimum average variable cost, a perfectly competitive firm that continues to produce in the short run _____.

can cover all of its variable cost and some of its fixed cost

For the perfectly competitive firm represented in the figure given below, the short-run supply curve is:

cde.

The price elasticity of demand is useful because it measures the responsiveness of _____ to changes in _____.

consumers; price

Fixed costs are defined as:

costs that do not vary as quantity produced increases.

In order to prove that Coca Cola and 7-Up are substitutes, one should test the _____ and get a _____.

cross-price elasticity; positive number

A decline in market demand in a competitive industry will result in a(n):

decrease in the equilibrium quantity.

At its present rate of output, Barrel O' Biscuits, a perfectly competitive firm, finds that its marginal cost exceeds its marginal revenue and its price exceeds its average variable cost. To maximize profit, the firm should _____.

decrease output

Suppose Thelma and Louise both sell tomatoes in a perfectly competitive market. If Louise increases the amount of tomatoes that she sells in the market, _____.

the price at which Thelma sells her output is unaffected

The total revenue from selling trucks is equal to:

the price of a truck times the quantity sold.

In the short run, producers derive surplus from market exchange because:

the price they receive is greater than the minimum amount they require to sell a good.

If an industry is a constant-cost industry, _____.

the prices of its inputs remain the same as the number of firms increases

Elasticity measures:

the responsiveness of decision makers to changes in price, income, or other variables.

The supply of a product will be more elastic if:

the time the producer has to adjust to a price change is long.

Average revenue is:

total revenue divided by the quantity of output.

Along a linear demand curve, as the price increases from zero:

total revenue first increases but eventually decreases.

Figure 5.4 shows a downward-sloping linear demand curve. Between points b and c in the figure below, price decreases by $1, quantity demanded increases by 10, _____.

total revenue increases by $40, and demand is elastic

Economic profit is defined as _____.

total revenue minus total costs

If a market is allocatively efficient, _____.

total utility cannot be increased through a reallocation of resources

If a manufacturer shuts down in the short run, it must be true that before the shutdown, at all positive output levels, _____.

variable cost was greater than total revenue

Inputs that can be increased or decreased in the short run are called _____.

variable inputs

A constant-cost industry is one:

whose cost curves do not change as new firms enter the market.

If an increase in the price of a product from $1 to $2 per unit leads to a decrease in the quantity demanded from 100 to 80 units, then the value of the price elasticity of demand is:

−1/3