micro final review
what three things must a firm be able to do to price-discriminate? a. Separate the groups. b. Produce where MR = MC. c. Produce a differentiated product. d. Identify groups with different elasticities. e. Have a monopoly created by the government. f. Limit the ability to resell the good between groups.
a, d, and g; separate the groups, identify groups with different elasticities, and limit the ability to resell the good between groups.
price remains nearly constant. Quantity decreases enormously. supply is _____ and demand shifts ___
highly elastic; in
Price falls significantly. Quantity hardly changes at all. supply is ___ and demand shifts in ____
highly inelastic; in
price rises significantly. Quantity remains nearly constant. supply is ____ and demand shifts ____
highly inelastic; out
Technology is now being developed so that road use can be priced by computer. A computer in the surface of the road picks up a signal from your car and automatically charges you for the use of the road. How would this affect bottlenecks and rush-hour congestion?
it would decrease bottlenecks and rush-hour congestion
Say that equilibrium price remained constant and quantity fell. What would you say was the most likely cause?
there was a decrease in demand and a decrease in supply
Say that equilibrium price fell and quantity remained constant. What would you say was the most likely cause?
there was an increase in demand and no change in supply
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. perfume
Normal and luxury. As income increases, people purchase much more perfume than before. The income elasticity of perfume is positive and likely greater than 1.
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. furniture
Normal and luxury. Everyone needs some furniture, but as income goes up, people buy much more and much nicer furniture (income elasticity is positive and greater than 1 in the short run).
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. vodka
Normal and luxury. Individuals tend to drink more hard liquor as their income rises and income elasticity is likely greater than 1
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. beer
Normal and necessity. Beer is the cheapest type of alcohol and tends to be consumed by individuals with lower income. As income increases, people substitute wine and liquor for beer. Thus income elasticity for beer is positive and less than 1.
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. sugar
Normal and necessity. Increases in income lead to slightly more use of sugar. However, high-income people do not use much more sugar than low-income people, so income elasticity is positive but less than 1.
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. table salt
Normal and necessity. It is a small portion of people's income, and its consumption doesn't increase much with income (income elasticity is positive but close to zero).
You rent a car for $30.05. The first 160 miles are free, but each mile thereafter costs $0.16. You plan to drive it 220 miles. What is the marginal cost of driving the car?
The marginal cost is $9.60 plus the cost of gas. - The marginal costs are the additional costs. They are $0.16 per mile for miles over 160 plus the cost of gas. Therefore, the marginal cost is $9.60 [$0.16 × (220 - 160)] plus the cost of gas. The initial payment can be forgotten because it is a sunk cost; it is not part of the marginal costs.
state three reasons for potentially beneficial role of government intervention: a. Correcting for negative or positive externalities b. Offsetting the incentive effect provided by wages c. Restraining trade so prices rise d. Generating a government failure to affect market pricing e. Creating barriers to entry to promote market efficiency f. Providing public goods g. Correcting informational problems
a, f, and g; correcting for negative or positive externalities, providing public goods, and correcting informational problems.
A firm is producing 100 units of output at a total cost of $400. The firm's average variable cost is $3 per unit. What is the firm's total fixed cost? a. $100 b. $50 c. $1 d. $300
a. $100 -Total variable cost equals average variable cost times output, or $300 in this case. Since total fixed cost is the difference between total cost and total variable cost, or $400 - $300, it must equal $100.
Mary buys cell-phone services from a company that charges $30 per month. For that $30 she is allowed 600 minutes of free calls and then pays 25 cents per minute for any calls above 600 minutes. Mary has used 600 minutes this month so far. What is her marginal cost per minute of making additional calls? a. 25 cents b. 5 cents c. Zero d. 10 cents
a. 25 cents (Marginal cost is the cost of calling another minute. Since Mary has reached 600 minutes, making another call adds 25 cents per minute to her bill.)
For a monopolistic competitor: a. P = ATC in long-run equilibrium. b. P = MC in long-run equilibrium. c. P > ATC in long-run equilibrium. d. P = MR in long-run equilibrium.
a. P = ATC in long-run equilibrium. - As a result of easy entry, economic profits are pushed to zero in long-run equilibrium, and so price equals average total cost.
classify each of the following as fixed or variable costs for a coffee shop: a. coffee beans b. baristas c. espresso machine d. lease on the store
a. variable cost b. variable cost c. fixed cost d. fixed cost
Which statement is not consistent with the law of supply? a. Quantity supplied of a good is directly related to the good's price. b. More of a good will be supplied, the higher the price, other things constant. c. Quantity supplied of a good is inversely related to the good's price. d. Less of a good will be supplied, the lower the price, other things constant.
c. quantity supplied of a good is inversely related to the good's price. (The law of supply states that, other things constant as the price of a good goes up, the quantity supplied goes up and as the price of a good goes down, the quantity supplied goes down. Price and quantity supplied are directly related.)
Which 2 of the following are microeconomic problems? a. GDP fluctuations b. inflation c. recession d. negative externalities e. monopoly control over the market
d and e; negative externalities and monopoly control over the market
For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero. Explain your answers. an ipod and headphones
negative. they are complements
For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero. Explain your answers. pen and pencil
negative. they are complements
For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero. Explain your answers. smartphone and data plan
negative. they are complements
Kellogg's, which controls 32 percent of the breakfast cereal market, cut the prices of some of its best-selling brands of cereal to regain market share lost to Post, which controls 20 percent of the market. General Mills has 24 percent of the market. The price cuts were expected to trigger a price war. Based on this information, what market structure best characterizes the market for breakfast cereal?
oligopoly
You rent a car for $29.95. The first 165 miles are free, but each mile thereafter costs $0.16. You plan to drive it 200 miles. What is the marginal cost of driving the car?
the marginal cost is $5.60 plus the cost of gas
Average fixed cost: a. decreases as output increases. b. is constant and doesn't vary with output. c. increases as output increases. d. equals total cost divided by output.
a. decreases as output increases -Since total fixed cost is constant, average fixed cost must decrease as output increases.
The Herfindahl index is calculated by: a. adding the squared value of the market shares of all the firms in the industry. b. multiplying the squared value of the market shares of all the firms in the industry. c. adding the percentage of industry output produced by the largest eight firms. d. adding the percentage of industry output produced by the largest four firms.
a. adding the squared value of the market shares of all the firms in the industry
If a negative externality exists in the production of paper and paper is sold in a perfectly competitive market, at the equilibrium output: a. additional net gains to society are possible by reducing the output of paper. b. additional net gains to society are not possible from either increasing or decreasing the output of paper. c. the marginal social benefit of paper equals its marginal social cost. d. additional net gains to society are possible by increasing the output of paper.
a. additional net gains to society are possible by reducing the output of paper - If negative externalities exist, the marginal social cost exceeds the marginal private cost and too much of the good is produced. Net social gains are possible by reducing production.
The reason economists and accountants have problems using cost analysis in the real world is that: a. although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions. b. although explicit costs do not show up in accounting profits, they nevertheless affect managerial decisions. c. economists do not believe in the existence of explicit costs. d. explicit costs cannot be measured.
a. although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions. -Implicit costs are opportunity costs that affect economic profits but are difficult to measure.
Which of the following statements about urban sprawl and traffic congestion is the best illustration of a normative statement? a. Because urban sprawl is the result of individual choice, it is okay. b. The average U.S. urban traveler was stuck in road traffic 46 hours in 2002. c. Traffic congestion has increased in the last 20 years. d. Snarled traffic cost motorists in the 85 largest U.S. cities 3.5 billion hours in 2002.
a. because urban sprawl is the result of individual choice, it is okay. - Statistical statements are positive. Statements that argue what should be are normative. The source for part of this question is an article of September 7, 2004, on www.canada.com titled "Urban sprawl making for bigger cities and bigger traffic jams: US study."
Which of the pairs of goods would you expect to have a greater price elasticity of demand? a: cars or transportation b: housing or leisure travel c: rubber during the entire 20th century
a. cars b. leisure travel c. rubber during the entire 20th century - a. Cars: The broader the category, the less elastic the demand. b. Leisure travel: It is more of a luxury. c. Rubber during the entire 20th century: There are more substitutes over a longer period of time.
Which of the following most likely correctly orders goods from most to least demand elastic? a. cars, motor transportation, transportation b. pain-relieving medicine, brand-name Advil, aspirin c. transportation, bicycles, nonmotor transportation d. brand-name Advil, pain-relieving medicine, aspirin
a. cars, motor transportation, transportation (The more broadly defined a product is, the less elastic is demand.)
If Z is an inferior good, an increase in money income will shift the: a. demand curve for Z to the left. b. demand curve for Z to the right. c. supply curve for Z to the right. d. supply curve for Z to the left.
a. demand curve for Z to the left
One advantage of the Herfindahl index over the concentration ratio is that it: a. gives extra weight to firms that are especially large. b. takes into account only the leading firms in an industry. c. tells about only the top 50 firms in an industry. d. is easier to calculate.
a. gives extra weight to firms that are especially large. - By squaring the market shares of all firms and then summing them up, the Herfindahl index weighs the market shares of larger firms more heavily.
The more the current price exceeds the equilibrium price, the: a. greater the resulting surplus will be. b. smaller the resulting shortage will be. c. greater the resulting shortage will be. d. smaller the resulting surplus will be.
a. greater the resulting surplus will be. (At a higher price, quantity supplied is greater and quantity demanded is smaller, leading to a larger surplus.)
When marginal utility is positive, total utility is: a. increasing. b. at its minimum. c. decreasing. d. zero.
a. increasing -Marginal utility is the rate of change in total utility. If the rate of change of a function is positive, the function is increasing.
The central characteristic of oligopolistic industries is: a. interdependent pricing decisions. b. flexible prices. c. price competition. d. few or no economies of scale.
a. interdependent pricing decisions - Oligopolistic industries contain a small number of firms whose actions affect one another in obvious ways.
If the percentage increase in the quantity supplied is smaller than the percentage increase in the price, the supply: a. is inelastic. b. is perfectly elastic. c. is unit elastic. d. is elastic.
a. is inelastic
"Government should not use price controls" is an example of: a. normative economics. b. the art of economics. c. Marshallian economics. d. positive economics.
a. normative economics ("Should" statements are always normative, or based on opinion.)
Demand is said to be elastic when the: a. percentage change in quantity demanded is greater than the percentage change in price. b. percentage change in quantity demanded is less than the percentage change in price. c. change in quantity demanded is less than the change in price. d. change in quantity demanded is greater than the change in price.
a. percentage change in quantity demanded is greater than the percentage change in price. (Demand is elastic if the price elasticity of demand is greater than 1. This occurs if the percentage change in quantity demanded exceeds the percentage change in price. We cannot say whether demand is elastic based on information about the change in quantity demanded relative to the change in price because elasticity is a percentage measurement.)
A price elasticity of demand for a good or service of 1.8 tells us that: a. quantity demanded falls by 1.8 percent when price rises by 1 percent. b. quantity demanded falls by 1.8 units when price changes by $1. c. the price rises by 1.8 percent when quantity demanded falls by 1 percent. d. the price changes by $1.80 when quantity changes by 1 unit.
a. quantity demanded falls by 1.8 percent when price rises by 1 percent - Price elasticity tells us the percentage change in quantity in response to a percentage change in price.
Along a straight-line demand curve, elasticity: a. rises as price rises. b. is equal to slope. c. declines as price rises. d. is always zero.
a. rises as price rises (Elasticity is infinite at the price axis intercept and declines to zero at the quantity axis intercept.)
An old canceled U.S. stamp of an upside-down airplane is worth $80,000, but a newer stamp in 2008 that features Bette Davis is worth only $0.42. This is explained by the fact that the: a. scarcer the product, the higher the marginal utility and the higher the price. b. more available the product, the higher the marginal utility and the lower the price. c. scarcer the product, the higher the total utility and the higher the price. d. scarcer the product, the higher the marginal utility and the lower the price.
a. scarcer the product, the higher the marginal utility and the higher the price. -The law of diminishing marginal utility states that after some point, marginal utility falls. As marginal utility falls, one is willing to pay less for it. Since the upside-down airplane is in limited quantity, its marginal utility is greater.
If the price of chicken rises and the price of beef does not rise, consumers will respond by: a. substituting beef for chicken. b. substituting chicken for beef. c. increasing purchases of beef and chicken. d. reducing purchases of beef and chicken.
a. substituting beef for chicken (If the price of chicken has risen but the price of beef has not, the quantity of chicken demanded will fall as demanders substitute beef for chicken.)
If medical insurers could use information contained in DNA to predict the likelihood of major medical illnesses, the most likely outcome is that: a. the adverse selection problem would be decreased and average insurance rates would fall. b. there would be an adverse selection problem and average insurance rates would rise. c. there would be an adverse selection problem and average insurance rates would fall. d. the adverse selection problem would be decreased and average insurance rates would rise.
a. the adverse selection problem would be decreased and average insurance rates would fall - Rates probably would fall on average because those with a very low likelihood of having a major medical illness could purchase insurance at a much lower rate. Currently, an adverse selection problem exists because individuals have better information about their health than do insurance providers.
Countries gain from trade by producing: a. the goods they can produce at the lowest opportunity cost. b. all goods in equal amounts. c. the goods they produce at the highest opportunity cost. d. where the production possibility curve has a slope of -1.
a. the goods they can produce at the lowest opportunity cost. (The principle that the lowest cost rules is the basis for the gains from trade because countries that produce a good at the lowest cost have a comparative advantage in the production of that good.)
The deadweight loss from monopoly exists because: a. the marginal benefit of the monopolist's product to society exceeds the monopolist's marginal cost. b. there are no net gains to society at the output level produced by a monopolist. c. resource owners hired by the monopolist gain at the expense of consumers. d. the monopolist produces at an output level at which no one can be made better off without making someone worse off.
a. the marginal benefit of the monopolist's product to society exceeds the monopolist's marginal cost. -The social cost of monopoly exists because the price of a monopolist (marginal benefit to consumers) exceeds the monopolist's marginal cost.
According to the law of diminishing marginal utility, after some point: a. the more we consume of something, the less each additional unit adds to our satisfaction. b. the more we buy of something, the more it costs. c. people should spend all of their income on one good. d. the more we consume of something, the smaller the total satisfaction received from that good.
a. the more we consume of something, the less each additional unit adds to our satisfaction (The principle of diminishing marginal utility states that as you consume more of a good, after some point, you enjoy the additional units less than you did the previous units.)
If a monopolistically competitive firm is earning economic profits in the short run: a. these profits will be eliminated in the long run as new firms enter the industry. b. its output will increase in the long run. c. price will be driven down to minimum average total cost in the long run. d. these profits will persist in the long run because of the firm's limited monopoly power.
a. these profits will be eliminated in the long run as new firms enter the industry. -There are no barriers to entry in monopolistically competitive industries, and so entry will continue in the long run until zero economic profits prevail. Its output might not increase if other firms enter the market.
Gary Becker believes that traditional building blocks should be the essence of the economic approach because: a. they apply to most situations and give clear-cut results. b. they allow for predictable irrationality. c. they contain more mathematical rigor. d. they reflect people's notions of fairness.
a. they apply to most situations and give clear-cut results -Modern traditional economists such as Gary Becker prefer the narrower building blocks of rationality and self-interest. They believe that these assumptions apply to almost all scenarios and make models simple enough to provide policy recommendations.
An economist observes that a pharmaceutical company is sponsoring a diabetes clinic and providing free medications. She concludes that the pharmaceutical company is reducing short-term profits for the possibility of higher long-term profits. This economist is most likely a(n): a. traditional economist. b. engineering economist. c. irrational economist. d. behavioral economist.
a. traditional economist -Traditional economists are more likely to see actions as self-interested and will look for self-interested reasons to explain why firms might do something to benefit society.
John and Jane Smith are both economists who are deciding how to split household chores of cooking and cleaning. They discover that John has a comparative advantage in cooking. Does this discovery tell them anything about comparative advantage in cleaning? a. Yes; Jane must have a comparative advantage in cleaning. b. No; both or neither may have a comparative advantage in cleaning. c. No; either one may have a comparative advantage in cleaning. d. Yes; John must also have a comparative advantage in cleaning.
a. yes; Jane must have a comparative advantage in cleaning - In a two-good situation, a comparative advantage in one good necessarily implies a comparative disadvantage in the other good.
You are shown a graph of a monopolist in long-run equilibrium and a graph of a monopolistically competitive firm in short-run equilibrium. How could you tell which is which? a. You probably could not. b. In the graph of monopoly, the MR curve would be closer to the demand curve. c. In the graph of monopoly, the MC would slope upward. d. In the graph of monopolistic competition, the MR curve could be closer to the demand curve.
a. you probably could not -The graphs could be identical.
name two advantages of the traditional model: a. the model is very realistic b. its conclusions can be tested c. it is simple d. the model takes into account predictable irrationalities e. the model supports government intervention
b and c; its conclusions can be tested and it is simple
Which 2 of the following macroeconomic problems? a. negative externalities b. slow growth c. the pricing policies of firms d. GDP fluctuations e. Advertisement outlay
b and d; slow growth and GDP fluctuations
Measuring the price of gasoline in dollars per quart, an economist calculates the price elasticity of demand to be 1. What would the price elasticity of demand be if the economist had chosen to measure the price in dollars per gallon? a. 4 b. 1 c. .25 d. .5
b. 1 - elasticity is independent of units
The short-run elasticity of demand for gasoline sold at gasoline stations is 0.20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, if other things remain the same, the price per gallon will increase by: a. 5 percent. b. 25 percent. c. 20 percent. d. 4 percent.
b. 25 percent - Price elasticity of demand = % change in quantity/% change in price, implying that 0.2 = 5%/x. Solving for the percentage change in price, or x, yields the prediction of a 25 percent change in price.
If the price of a good goes up by 5 percent and, in response, the quantity demanded falls by 15 percent, the price elasticity of demand will be: a. .05. b. 3. c. 0.15. d. 0.3333.
b. 3 - Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price = 15%/5% = 3.
It is estimated that a 3 percent drop in the price of Asian and European autos will decrease the demand for American cars by .84 percent. From this information one can conclude that: a. the income elasticity of demand for American cars is less than 1. b. European and Asian cars are substitutes for American cars. c. European and Asian cars are luxuries. d. European and Asian cars are complements for American cars.
b. European and Asian cars are substitutes for American cars (Cross-price elasticity of demand is positive, and so they are substitutes.)
The supply of leather jackets would be expected to increase as a result of: a. an increase in the popularity of leather jackets. b. a decrease in the cost of producing leather jackets. c. the expectation that the price of leather jackets will rise in the future. d. an increase in the price of leather jackets.
b. a decrease in the cost of producing leather jackets. (A decrease in the cost of producing leather jackets will cause supply to increase or shift rightward. A change in price causes a movement along supply, not a shift. Increased popularity affects the demand for leather jackets. The expectation of a higher future price will motivate suppliers to store some of today's supply in order to sell it later and reap higher profits, so the current supply decreases.)
You bought one share of McDonald's stock for $10, one share of Coca-Cola for $15, and one share of Pepto-Bismol for $20. Currently, each stock is priced at $15. Assuming that there are no tax issues and that you cannot predict the future price of any of the stocks, if you needed $15, which stock would you sell? a. McDonalds b. Any one of them c. Coca-Cola d. Pepto-Bismol
b. any one of them - Since the purchase price is a sunk cost, it will not enter into your decision. Without additional information, it would not matter which one you sell since you don't know the future performance of any of the stocks.
An economic model: a. is so abstract that it cannot be applied to real-world events. b. applies economic theory to understand real-world events. c. is an action taken to influence the course of economic events. d. can be used only to understand free markets.
b. applies economic theory to understand real-world events - An economic model uses insights in more general theories to understand real-world events.
Sunk costs: a. should be considered, but only when marginal cost is less than marginal benefit. b. are irrelevant to economic decisions. c. are essential parts of economic decisions. d. should be considered only when there is no information about marginal cost and marginal benefit.
b. are irrelevant to economic decisions - Sunk costs are costs that already have been incurred and cannot be recaptured. They are in essence "water under the bridge," and as such, they do not influence economic decisions.
if government regulators want a natural monopolist to earn only zero economic profit, they will set price equal to: a. average fixed cost (AFC). b. average total cost (ATC). c. marginal cost (MC). d. average variable cost (AVC).
b. average total cost (ATC) -Profit is price minus ATC times quantity. If regulators want the monopolist to earn no economic profit, they will set P = ATC.
Joseph Gallo poured two glasses of wine from the same bottle but put a more expensive price tag on one glass than on the other. He let people test both and asked them which they wanted, and most wanted the more expensive glass, not knowing that both had come from the same bottle. This result indicates that firms should: a. always raise the price of their product. b. be careful about lowering the price of their product, because consumers may assume that a lower price means lower quality. c. never lower the price of their product. d. be careful about raising the price of their product, because the law of demand is always valid.
b. be careful about lowering the price of their product, because consumers may assume that a lower price means lower quality -If consumers follow the rule of thumb "you get what you pay for," they may react to a lower price by purchasing less of a good. This does not imply that firms should never lower price or always raise price but rather that they should be careful when considering a price cut because the result could be unexpected.
Total consumer surplus is measured as the area: a. between the demand curve and the supply curve. b. between the vertical axis, the demand curve, and a horizontal line through the market price. c. above the demand curve. d. between the demand curve and the horizontal axis.
b. between the vertical axis, the demand curve, and a horizontal line through the market price. (Given quantity demanded, consumer surplus is the distance between the demand curve and the price consumers must pay.)
Suppose a monopolist is at the profit-maximizing output level. If the monopolist reduces output: a. producer surplus falls but consumer surplus rises. b. both producer surplus and consumer surplus decrease. c. producer surplus rises but consumer surplus falls. d. both producer surplus and consumer surplus increase.
b. both producer surplus and consumer surplus decrease. -Consumer surplus falls because the decrease in output increases the price. Producer surplus falls because profits are reduced.
If MR < MC, a monopolist should: a. stop producing. b. decrease production. c. increase production. d. maintain the same level of production.
b. decrease production -Production should be decreased because the increase in revenue obtained by producing the last units was less than the increase in cost to produce those units.
(Consider This) Suppose that coffee growers sell 200 million pounds of coffee beans at $2 per pound in 2007, and sell 240 million pounds for $3 per pound in 2008. Based on this information we can conclude that the: a. supply of coffee beans has increased. b. demand for coffee beans has increased. c. law of supply has been violated. d. law of demand has been violated.
b. demand for coffee beans has increased
A purpose of advertising is to make the: a. demand for one's product less inelastic. b. demand for one's product more inelastic. c. supply for one's product less elastic. d. market closer to perfectly competitive.
b. demand for one's product more inelastic - Advertising is designed to increase the demand for one's product and make it more inelastic (with brand loyalty, many consumers will continue to buy the firm's product even when price increases).
A perfectly competitive firm's marginal revenue is: a. less than the selling price. b. equal to the selling price. c. sometimes below and sometimes above the selling price. d. greater than the selling price.
b. equal to the selling price. -Since a perfectly competitive firm faces a horizontal demand curve, the sale of another unit of output increases total revenue by the selling price.
The law of diminishing marginal productivity implies that the marginal product of a variable input: a. always declines. b. eventually declines. c. never declines. d. is constant.
b. eventually declines -Diminishing marginal productivity occurs when the marginal product of a variable input declines. This decline need not occur immediately, however, and so the marginal product of a variable input may rise at first before it begins to decline.
In the case of a natural monopoly, as the number of firms in the industry increases, the average cost of producing a: a. fixed number of units decreases. b. fixed number of units increases. c. fixed number of units stays the same. d. variable number of units stays the same.
b. fixed number of units increases. - For a natural monopolist, average total costs are falling as output increases. Thus, one firm that produces the entire quantity demanded would face smaller per-unit costs than would two more firms that divided the market.
In the absence of economies of scale, advertising and product differentiation: a. benefit consumers if product variety increases. b. have an uncertain effect on welfare because they increase both average total cost and product variety. c. increase social welfare by giving consumers a greater variety of goods to choose from. d. reduce social welfare by increasing average total cost.
b. have an uncertain effect on welfare because they increase both average total cost and product variety. -Product differentiation achieved through advertising increases average total cost, but if consumers are willing to pay this cost to have access to greater variety, welfare can increase. Welfare will decline if consumers are not willing to pay the higher costs associated with greater product variety.
Monopolistic competition is similar to perfect competition in that: a. both entail the production of differentiated products. b. long-run profits tend to zero in both. c. output is at minimum average total cost in both. d. firms advertise in both cases.
b. long-run profits tend to zero in both -The absence of barriers ensures that entry or exit continues until there are zero economic profits.
Jack Sprat could eat no fat, his wife could eat no lean. And so betwixt them both, they licked the platter clean. Which of the following is true about Jack and his wife? a. Marginal utility of lean is rising for Jack; marginal utility of fat is rising for his wife. b. Marginal utility of fat is negative for Jack; marginal utility of lean is negative for his wife. c. Marginal utility of fat is falling for Jack; marginal utility of lean is falling for his wife. d. Marginal utility of lean is negative for Jack; marginal utility of fat is negative for his wife.
b. marginal utility of lean is rising for Jack; marginal utility of fat is rising for his wife. -People will stop eating a good once its marginal utility is negative.
Real-world markets: a. can operate efficiently only if government takes steps to correct informational problems. b. often involve deception, cheating, and inaccurate information. c. ensure that sellers will always be honest and provide accurate information because those who are dishonest or provide inaccurate information go out of business. d. provide no mechanism for solving informational problems.
b. often involve deception, cheating, and inaccurate information. -Deception, cheating, and inaccurate information characterize real-world markets, but informational problems can be solved either through government intervention or through markets. For example, a consumer can hire a mechanic to check out a used car before purchasing it.
Price elasticity of demand is the: a. percentage change in price of that good divided by the percentage change in the quantity of that good demanded. b. percentage change in quantity of a good demanded divided by the percentage change in the price of that good. c. change in the price of a good divided by the change in the quantity of that good demanded. d. change in the quantity of a good demanded divided by the change in the price of that good.
b. percentage change in quantity of a good demanded divided by the percentage change in the price of that good.
When total product is increasing at an increasing rate, marginal product is: a. negative. b. positive and increasing. c. constant. d. positive and decreasing.
b. positive and increasing
A perfectly competitive firm facing a price of $10 decides to produce 100 widgets. If its marginal cost of producing the last widget is $12 and it is seeking to maximize profit, the firm should: a. shut down. b. produce fewer widgets. c. produce more widgets. d. continue producing 100 widgets.
b. produce fewer widgets -Since marginal cost exceeds price, the firm can save more by reducing costs than it will lose in revenue by reducing output.
When labor is the variable input, the average product equals the: a. marginal product multiplied by the number of workers. b. quantity of output divided by the number of workers. c. number of workers divided by the quantity of output. d. marginal product divided by the number of workers.
b. quantity of output divided by the number of workers. -In developing this concept, the text focuses on the case in which labor is the variable input and other inputs are held constant.
What events most likely explain the following Wall Street Journal headline, "Cities Couldn't Give Away Their Trash; Now They Get Top Dollar?" a. Quantity supplied initially exceeded quantity demanded, but a subsequent increase in the supply of trash not only eliminated the surplus, but led to a rise in the price of trash. b. Quantity supplied initially exceeded quantity demanded, but a subsequent increase in the demand for trash not only eliminated the surplus, but led to a rise in the price of trash. c. Supply initially exceeded demand, but a subsequent increase in the quantity of trash supplied not only eliminated the surplus, but led to a rise in the price of trash. d. Supply initially exceeded demand, but a subsequent increase in the quantity of trash demanded not only eliminated the surplus, but led to a rise in the price of trash.
b. quantity supplied initially exceeded quantity demanded, but a subsequent increase in the demand for trash not only eliminated the surplus, but led to a rise in the price of trash. (That the cities couldn't give away their trash suggests a surplus, or quantity supplied exceeded quantity demanded. That they now get top dollar must have resulted from a shift to the right in demand or to the left in supply. Since no option includes a shift to the left in supply, it must be a shift to the right in demand.)
Recently, Wendy's fast-food restaurants began to offer fruit or salad as a substitute for French fries in their value meals. It made sense for Wendy's to advertise this fact as long as doing so: a. raised revenue by less than the cost of advertising. b. raised revenue by more than it raised the cost of advertising. c. did raise costs. d. raised any revenue at all.
b. raised revenue by more than it raised the cost of advertising. - Since advertising does involve a cost, it is justified only if the advertising attracts additional customers and results in greater revenue (sufficient to at least cover the cost of the advertising).
Regulations created some years ago allow cell phone customers to keep the same phone number even when they switch to a different provider. This change: a. showed that lobbyists employed in the telecom industry are interested only in engaging in rent-seeking activities. b. reduced the monopoly power of cell phone providers. c. increased the monopoly power of cell phone providers. d. did not affect the degree of competition in the industry.
b. reduced the monopoly power of cell phone providers. -Cell phone providers have less monopoly power when phone numbers are portable because this reduces the penalty to customers of switching. This indicates that lobbying efforts sometimes may increase competition, to the benefit of newer companies trying to penetrate established markets.
Along a straight-line demand curve, elasticity: a. is equal to slope. b. rises as price rises. c. declines as price rises. d. is always zero.
b. rises as price rises - Elasticity is infinite at the price axis intercept and declines to zero at the quantity axis intercept.
If supply and demand both shift to the right, equilibrium quantity: a. falls, but the equilibrium price may rise, fall, or stay the same. b. rises, but the equilibrium price may rise, fall, or stay the same. c. may rise, fall, or stay the same, but equilibrium price will rise. d. may rise, fall, or stay the same, but equilibrium price will fall.
b. rises, but the equilibrium price may rise, fall, or stay the same. (Whether equilibrium price rises, falls, or stays the same depends on the magnitude of the supply shift versus the demand shift.)
When the polio vaccine first became available in the United States, the government controlled the price with an effective price ceiling. Production of the vaccine was not sufficient to fill all orders and the government had to regulate its distribution. Had the vaccine been sold without government intervention, the shortage would have been eliminated by price: a. falling, quantity demanded decreasing, and supply increasing. b. rising, quantity demanded decreasing, and quantity supplied increasing. c. rising, demand decreasing, and quantity supplied increasing. d. falling, demand decreasing, and supply increasing.
b. rising, quantity demanded decreasing, and quantity supplied increasing - The removal of a price ceiling will cause price to rise to equilibrium; it will not cause supply or demand to change, it will change only quantity demanded and quantity supplied.
The short run is a period during which: a. no inputs are variable and some inputs are fixed. b. some inputs are variable and some inputs are fixed. c. no inputs are variable and all inputs are fixed. d. some inputs are variable and no inputs are fixed.
b. some inputs are variable and some inputs are fixed. -At least one input is fixed in the short run.
The reason a profit-maximizing natural monopolist cannot set price equal to marginal cost is that it would: a. earn excessive profits, which would attract new firms into the market. b. suffer losses since price would be less than average cost. c. then be forced to produce more than the socially optimal level of output. d. then be forced to produce more than it could sell.
b. suffer losses since price would be less than average cost. -Since for a monopolist, ATC is always falling, MC < ATC. Therefore if P = MC, the monopolist would produce at a loss.
To derive a market demand curve from individual demand curves, it would be necessary to: a. take the demand curve that is the furthest to the right as the market demand curve. b. sum the curves horizontally, adding quantities demanded at each price. c. multiply the quantities demanded on each demand curve at each price to find the market quantity demanded at each price. d. take the maximum quantity of each demand curve as the market quantity demanded at each price.
b. sum the curves horizontally, adding quantities demanded at each price. - The market demand is the sum of the individual quantities demanded at each price.
A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect: a. the large group's interest. b. the small group's interest. c. neither group's interest over the other. d. the interest of a free market.
b. the small group's interest (Because each person in the smaller group benefits more, each person in that smaller group has an incentive to lobby harder.)
Goods A and B cost $1 each. The total utility one could get from consuming one unit of good A is 30. The total utility one could get from consuming two units of good B is 60. Based on rational choice one: a. should consume more of good B. b. would not be able to decide what to do because there is not enough information. c. should be indifferent between consuming goods A and B. d. should consume more of good A.
b. would not be able to decide what to do because there is not enough information (To decide, we must find out the marginal utility of consuming the first or the second unit of good B.)
two disadvantages include of the traditional method includes: a. its conclusions cannot be tested b. the model does not include the assumption of rationality c. the tools of analysis to determine what is studied may cause researchers to overlook important data d. the model is too complicated to manage e. its assumptions are too simple to reflect reality
c and e; the tools of analysis to determine what is studied may cause researchers to overlook important data; its assumptions are too simple to reflect reality
list three conditions for perfect competition: a. Firms' products are differentiated. b. There are high barriers to entry. c. Firms engage in strategic decision making. d. There is only one firm that makes up the entire market. e. Both buyers and sellers are price takers. f. There are no barriers to entry. g. Firms' products are identical.
c, e, and f; there are no barriers to entry, both buyers and sellers are price takers, and firms' products are identical -A perfectly competitive market is a market in which economic forces operate unimpeded. For a market to be called perfectly competitive, it must meet some stringent conditions. Some of these conditions include: both buyers and sellers are price takers, there are no barriers to entry, firms' products are identical.
A business owner makes 50 items by hand in six hours. She could have earned $10 an hour working for someone else. If each item sells for $5 and the explicit costs total $14, economic profit equals: a. $0. b. $64. c. $176. d. $236.
c. $176 (Economic profit equals explicit and implicit revenues ($5 × 50) minus explicit costs ($14) and implicit costs ($10/hour × 6 hours), or $176.)
It has been estimated that the price elasticity of demand for attending baseball games is 0.23. Other things held constant, a 10 percent increase in attendance can be explained by a: a. 23 percent fall in the price of a ticket. b. 23 percent rise in the price of a ticket. c. 43.48 percent fall in the price of a ticket. d. 43.48 percent rise in the price of a ticket.
c. 43.48 percent fall in the price of a ticket (Price elasticity of demand = % change in quantity/% change in price = 10/x = 0.23. Solve for x.)
Which of the following statements is true? a. A production process must always be both economically efficient and technically efficient. b. A production process is either economically efficient or technically efficient but never both. c. Any economically efficient production process is always technically efficient. d. Any technically efficient production process is always economically efficient.
c. Any economically efficient production process is always technically efficient. - This is the case because an economically efficient production process minimizes production costs. Such a process must be technically efficient because if it weren't, it would be possible to lower costs by reducing the use of some inputs.
Chuck offers $70,000 for a house. The seller turns down the offer but says she will sell the house for $72,000. However, Chuck refuses to pay the higher price. If Chuck is following the economic decision rule, the marginal benefit of the house to: a. the seller must be less than $70,000. b. Chuck must be greater than $72,000. c. Chuck must be less than $72,000. d. the seller must be less than $72,000.
c. Chuck must be less than $72,000 (The economic decision rule is do something if the marginal benefit exceeds the marginal cost and not do it otherwise. Since Chuck was unwilling to purchase the house at $72,000, we can deduce that the marginal benefit of purchasing the house must be less than $72,000.)
College education provides higher income for the individual but also a more productive and more educated person who will contribute to society in many ways. Higher education is an example of: a. adverse selection. b. a negative externality. c. a positive externality. d. a nonexcludable service.
c. a positive externality -The spillover effect of a person who is educated making others around him more productive is a positive externality. It is a primary justification for the state subsidizing higher education.
Which of the following is least likely to be studied in macroeconomics? a. Business cycles b. Unemployment c. Advertising d. Inflation
c. advertising (Macroeconomics is the study of inflation, unemployment, business cycles, and growth as defined in the text.)
Total fixed costs: a. increase as output increases. b. decrease as output increases. c. are positive even when no output is produced. d. are zero when no output is produced.
c. are positive even when no output is produced. - total fixed costs do not vary with output. they are constant.
Monopolistically competitive firms: a. earn economic profits in the short run but zero economic profits in the long run. b. earn zero economic profits in both the short run and the long run. c. can earn either profits or losses in the short run but earn zero economic profits in the long run. d. can earn economic profits or losses in both the short run and the long run.
c. can earn either profits or losses in the short run but earn zero economic profits in the long run -Monopolistically competitive firms can earn economic profits or losses in the short run depending on market conditions, but the absence of barriers to entry or exit ensures zero economic profits in the long run.
The distinction between demand and the quantity demanded is best made by saying that: a. the quantity demanded is in an inverse relation with prices, whereas demand is in a direct relation. b. the quantity demanded is represented graphically by a curve and demand as a point on that curve. c. demand is represented graphically by a curve and quantity demanded as a point on that curve. d. the quantity demanded is in a direct relation with prices, whereas demand is in an inverse relation.
c. demand is represented graphically by a curve and quantity demanded as a point on that curve (Demand refers to a schedule of quantities that will be bought per unit of time at various prices. It refers to the entire demand curve. Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price. It refers to a point on a demand curve.)
There would be no deadweight loss if: a. demand was perfectly elastic. b. taxes collected were used for societal good. C. demand was perfectly inelastic. D. demand was to shift by the amount of the tax.
c. demand was perfectly inelastic (Deadweight loss is caused by changes in behavior. If demand is perfectly inelastic, quantity demanded doesn't change and there is no deadweight loss.)
If supply and demand intersect at a price of $5.00, then a reduction in price from $6.00 to $5.00 will cause an increase in quantity: a. supplied, a decrease in quantity demanded, and the alleviation of a surplus. b. supplied, a decrease in quantity demanded, and the alleviation of a shortage. c. demanded, a decrease in quantity supplied, and the alleviation of a surplus. d. demanded, a decrease in quantity supplied, and the alleviation of a shortage.
c. demanded, a decrease in quantity supplied, and the alleviation of a surplus. (A lower price causes quantity demanded to rise and quantity supplied to fall according to the law of demand and the law of supply. If price is initially above equilibrium, then there is a surplus initially. As price falls, the surplus disappears.)
Economies of scale account for what part of a long-run average total cost curve? a. upward-sloping b. horizontal c. downward-sloping d. vertical
c. downward-sloping -Economies of scale imply that long-run average total cost declines as output increases.
Suppose farmers can use their land to grow either wheat or corn. The law of supply predicts that an increase in the market price of wheat will cause: a. farmers to lower the production of corn and wheat. b. farmers to substitute corn for the production of wheat. c. farmers to substitute wheat for the production of corn. d. farmers to raise the production of wheat and corn.
c. farmers to substitute wheat for the production of corn. (The increase in the price of wheat causes a movement along the supply curve for wheat (change in quantity supplied), not a shift.)
Public television periodically runs pledge drives to raise money. Only a small percentage of the people who benefit from public television are willing to pay. What do economists call the people who do not pay? a. Adverse selectors b. Excludables c. Free riders d. Thieves
c. free riders - Free riders enjoy public goods for free because they are nonexcludable.
It is estimated that a 5 percent decline in income will reduce health care purchases by 2.5 percent and reduce dental service purchases by 8 percent. From this information, one can conclude that: a. both health care and dental services are luxuries. b. both health care and dental services are necessities. c. health care is a necessity and dental services are a luxury. d. health care is a luxury and dental services are necessities.
c. health care is a necessity and dental services are a luxury (Income elasticity of health care is 0.5, and that of dental services is 1.6. Thus, dental services are luxuries and health care is a necessity.)
According to the text, economics is the study of how: a. scarce resources are allocated to their most productive uses. b. government policies can be used to meet individuals' wants and desires. c. human beings coordinate their wants and desires. d. governments allocate resources in the face of constraints.
c. human beings coordinate their wants and desires - According to the text, economics "is the study of how human beings coordinate their wants and desires given a society's decision-making mechanisms, social customs, and political realities."
Which of the following is true concerning purely competitive industries? a. Economic profits will persist in the long run if consumer demand is strong and stable. b. There are economic profits in the long run, but not in the short run. c. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. d. There will be economic losses in the long run because of cut-throat competition.
c. in the short tun, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits
Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies. However, Brooke is a famous actress who could earn $2 million per year if she were not attending college whereas Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity cost of attending college: a. is the same for both Brooke and Sandy. b. for Brooke and Sandy cannot be compared. c. is greater for Brooke than for Sandy. d. is greater for Sandy than for Brooke.
c. is greater for Brooke than for Sandy - Opportunity cost is the benefit forgone by undertaking an activity. Since Brook is forgoing a $2 million salary and Sandy is forgoing a $10,000 salary, the opportunity cost of attending college is greater for Brooke.
Which of the following provides the best explanation for diseconomies of scale? a. diminishing marginal productivity b. increased specialization c. monitoring costs d. Indivisible setup costs
c. monitoring costs -Monitoring costs increase with a firm's size because supervising larger firms becomes increasingly complex. Diminishing marginal productivity is a short-run concept. Indivisible setup costs help explain economies of scale.
A person who has auto insurance is likely to drive a little less safely and to take less care in parking the car in a safe place off the street. This is an example of a problem called: a. adverse selection. b. externality. c. moral hazard. d. signaling.
c. moral hazard -Moral hazard occurs when an insured individual changes his or her behavior to the detriment of the insurer.
Scarcity exists because: a. individuals cannot solve the three central coordination problems. b. the supply of goods is always less than the demand. c. new wants continue to develop and willingness to meet them is limited. d. governments cannot solve the three central coordination problems.
c. new wants continue to develop and willingness to meet them is limited. (Scarcity is perceived because human desires have always exceeded human willingness to meet those desires.)
The law of diminishing marginal productivity does not apply in the long run because: a. all inputs are fixed in the long run. b. some inputs are variable in the long run. c. no inputs are fixed in the long run. d. some inputs are fixed in the long run.
c. no inputs are fixed in the long run. - Because all inputs are variable in the long run, the law of diminishing marginal productivity does not apply.
Sometimes price cuts can have an unintended result of consumers waiting for deeper discounts. What does this waiting suggest about supply and demand? a. If buyers are buying less when price falls, the supply curve must have moved right. b. If buyers are buying less when price falls, the supply curve must have moved left. c. Price cuts have changed buyers' expectations, and the change in expectations has moved the demand curve left. d. The demand curve slopes the wrong way because price cuts have lead to smaller sales.
c. price cuts have changed buyers' expectations, and the change in expectations has moved the demand curve left - A shift to the left of the supply curve would be associated with an increase in price and a shift to the right of the supply curve would be associated with an increase in quantity purchased. Expectations can play a significant role in markets, often resulting in unanticipated consequences.
Which of the following is an example of conspicuous consumption? a. Purchasing of hip-hugger pants because pop stars wear them b. Avoiding cheap computers because low price indicates low quality c. Purchasing an expensive automobile to impress others d. Purchasing fast food because it is cheap and convenient
c. purchasing an expensive automobile to impress others. -The point of conspicuous consumption is to impress others.
Stricter environmental regulations and increased demand for energy have caused an increase in the demand for relatively clean natural gas. In the last several years, improved extraction technologies and new discoveries have increased the availability of natural gas. What has been the net effect on price and quantity for natural gas? a. Quantity sold fell and the effect on price is ambiguous. b. Quantity sold and price both fell with certainty. c. Quantity sold rose while the effect on price is ambiguous. d. Quantity sold and price both rose with certainty.
c. quantity sold rose while the effect on price is ambiguous - With the improvements in extraction technology and new discoveries, the supply of natural gas shifted to the right, lowering price and increasing quantity demanded. Environmental regulations and increased demand for energy shifted the demand for natural gas to the right, raising price and increasing quantity sold even further. The net effect on price is ambiguous.
Which of the following statements is correct? a. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic. b. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry. c. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping. d. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry.
c. the demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping
Marginal revenue is not equal to price for a monopolist because: a. the monopolist sets price equal to marginal cost. b. the monopolist's demand curve is below its marginal revenue curve. c. the monopolist must lower the price of all units in order to sell more. d. total revenue increases as output increases.
c. the monopolist must lower the price of all units in order to sell more. -Since the demand curve of a monopolist is downward-sloping, the price must be lowered on all units to sell an additional unit; the revenue obtained from selling another unit is less than the price received for that unit.
What do all economists have in common? a. They believe institutions are the primary forces in the market. b. They use highly mathematical models to explain real-world events. c. They believe that models must capture the importance of incentives. d. They believe that the invisible hand results in the most efficient outcome.
c. they believe that models must capture the importance of incentives -Although some economists focus on institutions, this is not true of all economists. Many economists do not believe that the invisible hand is the most efficient mechanism to organize markets, and some economists use heuristic models to explain real-world events. Despite these differences, all economists believe that incentives are important and models must capture their importance
Fixed costs plus variable costs equal: a. marginal costs. b. average costs. c. total costs. d. average total costs.
c. total costs -If the words "average" and "marginal" are not used, it is understood that fixed costs refer to total fixed costs and variable costs refer to total variable costs.
For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero. Explain your answers. jeans and formal suits
close to zero. while they are substitutes they are not close substitutes
If a monopolist increases output from 14 to 15 by lowering its price from $32 to $31, marginal revenue is: a. $1. b. $448. c. $465. d. $17.
d. $17 - Total revenue increases from $32 × 14 = $448 to $31 × 15 = $465, and so marginal revenue is 17. $1 is the change in average revenue.
Joan is deciding where to spend her spring break. If she goes to Cancún, Mexico, the trip will give her 9,000 units of utility and will cost her $300. If she travels to Florida instead, the trip will give her 8,000 units of utility and will cost her only $200. Joan will do best going to: a. Florida because her total cost will be lower. b. Mexico because her total pleasure will be greater. c. Mexico because her pleasure per dollar will be greater. d. Florida because her pleasure per dollar will be greater.
d. Florida because her pleasure per dollar will be greater -Individuals choose the good that has the highest marginal utility per dollar.
If Portuguese wines are an inferior good, higher incomes will cause: a. an increase in the demand for Portuguese wines. b. an increase in the quantity demanded for Portuguese wines. c. a decrease in the quantity demanded for Portuguese wines. d. a decrease in the demand for Portuguese wines.
d. a decrease in the demand for Portuguese wines (A good whose demand decreases when income increases is known as an inferior good. If Portuguese wines are inferior goods, as income rises, demand for the wines will decline. This is not movement along the demand curve because the price of the wine hasn't changed.)
A strategy that is preferred by an individual regardless of an opponent's decision is called: a. a Nash equilibrium. b. a Vickrey position. c. a framing strategy. d. a dominant strategy.
d. a dominant strategy
Any economic system: a. provides equal distribution of well-being among its participants. b. can eliminate scarcity. c. provides all the goods people want and desire. d. addresses the questions what is produced, how it is produced, and for whom it is produced.
d. addresses the questions what is produced, how it is produced, and for whom it is produced. - Any economic system must solve the three coordination problems. An economic system does not necessarily eliminate scarcity. Individual decisions within an economic system are what solve the three central problems. An economic system allocates what is produced but may not do so equally.
The MR = MC rule: a. does not apply to pure monopoly because price exceeds marginal revenue. b. applies only to pure monopoly. c. applies only to pure competition. d. applies both to pure monopoly and pure competition.
d. applies both to pure monopoly and pure competition
You run a small business producing picture frames. This month your total cost is $10,000, your variable cost is $5,000, and your output is 5,000 picture frames. Given this information, your: a. average variable cost is $2. b. average total cost is $3. c. average total cost is $1. d. average fixed cost is $1.
d. average fixed cost is $1. (Fixed cost in this case is the difference between total cost and variable cost, which is $10,000 - $5,000, or $5,000. Dividing this by output yields an average fixed cost of $5,000/5,000, or $1.)
If X is a normal good, a rise in money income will shift the: a. supply curve for X to the left. b. demand curve for X to the left. c. supply curve for X to the right. d. demand curve for X to the right.
d. demand curve for X to the right
If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that: a. diseconomies of scale are being encountered. b. technological progress has occurred. c. the firm is encountering diminishing returns. d. economies of scale are being realized.
d. economies of scale are being realized
The president of a college has been told that when they raised their tuition by 15 percent the previous year, total revenue from tuition remained unchanged. Assuming the change in revenue is due to the change in tuition only, the president could conclude that demand for that college, over that tuition range, must be: a. greater than 1. b. equal to zero. c. less than 1. d. equal to 1.
d. equal to 1 (Only unit elasticity results in no change in revenue with a change in price.)
The diamond-water paradox arises because: a. essential goods are always higher priced than nonessential goods. b. we sometimes fail to use money as a standard of value. c. the marginal utility of certain products increases, rather than diminishes. d. essential goods may be cheap while nonessential goods may be expensive.
d. essential goods may be cheap while nonessential goods may be expensive
The existence of economic losses induces firms to: a. enter an industry, which shifts the market supply curve to the left and decreases market price. b. exit an industry, which shifts the market supply curve to the right and decreases market price. c. enter an industry, which shifts the market supply curve to the right and decreases market price. d. exit an industry, which shifts the market supply curve to the left and increases market price.
d. exit an industry, which shifts the market supply curve to the left and increase market price -If losses exist, some firms will exit the industry, reducing the supply of output available and driving up the market price. The supply will shift inward, and the price will rise.
A four-firm concentration ratio of 75 tells you that the top: a. firm in the industry produces 75 percent of the industry's output. b. four firms in the industry produce 25 percent of the industry's output. c. four firms in the industry earn 75 percent of the industry's profits. d. four firms in the industry produce 75 percent of the industry's output.
d. four firms in the industry produce 75 percent of the industry's output -The four-firm concentration ratio gives the combined market share of the four largest companies in the market.
Microsoft sells a special version of its Windows operating system at a low price in countries where cheap pirated software is widespread. Since the cost of producing another copy of this software is the same as the cost of producing another copy of the regular Windows product, why is Microsoft charging this lower price? a. The differential pricing reflects the differences in the barriers to entry. b. The price differences are due to differences in cost among countries. c. The price differential is explained by the lower cost to develop the new software. d. It is trying to take advantage of the different demand elasticities in the different countries.
d. it is trying to take advantage of the different demand elasticities in the different countries. -Microsoft is pursuing a strategy that is very much like price discrimination.
The prisoner's dilemma is a well-known game in which: a. players always cheat. b. players never cheat. c. cooperation is always the best independent action. d. noncooperation is not the best joint action but is the best independent action.
d. noncooperation is not the best joint action but is the best independent action. -In the prisoner's dilemma game, cooperation is beneficial for both prisoners but difficult to achieve. There are gains to both cooperative action and independent action. Individuals don't always act in their best joint interest.
Which of the following will not hold true for a competitive firm in long-run equilibrium? a. P equals minimum ATC b. MC equals minimum ATC c. P equals MC d. P equals AFC
d. p equals AFC
Demand is said to be elastic when the: a. percentage change in quantity demanded is less than the percentage change in price. b. change in quantity demanded is less than the change in price. c. change in quantity demanded is greater than the change in price. d. percentage change in quantity demanded is greater than the percentage change in price.
d. percentage change in quantity demanded is greater than the percentage change in price - Demand is elastic if the price elasticity of demand is greater than 1. This occurs if the percentage change in quantity demanded exceeds the percentage change in price. We cannot say whether demand is elastic based on information about the change in quantity demanded relative to the change in price because elasticity is a percentage measurement.
Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must true that the firm's: a. marginal cost exceeds its marginal revenue. b. price exceeds its marginal revenue. c. marginal revenue is less than its marginal cost. d. price exceeds its marginal cost.
d. price exceeds its marginal cost -If this is the case, selling one more unit of output will increase total cost by less than the increase in total revenue, and so profits will rise.
A number of states have a minimum wage that is higher than the federal minimum. In those states that impose a minimum wage above $7.25 an hour, it is more likely that the minimum wage acts as a binding: a. price ceiling, causing excess demand in the market. b. price floor, causing excess demand in the market. c. price ceiling, causing excess supply in the market. d. price floor, causing excess supply in the market.
d. price floor, causing excess supply in the market. (If the market equilibrium wage is above the minimum wage, then the minimum wage is non-binding. Other things the same, a higher minimum wage makes it more likely that the price floor is binding and a binding price floor causes excess supply or a market surplus.)
If demand is highly inelastic and supply shifts to the left: a. neither price nor quantity will rise much. b. price probably will rise significantly, as will quantity. c. price will hardly rise at all; quantity will decline significantly. d. price will rise significantly; quantity hardly changes at all.
d. price will rise significantly; quantity hardly changes at all (A highly inelastic demand curve means that quantity would be much less sensitive to large price changes.)
In a perfectly competitive market, firms set: a. prices but not quantities. b. prices and quantities. c. neither prices nor quantities. d. quantities but not prices.
d. quantities but not prices -Since firms are price takers in a perfectly competitive market, their individual output decisions do not affect price and they choose only the quantity of output they wish to supply at the existing market price.
Season tickets to the Miami Heat games are sold out at $30 a game and some people who wanted to get tickets couldn't buy them. As the season progresses, it is clear that the Heat will make it to the playoffs. What is the effect on resale price of tickets to Miami Heat games, assuming resale is legal? a. Resale price will decline as supply rises. b. Resale price will remain at $30 a game. c. Resale price will rise and supply will rise. d. Resale price will rise and quantity supplied will rise.
d. resale price will rise and quantity supplied will rise. (Prospects of seeing a playoff team will shift demand for resale tickets to the right. As a result the price of resale tickets will rise as will quantity supplied.)
Suppose the equilibrium price of oranges is $0.79 an orange, but government takes steps to prevent the price from exceeding $0.60 an orange. The likely result will be a: a. surplus of oranges as the price ceiling keeps the market from reaching equilibrium. b. lower equilibrium price for oranges as the supply curve for oranges shifts to the right. c. higher equilibrium price for oranges as the demand curve for oranges shifts to the right. d. shortage of oranges as the price ceiling keeps the market from reaching equilibrium.
d. shortage of oranges as the price ceiling keeps the market from reaching equilibrium - A price ceiling for a good does not shift the demand or supply curves of that product. A price ceiling below equilibrium price results in a greater quantity demanded than supplied, or a shortage.
Which of the following statements is correct? a. The long-run supply curve for a purely competitive decreasing-cost industry will be upsloping. b. The long-run supply curve for a purely competitive increasing-cost industry will be perfectly elastic. c. The long-run supply curve for a purely competitive industry will be less elastic than the industry's short-run supply curve. d. The long-run supply curve for a purely competitive increasing-cost industry will be upsloping.
d. the long-run supply curve for a purely competitive increasing cost industry will be upsloping.
The supply curve of a perfectly competitive firm is: a. the average total cost curve only if price exceeds average variable cost. b. nonexistent. c. the marginal cost curve only if price exceeds average total cost. d. the marginal cost curve only if price exceeds average variable cost.
d. the marginal cost curve only if price exceeds average variable cost. -The supply curve for a competitive firm is its marginal cost curve. If price does not exceed average variable cost, the firm will shut down immediately and quantity supplied will be zero.
A significant difference between monopoly and perfect competition is that: a. profits are driven to zero in a monopolized industry but may be positive in a competitive industry. b. competitive firms control market supply, but monopolies do not. c. free entry and exit is possible in a monopolized industry but impossible in a competitive industry. d. the monopolist's demand curve is the industry demand curve, whereas the competitive firm's demand curve is perfectly elastic.
d. the monopolist's demand curve is the industry demand curve, whereas the competitive firm's demand curve is perfectly elastic. -Since the monopolist is the only seller in a market, its demand curve must be the market demand curve and is downward-sloping. Since competitive firms are too small to affect market price, their demand curves must be perfectly elastic, or horizontal.
After several years of slow economic growth, world demand for petroleum began to rise rapidly in the 1990s. Much of the increase in demand was met by additional supplies from sources outside OPEC. OPEC during this time was unable to restrain output among members in its effort to lift oil prices. What best describes these events? a. The rise in demand shifted the demand for oil to the right. OPEC actions shifted the demand for oil back to the left. b. The rise in demand shifted the demand for oil to the right. As price rose, supply of oil also rose. c. The rise in demand reflects a movement down along the demand curve as supply shifted to the right when suppliers produced more oil. d. The rise in demand shifted the demand for oil to the right. As price rose, quantity of oil supplied rose.
d. the rise in demand shifted the demand for oil to the right. as price rose, quantity of oil supplied rose. (An increase in world demand for oil is reflected by a shift to the right in the demand for oil. As a result, price rose and quantity supplied also rose. That existing suppliers supplied more oil is reflected by the movement along the existing supply curve. OPEC had no effect on the market.)
Behavioral economists have found that people are more willing to save if saving is the default option, as in the case in which they have to opt out of an automatic payroll deduction savings plan. Economists call this: a. bounded rationality. b. the ultimatum game. c. a rule of thumb. d. the status quo bias.
d. the status quo bias (These results indicate that people are influenced by the current situation; they are more likely to save if that is what they are currently doing even if it is easy to opt out. Behavioral economists call this the status quo bias.)
A screening question is structured: a. to alter a respondent's behavior. b. to extract information from prisoners. c. to screen unqualified applicants for a job. d. to reveal strategic information about the person who answers.
d. to reveal strategic information about the person who answers
Say that the equilibrium price and quantity both fell. What would you say was the most likely cause?
there was a decrease in demand and no change in supply