Micro. Study Plan Chapter 7 and 8

What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?

ATC= TC/Q; MC= (triangle) TC/ (triangle) Q.

For which of the following reason(s) may firms experience economies of scale?

All of the above.

How are implicit costs different from explicit costs?

An explicit cost is a cost that involves spending money, while an implicit cost is a nonmentary cost.

One description of the costs of operating a railroad makes the following observation:... "The fixed... expenses.. In what sense is this tax smaller when the amount of business is larger?

As production increases, fixed costs can be allocated over a greater amount of output, decreasing the average cost of the tax.

[Related to the Making the Connection] In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu "Griffen behavior is most likely to be found among a range of households that are poor ( but not too poor or too rich)." a. "Griffen behavior" describes the purchase of A. more of a good regardless of the price change. B. more of a good when the price rises. C. more of a good when the price falls. D. less of a good when the price rises.

B

When a positive technological change occurs,

Either (a) or (b).

Many firms consider wage costs to be variable costs. Why do academic book publishers usually consider their wage and salary costs to be fixed costs?

Employees work on several books simultaneously.

The demand curve for a luxury is less elastic than the demand curve for a necessity.

False

The more time that passes, the more inelastic the demand for a product becomes.

False

When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more

False

What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?

Firms have difficulty coordinating production.

suppose there are substantial economies of scale related to oil production from fracking. What is the likely outcome?

Firms will combine through mergers and acquisitions to become larger.

Is it possible for technological changes to be negative? If so, give an example.

It is possible for technological change to be negative. An example is when a firm hires less-skilled workers.

Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city.... What do you think of Jill's reasoning?

Jill is incorrectly ignoring the opportunity cost of using the building she owns.

Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost...

Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing.

Does it apply in the long run?

No

Is the amount of time that separates the short run from the long run the same for every firm?

No

Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged? Explain.

No. An increase in the marginal product of labor will increase the average product of labor.

A student looks at the data in the table to the right... "The marginal product of labor is increasing for the first 3 workers hired... Do you agree with the students analysis? Briefly explain

No. Marginal product initially increase due to division of labor and then decreases due to the law of demising returns.

Suppose a firm has no fixed costs, so all of its costs are variable, even in the short run. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape?

No. The average total cost curve will be continually increasing.

Sally looks at her college transcript... "How is this possible? My grade point average (GPA).... Explain to Sally how this is possible.

Sally's GPA for this semester is lower than her cumulative GPA.

"Henry Ford expected to be able to produce cars at a lower average cost at his River Rouge plant. Unfortunately, because of demising returns, his costs were actually higher."

The statement is incorrect. For was not able to produce cars at lower average cost due to diseconomies of scale.

Is Jill Johnson correct when she says the following: "I am currently producing 20,000 pizzas per month at a total cost...

Though Jill's average total cost of production is decreasing, her marginal cost of producing pizzas could be increasing or decreasing.

Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.

Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.

If demand is perfectly elastic, then what is the effect of an increase in price?

a decrease in quantity demanded to zero

What are implicit costs? An implicit cost is

a nonmonetary opportunity cost.

What is the law of demising returns? The law of demising returns states that

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the fixed input to decline.

As production levels increase, the Nook would become more profitable because

average cost per unit will fall

The Port Authority might be reasonably confident about the $720 million revenue for the agency

because they know that the percentage decrease in the quantity of vehicles will be less than the percentage increase in tolls received.

The 7-Eleven chain of convince stores in Japan reorganized its system for......... Briefly explain whether you agree with this argument.

both a and b

Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.

both a and b.

How is the price elasticity of demand measured?

by dividing the percentage change in the quantity demanded of a product by the percentage change in product's price

As the level of output increases, what happens to the difference between the value of average total cost and average variable cost? As the level of output increases, the difference between the value of average total cost and average variable cost

decreases because average fixed cost decreases as output increases.

Which of the following is most likely to a variable cost for a business firm?

cost of shipping products

If the demand for orange juice is elastic, will a increase in the price of orange juice increase or decrease the revenue received by orange juice sellers? If the price of orange juice increases revenue will ________

decrease

If the demand for orange juice is inelastic, will a decrease in the price of orange juice increase or decrease the revenue received by orange juice sellers? If the price of orange juice decrease revenue will ________

decrease

Economies of scale happen when the firm's long run average total cost ________ as output increases.

decreases

The GPA you earn in a particular semester is your ______ GPA, and your cumulative GPA for all completed semesters is your _____ GPA.

marginal; average

The marginal cost curve intersects both the average variable cost and the average total cost curves at their _______ points.

minimum

An article in the Dallas Morning News discussed the market for green cars such as... This factor is likely to cause the demand for green cars to become

more price elastic

From point A up until point B,

output increases at a decreasing rate.

Refer to the graph on the right. From the origin up until point A,

output increases at an increasing rate.

According to an article in the Wall Street Journal, some small publishers have argued that Amazon has been increasing the prices it sells their books for on its Web site... Some buyers will no longer buy the publisher's books at a higher price. The publisher will earn less revenue only if

sales fall significantly

An output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals ______.

smaller; average fixed cost

Refer to the table below. Which of the following costs are implicit costs? Type of $ Amount Paper 20,000 Wages 48,000 Lease....

the forgone salary and interest

What is minimum efficient scale? Minimum efficient scale is

the level of output at which the long-run average cost of production no longer decreases with output. the level of output at which all economies of scale are exhausted.

What is the difference between total cost and variable cost in the long run? In the long run,

the total cost of production equals the variable cost of production.

Which of the following are sometimes called accounting costs?

explicit costs

According to the law of diminishing marginal utility, as the consumption of a particular good increases, A. total utility increases by larger and larger amounts. B. marginal utility decreases. C. marginal utility increases. D. total utility decreases.

B

An article in the New York Times about J.C. Penney's pricing strategy under former...... In behavioral economics, an "anchor" is A. relating an unknown value or price to another similar known value or price. B. setting the highest possible price for a product. C. linking the price of one product to another product. D. setting the lowest possible price for a product.

A

Before attempting the exercise, click here to watch a short video. Consumers generally believe that it is fair if a firm increases prices following an increase in demand, but it is not fair if a firm increases prices following an increase in the firm's costs. A. False B. True

A

If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product. A. True B. False

A

In many cases, the popularity of people who use a product can make the product desirable. A. True B. False

A

In 2008, Clay Bennett, the owner of the then Seattle Supersonics NBA basketball team (now the Oklahoma City Thunder), estimated that if the team remained in Seattle, he would suffer a loss of about $63 million over the following two seasons. If the team were allowed to move to Oklahoma City, he estimated that he would earn a profit of $19 million. What was the opportunity cost to Bennet of his team playing in Seattle rathe than Oklahoma City? Briefly explain. The opportunity cost to Bennet of his team playing in Seattle rather than Oklahoma City (over a two-year period) is

$82 million because that is the value of the move to Oklahoma City.

When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand?

0

A firm can use anchoring to influence consumer choices so as to increase sales by marking A. a low "sale price" on a product, which makes the regular price appear to be a bargain. B. a high "regular price" on a product, which makes the discounted "sale price" appear to be a bargain. C. a high "sale price" on a product, which makes the regular price appear to be a bargain. D. a low "regular price" on a product, which makes the discounted "sale price" appear to be a bargain.

B

Briefly explain whether you agree with the following observation: "Technological change refers only to the introduction of new products, so it is not relevant to the operations of most firms."

Both a and b.

How are efficiencies realized when combining two firms?

Cutting the overlap between the two firms and leveraging fixed costs across greater quantities.

Two mangers have the following conversation. Manager 1: "The only way we can increase the revenue.... Manager 2: "Cutting the price of a product never increases the amount... Do you agree with the reasoning of Manger 2?

I disagree. Cutting the price will increase the revenue if the demand is price elastic.

What is the difference between the short run and the long run?

In the short run, at least one of a firm's inputs in fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.

What is the difference between technology and technological change?

Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs.

Adam Smith's idea of the gains to firms from the division of labor makes a lot of sense when the good being...

The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.

Older oil wells that produce fewer than 10 barrels of oil... In making your calculation, you take into account the cost of labor,.... Which of the following statements is most true?

The bank loan should not be included in marginal cost because it cannot be avoided by not producing another barrel.

Of the three ways to enter the park-in a private, noncommercial vehicle; on a snowmobile or motorcycle; and by foot, bike, or ski- which way would you expect mohave the largest price elasticity of demand, and which would you expect to have the smallest price elasticity of demand?

The private, noncommercial vechile has the largest price elasticity of demand and visitors 16 and older entering by foot, bike, ski, etc. have the smallest price elasticity of demand.

When the DuPont company first attempted to enter the paint business it was not successful..... Why did this report include as part of the company's loss the amount it had expected to earn--- but didn't--- on its investment in manufacturing paint?

The report sought to include implicit costs because DuPont could have invested its money elsewhere and earned $500,000.

The Statistical Abstract of the United States is published each year by the U.S. Census Bureau.... How can these companies sell the same book for a lower price than the government and still cover their costs?

These companies decrease their average cost of production by increasing production from low levels.

For which of the following products is the price elasticity of demand (in absolute value) the largest?

Tide liquid detergent

Firms often rely on market experiments to calculate the price elasticity of demand for a new product.

True

The more substitutes available for a product, the greater the price elasticity of demand.

True

How do specialization and division of labor typically affect the marginal product of labor? In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers,

allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.

All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?

average fixed cost

What cost measure is equal to AFC + AVC?

average total cost

The price of organic apples falls and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic? The demand for organic apples is

elastic

The entrance fee into Yellowstone National Park in northwestern Wyoming is... The demand for entry into Yellowstone National Park for visitors in private, noncommercial vehicles is

elastic because when the price is high and the quantity demanded is low, demand is elastic

For Jill Johnson's pizza restaurant, explain whether each of the following is a fixed or variable cost. The payment she makes on her fire insurance policy is a _______ cost.

fixed

The $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a ________ cost.

fixed

The lease payment she makes to her landlord who owns the building where her store is located is a ___________ cost.

fixed

Any cost that remains unchanged as output changes represents a firm's

fixed cost

What happens when the quantity demanded is very responsive to changes in price? The percentage change in quantity demanded will be

greater than the percentage change in price.

The Energy Information Administration estimated that in 2012, American consumers spent 4 percent of their incomes on gasoline. If, instead, consumers spent 8 percent of their incomes on gasoline, the price elasticity of demand likely would be

higher

If the firm's marginal costs are $5 at every level output, what shape will the firm's average total cost have? The firm's average total cost curve will be _______.

horizontal

What is a production function? A firm's production function is best described as

illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.

The short-run average cost can never be less the long-run average costs because

in the long run, all inputs are adjusted including the ones that are fixed in the short run.

The law of diminishing returns applies

in the short run.

If the demand for orange juice is elastic, will a decrease in the price of orange juice increase or decrease the revenue received by orange juice sellers? If the price of orange juice decrease revenue will ________

increase

If the demand for orange juice is inelastic, will a increase in the price of orange juice increase or decrease the revenue received by orange juice sellers? If the price of orange juice increase revenue will ________

increase

When Lynch said that "the Nook business will scale," he meant the Nook business will

increase in size gaining economy of scale advantages.

As you move up a linear demand curve, the price elasticity of demand in absolute value

increases

When the marginal product of labor is greater than the average product of labor, tenth average product of labor must be

increasing

According to tan article in the New York Times, in 2011 the Port Authority of New York and New Jersey was planning to.... The Port Authority is assuming that the demand for using bridges and tunnels crossing the Hudson is

inelastic

The price of organic apples rises and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic? The demand for organic apples is

inelastic

On the lower part of linear demand curve below the midpoint, the demand is ________ and raising the price causes total revenue to ________.

inelastic; increase

Which of the following is most likely to be a fixed cost for a farmer?

insurance premiums on property

b. A training program makes a firm's workers more productive. This _____ an example of positive technological change.

is

c. An exercise program makes a firm's workers more healthy and productive. This _____ an example of positive technological change.

is

d. A firm cuts its workforce and is able to maintain its initial level of output. This _____ an example of positive technological change.

is

The price elasticity of demand in the United States for crude oil has been estimated to be -0.061 in the short run and -0.453 in the long run. The demand for crude oil

is more price elastic in the long run than in the short run because in the long run a substitute for crude oil may be found.

Which of the following are examples of a firm experiencing positive technological change? a. A firm is able to cut each worker's wage rate by 10 percent and still produce the same level of output. This _____ an example of positive technological change.

is not

e. A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before. This _____ an example of positive technological change.

is not

The price elasticity of demand for a particular brand of raisin bran is, in absolute value,

larger than the price elasticity of demand for all breakfast cereals.

If a firm increases the price of its product and its total revenue increases, further increases in its price will

lead to further increases in its total revenue as long as the demand remains inelastic.

In general, the price elasticity of demand for a good will be _______ elastic the _______ the share of the good in the average consumer's budget.

less; smaller

a rental car company can realize benefits from economies of scale by

leveraging its purchasing power when buying new cars.

An article in Forbes discussed an estimate that the cost of materials in Apple's iPhone 5 with 64 gigabytes of memory was $230..... Can we conclude from this information that Apple is making profit of about $619 per iPhone? Briefly explain. Apple's profit is

likely less than $619 per iPhone because Apple also has fixed costs of production.

The author's statement would be correct if the price elasticity of demand for the publisher's book is

more than one in absolute value

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the

production function

A sports writing about the Cleveland Indians baseball team made the following observation: The sports writer is assuming that the demand for Indian tickets is

relatively price inelastic

What does the short-run production function hold constant? A short-run production function holds constant

the amount of capital

If the marginal product of labor is falling, is the marginal cost of production rising or falling? Briefly explain. If the additional output from each new worker is falling,

the marginal cost of that output is rising because the only additional cost to producing more output is the additional wages paid to hire more workers.

Is the cost of rent fixed, variable, or can it be both? Briefly explain. Academic book publishers typically consider the cost of rent

to be fixed because it remains constant as output changes.

Factories for producing computer chips are called "fabs".... Why would the rising cost of chipmaking machines lead chipmaking companies, such as intel, to build larger factories? The rising costs of chipmaking machines might lead chipmaking companies to build larger factories

to spread the large fixed cost of the fab across a larger quantity of output

The payment she makes to buy pizza dough is a _________ cost.

variable

The wages she pays her workers is a __________ cost.

variable

Any cost that changes as output changes represents a firm's

variable cost

Which costs are affected by the level of output produced?

variable costs

Economics of scale occur

when a firm's long-run average costs decrease with output.

What are diseconomies of scale? Diseconomies of scale is

when a firm's long-run average costs increase with output.

Explain why the marginal cost curve intersects the average... The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because

when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up.

Refer to the table below. When do diminishing returns in the production of pizzas start?

when the third worker is hired

Recently some colleges and private companies have launched free online courses that can be taken... "Though marginal costs are low,.... The marginal costs of offering a MOOC are low because

while the upfront time to create the material is costly, adding another student is low cost.

What is likely to happen in the long run to firms that do not reach minimum efficient scale? A firm that does not reach its minimum efficient scale

will lose money if it remains in business.

If Avis and Zipcar, before the merger, each were already as efficient as possible as stand alone companies, would a merger provide any additional possible efficiencies for the combined company?

yes, because economies of scale would increase

A market demand curve is derived by A. adding horizontally the individual demand curves. B. adding vertically the individual demand curves. C. adding the substitution effect and the price effect. D. adding horizontally the individual marginal utility curves.

A

Suppose that you are a big fan of the Harry Potter books..... If you keep the copy rather than sell it, then all of the following are correct except A. you are making a rational choice since the opportunity cost of the book is $5,000. B. you are behaving in a way that can be explained by the endowment effect. C. you have made choices that do not appear to be economically rational. D. you value the book you already own more than a book you do not yet own.

A

Suppose the price of a bag of Frito's Corn Chips declines from $0.69 to $0.59. Which is likely to be larger: the income effect or the substitution effect? A. The substitution effect will be larger. B. The income and substitution effect will be the same. C. There will be no effect. D. The income effect will be larger.

A

Suppose your little brother tells you on Tuesday that one of his friends offered him $20 for his Barry Bonds rookies baseball card, but your brother decided not to seek the card... (which we will assume he could have done), your brother uses the money to go to the movies. Which of the following is the mistake your brother is making? A. He is exhibiting the endowment effect. B. He is failing to take into account sunk costs. C. He is overly optimistic about future behavior. D. None of the above.

A

The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible form among all the combinations that their budgets allow them to buy. A. True B. False

A

The substitution effect is the change in the quantity demanded of a good that results from ____________, holding constant the effect of the price change on consumer purchasing power. A. a change in price making the good more or less expensive relative to other goods B. the tendency of people to be unwilling to see something they own C. an increase in the the usefulness of a product as the number of consumers who use it increases D. a change in the price of substitute for the good.

A

Use the information in the following table to calculate the marginal utility from consuming the second ice cream cone. ICC TU MU 1 10 ? 2 18 ? 3 ? 6 4 28 ? 5 ? 2 A. 8 B. 9 C. 10 D. 18

A

What happens when consumption of a product is path dependent? A. The cost of switching to a product with a better technology gives the product with the initial technology an advantage. B. The product can sell for a higher price when it is new and there are no similar products consumers can buy than when it is older and consumers can choose to buy substitutes for the product. C. The technology used to produce the product has a specific growth path. D. The consumption path that a product follows depends on the firm that uses the best technology to product it.

A

What happens when network externalities are present? A. The usefulness of a product increases with the number of consumers who use it. B. The usefulness of telecommunication equipment rises. C. The usefulness of a product decreases as the number of firms selling the product increases. D. The usefulness of networks diminishes with the number of consumers who enter them.

A

What is the definition of marginal utility? A. the change in enjoyment or satisfaction a person receives from consuming one additional unit of good or service. B. the average utility from consuming a good service multiplied by the number of units of that good or service consumed. C. the utility from consuming a good or service divided by the number of units of that good or service consumed. D. the enjoyment or satisfaction people receive from consuming goods and services. E. utility measured in utils.

A

When the price of pizza falls along the demand curve for pizza, A. the consumer adjusts the consumption of both pizza and Coke following the rule of equal marginal utility per dollar. B. the consumer follows the rule of equal marginal utility per dollar does not always adjust the consumption of pizza or Coke because that may lead to consuming fractional slices of pizza or fractional cup of Coke. C. the consumer only adjusts the consumption of pizza since price of Coke remains unchanged and does not follow the rule of equal marginal utility per dollar. D. the consumer may adjust the consumption of both pizza and Coke provided he does not consume fractional slices of pizza or fractional cups of Coke and does not follow the rule of equal marginal utility per dollar.

A

[Related to Don't Let This Happen to You] Mary is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her shopping cart. The marginal utility of the fourth bag of corn chips is 10, and the marginal utility of the fifth bottle of soda is also 10. Is Mary maximizing utility? A. This cannot be determined because we do not know the price of corn chips and soda whether or not she fully spent her budget allocated to corn chips and soda. B. No. She is not maximizing marginal utility. C. No. She is maximizing marginal utility but not total utility. D. Yes. She is maximizing utility.

A

b. The poorest of the poor would less likely to exhibit this behavior than people with slightly higher incomes because A. the poorest of the poor often cannot purchase more of a good when the price rises. B. different prices are charges to different groups. C. people with slightly higher incomes have less ability to choose goods. D. the poorest of the poor don't follow price changes.

A

What is the economic definition of utility? Utility is A. the enjoyment or satisfaction people receive from consuming goods and services. B. the change in enjoyment or satisfaction a person receives from consuming one additional unit of good or service. C. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. D. the decrease in additional satisfaction consumers receive as they consume more of a good or serving during a given period of time. E. the sum of consumer and producer surplus. Is it measurable? yes or no

A no

According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations? A. If the good was a gift the had great sentimental value. B. If they are offered a price greater than the price they would pay if they did not already own the good. C. If they can't replace the good. D. IF they are offered a price lower than the price they would have to pay to replace the good.

B

After owning a used car for two years, you start having problems with it. you take it into the shop and are told that it will cost $4,000 to repair it. In considering whether to repair it or not, you should take what into consideration? A. Which alternative will give you the highest utility. B. The comparison of the marginal benefit of spending $4,000 to have the car repaired against the benefits of spending the $4,000 in other ways. C. The price you paid for the car. D. None of the above.

B

Anchoring is relating a value to some other known value A. that the customer has previously experienced. B. even if the second value is irrelevant. C. only when the second value is irrelevant. D. except when the second value is irrelevant.B

B

In an opinion survey, Snoopy was found to be the most appealing celebrity endorser. The beagle from the popular Peanuts comic strip appears in commercials for the insurance company MetLife. The advantages of using Snoopy are that he always appears to be A. aggressive and fast-talking through the advertisement . B. lovable, funny and he has a reassuring aura. C. a scary and menacing dog causing fear. D. boring and dull, just like an insurance sales man.

B

In considering the attitudes of consumers toward fairness, which of the following have economists found to be true? A. People usually ignore fairness when making spending decisions. B. People attempt to treat others fairly, even if doing so makes them worse off financially. C. People attempt to treat others fairly, but only if doing so makes them better off financially. D. People are interested only in making themselves as well off as possible.

B

In deciding between consuming more goods now or saving money, consumers should do which of the following? A. Allocate their spending to which of the two they like best. B. Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal. C. Choose an amount of current spending which gives them the highest total utility. D. Weigh the additional utility they get from consumption.

B

In the ultimatum game, if neither the allocator nor the recipient cared about fairness, what would be the optimal distribution of $20.00? A. $19.99 for recipient and $0.01 for the allocator. B. $19.99 for the allocator and $0.01 for the recipient. C. $10.00 for the allocator and $10.00 for the recipient. D. $20.00 for the allocator and nothing for the recipient.

B

In which of the following situations are social influences on consumer decision making likely to be greater: choosing a restaurant for dinner or choosing a brand of toothpaste to buy? Consumer decision making is likely to be more affected by social influences when A. choosing a brand of toothpaste because consumers tend to have more knowledge about this form of consumption. B. choosing a restaurant for dinner because this takes place publicly. C. choosing a brand of toothpaste because such consumption has fewer celebrity endorsements. D. choosing a restaurant for dinner because this typically costs more. E. choosing a brand of toothpaste because there are no network externalizes.

B

Marginal utility is more useful than total utility in consumer decision making because A. consumer maximize utility by maximizing marginal utility from each good. B. optimal decisions are made at the margin. C. optimal decisions are made by consuming until marginal utility becomes negative. D. consumers maximize utility by equalizing marginal utility from each good. E. it is possible to measure marginal utility but not total utility.

B

Penney found this strategy because A. their major competitor, K-Mart, realized higher sales with this policy. B. it sold almost three-quarters of its products at prices marked down by at least 50 percent. C. their major competitor, Walmart, introduced this new policy also. D. it sold almost one-half of its products at prices marked down by at least 35 percent.

B

Rules of thumb are guides to decision making that always produce optimal choices. A. True B. False

B

The disadvantages of using Snoopy are that he appears to be A. serious and focused on his finances. B. too cute and cuddly to be giving insurance advice. C. too wordy and informed on matters of life and death. D. knowledgeable and wise about insurance laws.

B

The income effect causes quantity demanded to _______ when the price of a normal good decreases, and causes quantity demanded to _________ when the price of an inferior good decreases. A. decrease; increase B. increase; decrease C. decrease; decrease D. increase; increase

B

Utility refers to how much consumers utilize a product or service. A. True B. False

B

What is a budget constraint? A. It is the amount of money necessary to purchase a given combination of goods. B. It is the limited amount o income available to consumers to spend on goods and services. C. It is the amount of utility that a consumer receives from spending a limited amount of income on goods and services. D. It is the amount of income that yields equal marginal utility per dollar spent.

B

Which of the following products is most likely to have significant network externalities? A. LCD television sets B. Fax machines C. Dog food D. 3D television sets

B

[Related to the Making the Connection] An article in the New York Times notes that classic rock start Tom Petty likes to perform in smaller venues that don't have as many seats as large venues such as Madison Square Garden in New York. According to the article, Petty insists that tickets to his concert be sold "below market price." The author of the article wondered why "Petty and his promoter would price tickets so low when there were clearly people willing to pay much, much more." What is the best indicator that Petty sells tickets below market price? A. Large venues such as Madison Square Garden take a cut of all tickets sold at market price. B. Scalpers are able to sell many tickets high above the original price. C. The small venues refuse to sell tickets above market price. D. Petty is a classic rock star that believes in trusting nobody over thirty.

B

c. If a good has an upward-slopping demand curve, then is has to be A. a luxury good, and the income effect would have to be equal to the substitution effect. B. an inferior good, and the income effect would have to be larger than the substitution effect. C. a normal good, and the substitution effect would have to be larger than the income effect. D. a necessity, and the income effect would have to be smaller than the substitution effect.

B

How else can you calculate the price elasticity of demand?

Both a and b.

Assume that a consumer buys only two goods - pizza and Coke. He is faced with a budget constraint because he has a limited amount of income to spend on the two goods. All of the following statements regarding the individual's demand curve for pizza are true except that A. at each point on the demand curve, marginal utility per dollar spent on pizza equals marginal utility per dollar spent on Coke. B. at each point on the demand curve, the individual's budget constraint holds - the consumer spends only the limited amount of income that he has. C. at each point on the demand curve, marginal utility from the consumption of pizza equals marginal utility from the consumption of Coke. D. at each point on the demand curve, the individual maximizes his utility.

C

Based on Thaler's statement, how do his stolen bottles of wine illustrate the endowment effect, and why does he make the statement: "I'm a good enough economist to known there's a bit of an inconsistency there"? Thaler's stolen bottles of wine illustrate the endowment effect because A. Thaler's preferences for bottles of wine have changed over time. B. Thaler is reluctant to buy bottles of wine again because they are associated with increased risk. C. Thaler places a higher value on bottles of wine when he owns them than when he does not own them. D. Thaler would rather have given the original bottles of wine away than have them stolen. E. new bottles of wine are not a perfect substitute for the original bottles of wine.

C

Does purchasing a smaller (larger) quantity demanded when price falls (rises) mean that demand curves for inferior goods should slope upward? A. this does mean that the demand curves for inferior goods should slope upward. B. yes, demand curves for inferior goods will always have a positive slope. C. This does not mean that the demand curves for inferior goods should slope upward as we must also take into account the substitution effect. D. no, because the income and substitution effects always work in the same direction.

C

If pizza is an inferior good and its price falls, which of the following will most likely occur? A. The income and substitution effect work in the same direction and cause you to want to eat more pizza. B. The income effect causes you to want to eat more pizza. C. The substitution effect cause you to want to eat more pizza. D. The income and substitution effect work in the same direction and cause you to want to eat less pizza.

C

In an article in the Quarterly Journal of Economics, Ted O'Donoghue and Matthew Rabin make the following...... Which of the following is an example of pursuing a goal which is in a person's long-term interest? A. Spending more money than you earn. B. Eating donuts instead of sticking to a healthy diet. C. Succeeding in school. D. Going to the movies instead of studying.

C

In the ultimatum game, when the allocator and the recipient care about fairness, how does that affect the distribution of $20.00? A. Allocators usually offer recipients a very small share. B. Allocators and recipients always end up sharing the $20.00 equally. C. Recipients usually reject offers of less than a 10 percent share. D. Allocators receive everything, and recipients receive nothing.

C

Should the owner's decision about whether or not to sell depend on what price originally paid for the townhouse? The owner's decisions about whether or not to sell should A. not depend on the price he originally paid for the townhouse because that is a sunk cost he incurred. B. only depend on the opportunity costs incurred from using the house for himself. C. depend on the price he originally paid for the townhouse because that is a relevant monetary cost. D. only depend on the capital gain that he can enjoy from selling it at the highest possible price.

C

Thaler's behavior is inconsistent because A. he was accounting for the explicit monetary cost of the wine. B. he was ignoring the sunk cost of the wine. C. he was ignoring the nonomonetary opportunity cost of the wine. D. he was accounting for network externalities from the wine. E. he was not overly pessimistic about the wine's value.

C

The Economist magazine offered the following two options for subscribing:..... A large majority of subscribers now chose option 2 rather than option 1. What insights from behavioral economists that were discussed in this chapter can help explain this result? A. Option 2 looked good compared to option 1; but when option 3 was offered, option 1 looked better. B. Three options generally provide the optimal outcome when pricing choices. C. Option 1 looked good compared to option 2; but when option 3 was offered, option 2 looked better. D. Two options generally do not provide the optimal outcome when pricing choices.

C

The following excerpt is from a letter sent to a financial advice columnist:... How should the $3,000 in fees and costs be considered? A. It is an explicit cost of paying off the mortgage. B. It is sunk cost and should be taken into account when deciding to pay off the mortgage. C. It is a sunk cost and should not be taken into account when deciding to pay off the mortgage. D. It should be taken into consideration in the decision as to whether or not to pay off the mortgage.

C

The law of diminishing marginal utility suggest that A. consumers experience less total satisfaction on lower budget constraints. B. consumers experience less total satisfaction as they consume more of a good or service. C.consumers experience diminishing additional from satisfaction as they consume more of a good or service. D. consumers experience less total satisfaction from inferior goods than from normal goods. E. consumers experience less total satisfaction from a good or service over time.

C

The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by A. maximizing the marginal rate of substitution. B. maximizing the marginal utility per dollar spent across goods and services C. equalizing the marginal utility per dollar spent across goods and services. D. equalizing the last dollar spent across goods and services E. consuming goods and services until marginal utility is zero.

C

Three mistakes consumers often make are A. failing to ignore non monetary opportunity costs, failing to ignore sunk costs, and making decisions without full information. B. ignoring nonmonetary opportunity costs, failing to ignore sunk costs, and being overly pessimistic about the future. C. ignoring nonmonetary opportunity costs, failing to ignore sunk costs, and being overly optimistic about the future. D. ignoring nonmentary opportunity costs, ignoring sunk costs, and making decisions without full information. E. ignoring nonmentary opportunity costs, ignoring sunk costs, and being overly optimistic about the future.

C

What is path dependence? Path dependence is where A. the product endorsed by the most celebrities has an advantage over products endorsed by fewer celebrities. B. the product with the greatest endowment effect has an advantage over the products with lower endowment effects. C. the technology that was first available has advantages over better technologies that were developed later. D. the technology that was developed most recently has advantages over older technologies. E. the product with the lowest switching costs has an advantage over products with higher switching costs.

C

When the price of a product changes, A. it changes the relative price of the product causing a network effect and at the same time changes the purchasing power of the buyer causing an income effect as well. B. it only causes a substitution effect by changing the relative price of the product. C. it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well. D. it only causes an income effect by changing the purchasing power of the consumer.

C

In what sense did J.C. Penney "pull up the anchor"? J.C. Penney A. eliminated coupons and created the 'club status'. B. created the reward status based on purchases. C. began charging' everyday low prices' instead of the typical marking down process. D. began setting their prices at the equivalent of WalMart's.

Came

A budget constraint: A. shows the change in total utility a consumer receives from consuming one additional unit of a good or service. B. shows the combinations of consumption bundles that give the consumer the same utility. C. shows the rate at which a consumer would be willing to trade off one good for another. D. indicates the limited amount of income available. to consumers to spend on goods and services. E. indicated the marginal rate of substitution.

D

Data from health clubs show that members who choose a contract with a flat monthly fee over $70 attend, on avery 4.8 times per month. They pay a price per expected visit of more than $14, even though a $10-per-visit fee is also available. Why would these consumers choose a monthly contract when they lose money on it? A. At the time they signed up they estimated that they would attend 4.8 times a month. B. They are ignoring their sunk costs. C. They behavioral rationally because they calculated an accurate usage of the gym. D. They are overly optimistic about their future behavior in attending the gym regularly.

D

Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price. A. When the price of a good rises, the budget constraint shifts outward, leading consumers to buy less of the good. B. When the price of a good rises, this causes a negative income effect that is larger in absolute value than a corresponding positive substitution effect, leading consumers to buy less of that good. C. When the price of a good declines, this causes positive substitution and income effects, leading consumers to buy more of that good. D. When the price of a good declines, the ration of the marginal utility price rises, leading consumers to buy more of that good. E. When the price of a good declines, the marginal rate of substitution changes, leading consumers to buy more of that good.

D

How does using 'rules of thumb' impact the likelihood of a consumer making an optimal choice? Consumer utility A. is optimized because rules of thumb incorporate all available information. B. is optimized because rules of thumb are short cut rules for decision among. C. may be sub-optimized because rules of thumb incorporate all available information. D. may be sub-optimized because rules of thumb may not reflect current reality.

D

In which of the following situations does the law of diminishing marginal utility not hold? A. Mike finds that the additional utility of driving his new car around the block fell after four trips. B. I tried skiing, but after two runs I was too cold and wanted to sit in the ski lodge. C. After eating three pieces of pizza, I am thirsty and want a coke. D. For methamphetamine addicts, the more dosages of the illegal drug, the more euphoric they become.

D

Las Vegas is one of the most popular tourist destinations in the United States. In November 2008, the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to $5.99 for local residents, while keeping the regular price of $14.99 for nonlocal. Why would the restaurant do this? A. They wanted to appear unfair to tourists. B. Tourists will return often to the restaurants. C. They had a more difficult time raising prices when it was justified by cost increases. D. They were willing to trade off some profits to keep their regular customers happy.

D

Network externalities are present when the usefulness of a product A. increases because there are no switching costs. B. increases because there is no market failure. C. increases with the endowment effect. D. increases with the number of consumers who use it. E. decreases because it is endorsed by celebrities.

D

Petty and his manger might want tickets to have prices below the market price because A. they have a strong interest in funding scalpers' profits. B. they do not understand basic economics. C. they are trying to avoid confiscatory taxes by the federal government. D. below market prices allow poorer fans to attend the concert.

D

Rob Neyer is a baseball writer for sbnation.com...... What should Rob do? A. He should weigh the additional cost of his ticket plus the additional cost of being in the sun. B. He should move into the shade. C. He should not ignore the price he paid for the ticket. D. He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.

D

Someone who owns a townhouse wrote to a real estate advice columnist to ask whether he should sells townhouse or wait and sell it in the future when he hoped that prices would be higher.... Do you agree with the columnist? In what sense are you buying something if you don't sell it? A. Disagree. The owner may want this townhouse more than any other townhouse that he doesn't own. B. Agree. The owner should not consider the cost of buying the house since is a sunk cost. C. Disagree. If the owner doesn't sell the house, he is not incurring any cost from living in it. D. Agree. Every day the owner uses the house, there is an opportunity cost involved that is equal to the cost of not selling the house.

D

Suppose that Amazing Spider-Man 2 comes out, and hundreds of people arrive at a theater and discover that the movie is already sold out. Meanwhile, the theater is also showing a boring movie in its third week of release in a mostly empty theater. Why would this firm change the same $7.50 for a ticket to either movie, when the quantity of tickets demanded is much greater than the quantity supplied for one movie, and the quantity of tickets demanded is much less than the quantity supplied for the other? A. The firm may do this because customers think this is far. B. The firm may do this because the excuses demanders from The Amazing Spider-Man may also decide to stay and watch their second-favorite movie, while planning to return to see The Amazing Spider-Man later. C. The firm may do this because a sell-out creates even more interest in the movie, bringing in more customers later in the week. D. All of the above.

D

Suppose the wage you are being paid increases. Is there an income and substitution effect involved? If so, what is being substituted for what? A. It is impossible to tell without the wages given. B. No, there is no income and substitution effect. C. Yes, there is an income and substitution effect. Leisure is being substituted for work. D. Yes, there is an income and substitution effect. Work is being substituted for leisure.

D

The chapter states: "When the price of a normal good falls, the income and substitution effects work in the same direction." This statement means: A. If the price of an inferior good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same direction. B. The income and substitution effects are different names for the same thing. C. If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will decrease quantity demanded, so these two effects are in opposite direction. D. If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same directions.

D

The marginal utility per dollar you are spending on iTunes music downloads is less than the marginal utility per dollar you are spend on Red Bull. According to the rule of equal marginal utility per dollar spent, what can you do to increase your total utility from consumption of music downloads and Red Bull? A. you can increase your consumption of music downloads. B. you can increase your consumption of both goods. C. you can decrease your consumption of both goods. D. you can increase your consumption of Red Bull.

D

The optimal combination of pizza and coke you should consumer is the one A. where your marginal utility of pizza equals your marginal utility of coke. B. where your total utility of pizza equals your total utility of coke. C. where your marginal utility of pizza equals your total utility of pizza, and your marginal utility of coke equals your total utility of coke. D. where your marginal utility per dollar spend on pizza equals your marginal utility per dollar spent on coke.

D

The result of the strategy was A. a significant increase in sales and a bonus for Johnson. B. a gain in market share, but a drop in short-run revenue. C. a fall in market share, but a rise in short-run revenue. D. a significant drop in sales and the firing of Johnson.

D

What is the formula for the price elasticity of demand? The formula for the price elasticity of demand is A. the percentage change in price divided by the percentage change in quantity demanded. B. the percentage change in quantity supplied divided by the percentage change in quantity demanded. C. the change in price divided by the change in quantity demanded. D. the percentage change in quantity demanded divided by the percentage change in price. E. the change in quantity demanded divided by the price.

D

When does the law of diminishing marginal utility hold true? A. it holds true in every situation B. it does not hold true for necessitates C. it has not proven to be true D. it holds true in most situations involving the consumption of a good.

D

Which of the following mistakes do consumers commonly commit when making decisions? A. They are unrealistic about their future behavior. B. They fail to ignore sunk costs. C. They take into account monetary costs but ignore nonmonetary opportunity costs. D. All of the above are mistakes consumers commonly commit when making decisions.

D

Which of the following reasons do economists use to explain why people are overweight? A. People overvalue the utility from current choices. B. People undervalue the utility to be received in the future. C. People's preferences are not consistent over time. D. All of the above explain why people are overweight.

D

Behavioral economics is the study of A. fairness in decisions making B. obtaining information to make economically rational decisions. C. social influences on decision making. D. the economically rational actions people take to reach their goals. E. situations in which people make choices that do not appear to be economically rational.

E

Economically rational means that consumers and firms A. obtain full information prior to taking actions to reach goals. B. take into account monetary costs but ignore nonmonetary opportunity costs. B. take into account monetary costs but ignore non monetary opportunity costs. C. are realistic about the present but not necessarily the future. D. take into account monetary costs and sunk costs. E. take actions that are appropriate to teach goals given available information.

E

For what types of products are network externalities likely to be important? Network externalities are likely to be important for products that A. are widely used. B. use inferior technology. C. are inexpensive. D. are perishable. E. both a and b.

E

How does the fact that consumers apparently value fairness affect the decision that businesses make? A. Firms will raise prices in response to an increase in demand. B. Firms will set prices equal to the long-run average cost of production. C. Firms are not affected by consumers' value of fairness. D. Firms will not raise prices in response to an increase in costs. E. Firms will not raise prices in response to an increase in demand.

E

Speaking about a recent trip to Switzerland, Daniel Hammermesh made the following comment in the New York Times: A waste of time! After arriving at our hotel in Switzerland at 7 p.m., my wife and I had both hoped to work on our computers-but we couldn't. Although we had brought universal plug adapters (which convert American plugs to European, Australian, and English outlets), it turns out that Switzerland has its own unique three-prong plug. Why? This kind of plus adapter is not sold with standard adapter sets. Why does Switzerland renounce the network externalities that would come with using standard European plugs with their standard 220-volt electricity? How is Switzerland "renouncing network externalizes" by not using standard European plugs? Switzerland is "renouncing network externalities" by A. increasing the marginal utility of the standard European plug. B. promoting the three-prong plug as a complement to the standard European plug. C. increasing the profitability of producing a related good such as adapters for three-prong plugs. D. increasing the usefulness of a related good such as three-prong plug adapters. E. limited the usefulness of the standard European plug.

E

What would need to be true for a demand curve to be upward sloping? A. The good would have to be an inferior good. B. The income effect would have to be larger (in absolute value) than the substitution effect. C. The good would have to be an inferior good, and the income effect would have to be smaller (in absolute value) than the substitution effect. D. The good would have to be a normal good, and the income effect would have to be larger (in absolute value) than the substitution effect. E. The good would have to be an inferior good, and the income effect would have to be larger (in absolute value) than the substitution effect.

E

Why isn't elasticity just measured by the slope of the demand curve? A. Price elasticity of demand is the same as the slope of the demand curve. B. The slope of the demand curve is negative. C. The slope of the demand curve is often unknown. D. The slope of the demand curve changes along the curve. E. The slope can change dramatically, depending on the units chosen for quantity and price.

E

Which determinant is the most important? __________________ is the most important determined.

The availability of close substitutes

What is the advantage of the midpoint method?

The midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price.

What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:

availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.

The publisher of a magazine gives his staff the information in the table below. Current price $2.00 per issue Current sales 150,000 copies per month Current total costs $450,000 per month In order for the publisher's analysis to be correct,

demand is perfectly inelastic

Demand for frozen cheese pizza is likely to be

elastic

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _________ in this range.

elastic

One study found that the price elasticity of demand for soda is -0.78, while the price elasticity of demand for Cocoa-Cola is -1.22. The price elasticity of Coca-Cola is (interpret the absolute value of these elasticities, i.e., ignore the minus sign):

greater than it is for soda as a product because there are more substitutes for Coca-Cola than soda.

Demand for prescription medicine is likely to be

inelastic

Is the demand for agricultural products elastic or inelastic? Why? The demand for agricultural products is

inelastic because such products represent a small share in the consumer's budget.

Considering only the income effect, if the price of an inferior good declines, would a consumer want to buy a larger and smaller quantity or a smaller quantity of the good? A. If the price of a good increase, the consumer has less purchasing power, so he would want to purchase less of an inferior good. B. If the price of a good declines, the consumer has greater purchasing power, so he would want to purchase less of an inferior good. C. If the price of a good declines, the consumer has greater purchasing power, so he would want to purchase more of an inferior good. D. If the price of a good increase, the consumer has less purchasing power, so he would want to purchase more of an inferior good.

large B small C

In the 2010 holiday season, Steve Richardson decided to cut the prices of his hand-crafted wooden puzzles to increase.... The demand for these puzzles

must be inelastic because the percentage increase in the quantity demanded for orders is less than the percentage decrease in price of the puzzles.

What is the midpoint method for calculating price elasticity of demand? The midpoint method for calculating price elasticity of demand is:

the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices.