Micro Test 2
What is always true at the quantity where average total cost equals price? A) Profit is zero. B) Revenue is maximized. C) Profit is maximized. D) Marginal cost equals marginal revenue.
A
When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent. This indicates that the demand for tortilla chips is A) price inelastic. B) price elastic. C) unit price elastic D) perfectly inelastic.
A
In summer, the strawberry market in California is perfectly competitive. Suppose information about the antioxidants properties of strawberries increases the demand for strawberries. What happens to the demand curve faced by an individual strawberry producer in the short run? A) The demand curve facing the individual producer becomes more inelastic as more people desire strawberries. B) The demand curve facing the individual producer shifts upwards. C) The demand curve facing the individual producer shifts downwards. D) The demand curve facing the individual producer shifts to the right
B
A perfectly competitive firm's marginal revenue A) is greater than price. B) is less than price because a firm must lower its price to sell more. C) is equal to price. D) may be either greater or less than price, depending on quantity sold
C
A recent study indicated that "Stricter college alcohol policies such as raising the price of alcohol, or banning alcohol on campus, decreases the number of students who use marijuana." This indicates that the cross price elasticity between alcohol and marijuana is positive. T/F
False
If demand for a product is perfectly inelastic, a change in price will not change total revenue.
True
Which of the characteristics of perfect competition assures that economic profit will be zero in the long run? A) Each firm's output is small relative to the total market output. B) Goods produced in the market are identical. C) Each firm is a price taker. D) There are no barriers to firms entering or exiting the market. E) All of the above.
D
Which of the following does NOT hold true for the perfectly competitive firm in long-run equilibrium? A) Its economic profit will be zero. B) It will be minimizing average total cost. C) It will be charging a price equal to marginal cost. D) Marginal cost is minimized.
D
Which of the following does NOT hold true for the perfectly competitive firm in long-run equilibrium? A) Its economic profit will be zero. B) It will be minimizing average total cost. C) It will be charging a price equal to marginal cost. D) Marginal cost is minimized.
D
Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative. T/F
False
Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative. T/F
False
If automobiles and gasoline are complements, then their cross price elasticity is positive.T/F
False
If demand is unit price elastic, a 10 percent increase in price will result in a 10 percent increase in revenue. T/F
False
The government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: palm wine and pampers. If the price elasticity of demand for the goods are -0.47 and -1.89 respectively, which good should it tax if the goal is to raise revenue?
If the goal is to raise revenue, it should tax palm wine
Why would a firm that incurs losses choose to produce rather than shut down?
In the short run, a firm cannot avoid its fixed cost. Thus, if it shuts down its maximum loss equals the amount of its fixed cost. A firm that incurs losses might choose to produce rather than shut down when it is possible to reduce its losses below the amount of its fixed cost. This will occur if the total revenue it receives exceeds its variable cost of production.
Why would a firm that incurs losses choose to produce rather than shut down?
In the short run, a firm cannot avoid its fixed cost. Thus, if it shuts down its maximum loss equals the amount of its fixed cost. A firm that incurs losses might choose to produce rather than shut down when it is possible to reduce its losses below the amount of its fixed cost. This will occur if the total revenue it receives exceeds its variable cost of production.
Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each. a. Calculate the price elasticity of demand using the midpoint formula. b. Calculate the change in revenue as a result of the price cut.
Price elasticity of demand = -2; Change in revenue = $700-$540 = $16
In the mid-1990s, cattle ranchers in the U.S. kept raising cattle even though prices were at a ten-year low and well below average total cost. What is the likely explanation for this? A) Continuing to operate resulted in smaller losses than would have been incurred by shutting down. B) The ranchers were hoping to receive government subsidies. C) The exit costs were too high. D) Cattle is an important source of protein and its production is essential for the United States.
A
In the mid-1990s, cattle ranchers in the U.S. kept raising cattle even though prices were at a ten-year low and well below average total cost. What is the likely explanation for this? A) Continuing to operate resulted in smaller losses than would have been incurred by shutting down. B) The ranchers were hoping to receive government subsidies. C) The exit costs were too high. D) Cattle is an important source of protein and its production is essential for the United States
A
Jerrell's demand for pizza is price elastic. This means that Jerrell A) responds significantly to changes in the price of pizza. B) will not buy any pizza if its price increases. C) buys roughly the same amount regardless of price. D) prefers hamburger to pizza
A
Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is A) negative, so Joan considers hamburger to be an inferior good. B) positive, so Joan considers hamburger to be an inferior good. C) positive, so Joan considers hamburger to be a normal good and a necessity. D) negative, so Joan considers hamburger to be a normal good.
A
Opera Estate Girls' School is considering increasing its tuition to raise revenue. If the school believes that raising tuition will increase revenue, A) it is assuming that the demand for its education is price inelastic. B) it is assuming that the demand for its education is price elastic. C) it is assuming that the demand for its education is unitarily price elastic. D) it is assuming that the supply of its education is price inelastic.
A
Producing where marginal revenue equals marginal cost is equivalent to producing where A) total profit is maximized. B) average cost equals average revenue. C) average cost is minimized. D) both A and C are correct
A
Producing where marginal revenue equals marginal cost is equivalent to producing where A) total profit is maximized. B) average cost equals average revenue. C) average cost is minimized. D) both A and C are correct.
A
Suppose that when the price per case of Bullmoose beer rises from $14 to $16, the quantity demanded falls from 300 to 200 cases per week. Using the midpoint formula, calculate the price elasticity of demand (in absolute value) over this range? A) 3 B) 0.33 C) 0.032 D) 2
A
Suppose that when the price per case of Bullmoose beer rises from $14 to $16, the quantity demanded falls from 300 to 200 cases per week. What will happen to Bullmoose Brewery's total revenue in response to this price increase? A) decrease B) increase C) no change D) insufficient information to answer question
A
Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12. Which of the following will happen? A) The firm will not sell any output. B) The firm will sell more output than its competitors. C) The firm's revenue will increase. D) The firm's profits will increase.
A
Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12. Which of the following will happen? A) The firm will not sell any output. B) The firm will sell more output than its competitors. C) The firm's revenue will increase. D) The firm's profits will increase.
A
Suppose the supply of bicycles is price elastic. This means that suppliers A) respond significantly to changes in the price of bicycles. B) will not increase quantity supplied if the price of bicycles increases. C) will produce roughly the same amount regardless of price. D) face many substitutes for bicycles.
A
Suppose when the price of jean-jackets increased by 10 percent, the quantity supplied increased by 16 percent. Based on this information, calculate the value of the price elasticity of supply of jean-jackets. A) 1.6 B) 0.625 C) 6% D) There is insufficient information to answer the question
A
The cross-price elasticity of demand between Coke and Pepsi is calculated by dividing A) the percentage change in quantity demanded of Coke by the percentage change in the price of Pepsi. B) the percentage change in quantity demanded of Coke by the percentage change in the quantity demanded of Pepsi. C) the percentage change in the price of Pepsi by the percentage change in quantity demanded of Coke. D) the percentage change in the price of Coke by the percentage change in the price of Pepsi.
A
The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to A) decrease by approximately 12 percent. B) decrease by approximately 60 percent. C) decrease by approximately 32 percent D) decrease by approximately 26 percent.
A
The price elasticity of supply of hotdog buns is estimated to be 1.5. Other things equal, this means that a 10 percent decrease in the price of hotdog buns will cause the quantity of hotdog buns supplied to decrease by A) approximately 15 percent. B) approximately 1.5 percent. C) approximately 25 percent D) approximately 5 percent.
A
To calculate the price elasticity of demand we divide A) the percentage change in quantity demanded by the percentage change in price. B) the percentage change in price by the percentage change in quantity demanded. C) rise by the run D) the average price by the average quantity demanded.
A
To calculate the price elasticity of supply, we divide A) the percentage change in quantity supplied by the percentage change in price. B) the percentage change in price by the percentage change in quantity supplied C) rise by the run D) divide the average price by the average quantity supplied.
A
Using the midpoint formula, calculate the price elasticity of portable air conditioners if an increase in price from $300 to $360 leads to an increase in the quantity supplied from 10,000 to 14,000. A) 1.83 B) 1.5 C) 0.16 D) 0.09
A
What is always true at the quantity where average total cost equals price? A) Profit is zero. B) Revenue is maximized. C) Profit is maximized. D) Marginal cost equals marginal revenue.
A
What will happen to the price elasticity of demand for Bullmoose if two more breweries were established in the community? A) increase (in absolute value), that is, demand becomes more price elastic B) decrease (in absolute value), that is, demand becomes more price inelastic C) the entrance of two new breweries will only affect revenue not demand elasticity. D) the entrance of two new breweries will affect supply elasticity and not demand elasticity.
A
Which of the following could explain why the demand for table salt is inelastic? A) Households devote a very small portion of their income to salt purchases. B) Salt is a luxury good. C) Salt is a rare commodity. D) The time frame considered must be the short run because the demand for salt is quite inelastic in the short run but with passage of time, the demand becomes more elastic.
A
Which of the following is the best example of a perfectly competitive producer? A) The average corn farmer in Illinois. B) A Taco Bell restaurant. C) Ford Motors. D) UPS.
A
Which of the following is the best example of a perfectly competitive producer? A) The average corn farmer in Illinois. B) A Taco Bell restaurant. C) Ford Motors. D) UPS.
A
Which of the following pairs of good is likely to have a negative cross-price elasticity of demand? A) bagels and cream cheese B) hot-dogs and hamburgers C) orange juice and grapefruit juice D) peanuts and cat food
A
You own a small boutique hotel. In an attempt to raise revenues you reduced your rates by 20 percent. However, you did not see an appreciable increase in occupancy. What does this indicate about the demand for boutique hotel rooms? A) Demand is price inelastic. B) Demand is price elastic. C) Demand is income inelastic. D) There is a fixed quantity demanded.
A
A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price. D) horizontal at the minimum average total cos
B
A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price. D) horizontal at the minimum average total cost.
B
In summer, the strawberry market in California is perfectly competitive. Suppose information about the antioxidants properties of strawberries increases the demand for strawberries. What happens to the demand curve faced by an individual strawberry producer in the short run? A) The demand curve facing the individual producer becomes more inelastic as more people desire strawberries. B) The demand curve facing the individual producer shifts upwards. C) The demand curve facing the individual producer shifts downwards. D) The demand curve facing the individual producer shifts to the right.
B
Which of the following is not an assumption of perfectly competitive markets? A) There are many sellers and many buyers, none of which is able to influence the market price of the product. B) Each firm produces a similar but not identical product. C) There are no barriers to new firms entering the market. D) Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.
B
In the short run, a profit-maximizing firm will shut down if its total fixed costs exceeds total revenue. T/F
True
In the short run, a profit-maximizing firm will shut down if its total fixed costs exceeds total revenue T/F
True
Suppose the demand for basketball game tickets on your campus is price elastic. To increase the total revenue from ticket sales, your campus should lower ticket prices T/F
True
The income elasticity of demand for an inferior good is a negative number. T/F
True
The market demand curve in a perfectly competitive market is downward sloping. T/F
True
The price elasticity of Raisin Bran, a particular brand of cereal is larger in absolute value than the price elasticity for breakfast cereals in general.
True
The short-run supply curve for the perfectly competitive firm is that part of the marginal cost curve that lies above the average variable cost curve. T/F
True
There is a limited number of original Picasso paintings. This means that the supply of original Picasso paintings is perfectly inelastic. T/F
True
Total profit is represented by the vertical distance between a total revenue curve and a total cost curve for a given quantity. T/F
True
Total profit is represented by the vertical distance between a total revenue curve and a total cost curve for a given quantity. T/F
True
When a change in price results in a proportional change in quantity supplied, supply is unit elastic. T/F
True
When firms exit a perfectly competitive industry, the market supply curve shifts to the left. T/F
True
Suppose the total revenue curve is drawn with quantity on the horizontal axis and total revenue on the vertical axis. Then, the total revenue curve for a perfectly competitive firm A) is horizontal at the market price. B) is vertical. C) rises at an increasing rate. D) is a ray from the origin.
D
18) A newspaper story on the effect of higher milk prices on the market for ice cream contained the following: As a result [of the increase in milk prices], retail prices for ice cream are up 4 percent from last year. . . . And ice cream consumption is down 3 percent. Source: John Curran, "Ice Cream, They Scream: Milk Fat Costs Drive Up Ice Cream Prices," Associated Press, July 23, 2001. Based on the information given, calculate the price elasticity of demand for ice-cream A) 0.75 (in absolute value) B) 1.33 (in absolute value) C) 12% D) We do not have enough information to calculate elasticity.
A
A 5 percent increase in income leads to a 10 percent decrease in quantity demanded for a product. This product is a(n) ________ good and demand is income ________. A) inferior; inelastic B) inferior; elastic C) normal; inelastic D) normal; inelastic
A
A linear downward sloping demand curve has price elasticities (in absolute values) that A) decrease as price decreases. B) increase as price decreases. C) remain constant along the demand curve. D) impossible to tell.
A
A newspaper article reported that a 4 percent increase in retail prices for ice cream led to a 3 percent decrease in icecream consumption. Will the revenue received by ice cream suppliers have increased or decreased following the price increase? A) increase B) decrease C) no change D) indeterminate
A
A perfectly elastic demand curve is A) horizontal. B) vertical. C) curvilinear. D) upward sloping.
A
A price elasticity of demand equals to zero indicates that the demand curve for the product is A) vertical. B) horizontal. C) downward sloping D) curvilinear.
A
All else equal, the price elasticity of demand for a good tends to be higher in absolute value A) the more substitutes there are for the good. B) the shorter the time period involved. C) the more consumers perceive the good to be a necessity. D) the less important the product is in consumers' budgets.
A
All else equal, the price elasticity of demand in absolute value for Saucony tennis shoes is ________ than the price elasticity of demand for tennis shoes in general. A) greater B) less C) equal to D) either greater or less, depending on the quality
A
Holding all else constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten year period because A) buyers are more responsive to a price change when given more time to react. B) buyers are less responsive to a price change when given more time to react. C) income of buyers will rise substantially over a ten-year period. D) None of the above is a sound explanation.
A
If Carrie Bradshaw claims that when it comes to buying shoes, "price is no object," then her demand for shoes is A) perfectly inelastic. B) perfectly elastic C) unit elastic. D) horizontal.
A
If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are A) substitutes. B) complements. C) price inelastic goods. D) necessities.
A
If the demand for a product is price elastic, then A) the percentage change in quantity demanded is greater than the percentage change in price. B) the percentage change in quantity demanded is less than the percentage change in price. C) the percentage change in quantity demanded is equal to the percentage change in price. D) the quantity demanded is not responsive to changes in price.
A
If the demand for a product is unit elastic, then A) the percentage change in quantity demanded is equal to the percentage change in price. B) the percentage change in quantity demanded is 1 percent greater than the percentage change in price. C) the percentage change in quantity demanded is 100 percent greater than the percentage change in price. D) quantity demanded does not respond to changes in price.
A
In order to prove that Motrin and Ibuprofen are substitutes, one should test the ________ and get a ________. A) cross-price elasticity; positive number B) cross-price elasticity; negative number C) price elasticity of demand; number greater than1 (in absolute value) D) price elasticity of demand; number less than 1 (in absolute value)
A
A perfectly competitive firm's marginal revenue A) is greater than price. B) is less than price because a firm must lower its price to sell more. C) is equal to price. D) may be either greater or less than price, depending on quantity sold.
C
Firms in perfect competition are price takers because A) one firm determines price and all other firms accept this price. B) consumers have market power and can set prices. C) each firm is too small relative to the market to be able to influence price. D) firms take the price that government determines.
C
Firms in perfect competition are price takers because A) one firm determines price and all other firms accept this price. B) consumers have market power and can set prices. C) each firm is too small relative to the market to be able to influence price. D) firms take the price that government determines.
C
If productive efficiency characterizes a market, A) the marginal cost of production is minimized. B) the firm produces the goods that consumers desire most. C) the output is being produced at the lowest possible resource cost. D) firms use the best technology available to produce the good.
C
If productive efficiency characterizes a market, A) the marginal cost of production is minimized. B) the firm produces the goods that consumers desire most. C) the output is being produced at the lowest possible resource cost. D) firms use the best technology available to produce the good.
C
In the long run there are no barriers to new firms entering a perfectly competitive market. Suppose that firms already in the market are making profits. Which of the following sequence of events best describes the change in market price and output as a result of free entry? A) The market demand curve shifts to the right, causing price to rise and market output to increase. B) The market demand curve shifts to the left, causing price to fall and market output to decrease. C) The short-run industry supply curve shifts to the right, causing price to fall and total market output to increase. D) The short-run industry supply curve shifts to the left, causing price to rise; and total market output to decrease.
C
In the long run there are no barriers to new firms entering a perfectly competitive market. Suppose that firms already in the market are making profits. Which of the following sequence of events best describes the change in market price and output as a result of free entry? A) The market demand curve shifts to the right, causing price to rise and market output to increase. B) The market demand curve shifts to the left, causing price to fall and market output to decrease. C) The short-run industry supply curve shifts to the right, causing price to fall and total market output to increase. D) The short-run industry supply curve shifts to the left, causing price to rise; and total market output to decrease.
C
Which of the characteristics of perfect competition assures that economic profit will be zero in the long run? A) Each firm's output is small relative to the total market output. B) Goods produced in the market are identical. C) Each firm is a price taker. D) There are no barriers to firms entering or exiting the market. E) All of the above.
D
If price is less than the average variable cost, a firm that continues to produce in the short run A) can cover all of its fixed costs and some of its variable costs. B) can cover its variable costs but not its total costs. C) cannot cover any of its variable costs. D) incurs a loss greater than its fixed costs
D
If price is less than the average variable cost, a firm that continues to produce in the short run A) can cover all of its fixed costs and some of its variable costs. B) can cover its variable costs but not its total costs. C) cannot cover any of its variable costs. D) incurs a loss greater than its fixed costs
D
Suppose the total revenue curve is drawn with quantity on the horizontal axis and total revenue on the vertical axis. Then, the total revenue curve for a perfectly competitive firm A) is horizontal at the market price
D
If there are no economic profits in a competitive equilibrium, why do firms produce? How can they stay in business?
The "zero profit" conclusion of perfectly competitive markets refers to normal profit where there is no excess rate of return to the typical firm. A producer earns precisely as much as as she could have earned by investing her time and money elsewhere. In other words, each producer is able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating. The source of the confusion stems from failing to distinguish between accounting and economic profits.
If there are no economic profits in a competitive equilibrium, why do firms produce? How can they stay in business?
The "zero profit" conclusion of perfectly competitive markets refers to normal profit where there is no excess rate of return to the typical firm. A producer earns precisely as much as as she could have earned by investing her time and money elsewhere. In other words, each producer is able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating. The source of the confusion stems from failing to distinguish between accounting and economic profits.
When firms exit a perfectly competitive industry, the market supply curve shifts to the left.
The assumptions necessary for a market to be perfectly competitive are: 1. Many buyers and sellers, all of whom are small relative to the market. This assumption ensures that the firm is a price taker, that is, a single firm cannot affect market price by altering its output. 2. All firms sell identical products. This condition excludes the possibility of any product differences which might justify different prices. Because the consumer cannot differentiate between products of different producers, any firm that charges a higher price will lose all its customers. 3. No barriers to new firms entering the market or exiting the market. This assumption guarantees that any excess profits will be eliminated and in the long run firms will earn a normal profit. 4. Everyone has perfect information about prices, profits, etc. This is necessary so that consumers are able to compare prices charged by different firms so that no firm is able to get away with a price above the market price. Also, firms need to be able to compare their profits to those of firms in other markets and use that information to make decisions about entry and exit.
What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important
The assumptions necessary for a market to be perfectly competitive are: 1. Many buyers and sellers, all of whom are small relative to the market. This assumption ensures that the firm is a price taker, that is, a single firm cannot affect market price by altering its output. 2. All firms sell identical products. This condition excludes the possibility of any product differences which might justify different prices. Because the consumer cannot differentiate between products of different producers, any firm that charges a higher price will lose all its customers. 3. No barriers to new firms entering the market or exiting the market. This assumption guarantees that any excess profits will be eliminated and in the long run firms will earn a normal profit. 4. Everyone has perfect information about prices, profits, etc. This is necessary so that consumers are able to compare prices charged by different firms so that no firm is able to get away with a price above the market price. Also, firms need to be able to compare their profits to those of firms in other markets and use that information to make decisions about entry and exit.
The Mass Rapid Transit (MRT) System in Hong Kong as been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commute hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Further, officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day. a. What is the electricity of demand for MRT rides? b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system? c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.
a. Price elasticity = - 0.56; b. Total Revenue will increase; c. The expected increase in revenue is $8,000 per day. It is unlikely that the fare increase alone will resolve the problem.
In the long-run competitive equilibrium, the perfectly competitive firm produces where price equals minimum average total cost. a. What is this efficiency criterion called? b. How does it benefit consumers?
a. Productive efficiency b. Productive efficiency implies that the product is being produced at the lowest possible average cost. Consumers benefit from these cost efficient methods of production. Also, essentially, productive efficiency means that the product is being produced with as few scarce resources as possible thereby enabling society to spread its scarce resources across more products.
In the long-run competitive equilibrium, the perfectly competitive firm produces where price equals minimum average total cost. a. What is this efficiency criterion called? b. How does it benefit consumers?
a. Productive efficiency b. Productive efficiency implies that the product is being produced at the lowest possible average cost. Consumers benefit from these cost efficient methods of production. Also, essentially, productive efficiency means that the product is being produced with as few scarce resources as possible thereby enabling society to spread its scarce resources across more products.
For each pair of items below determine which for product would have the higher price elasticity of demand (in absolute value). a. Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair coloring product. b. A new Ford Escort or a tank of gas for your current car. c. Seiko watch or watches in general.
a. The demand for the hair product is more price elastic (higher absolute value) than that of blood pressure medicine. The latter is required for survival and has virtually no substitutes while substitutes abound for the former and it is not a necessity. b. The demand for a new car is more price elastic than the demand for a tank of gas for your current car. The former is a luxury good while the latter is essential for transportation at present. c. The demand for Seiko watches is more price elastic than demand for watches in general. Narrowly defined markets (such as the Seiko watch market) have more substitutes.