Microeconomics - 102

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. Moe's short run supply curve is:

curve A above curve C. (A perfectly competitive firm's supply curve is the segment of the marginal cost curve that lies above the average variable cost curve.)

As a consumer consumes more and more of a product in a particular time period, eventually marginal utility

declines.

Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.

elastic

Marginal utility is the

extra satisfaction received from consuming one more unit of a product.

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:

fall and the equilibrium quantity to stay the same.

In general, perfectly competitive firms maximize their profit by producing the level of output at which:

marginal cost equals price. (The rule for profit maximization follows from the Cost-Benefit Principle: a firm should continue to produce output as long as price is at least as great as marginal cost.)

If a firm is earning zero profits

the owners are earning a return on their time and investment that is equal to the opportunity costs of that time and investment.

Price elasticity of demand is defined as:

the percentage change in quantity demanded divided by the percentage change in price.

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. If mushrooms sell for $10 per bushel, and Moe chooses the profit-maximizing quantity, he will gather:

zero bushels. ($10 is below the minimum of the AVC curve, so Moe should shutdown).

Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.

inelastic; elastic

The profit maximizing rule MR = MC applies to

perfect competitors only

Marginal utility can be

positive, negative, or zero.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product. (In perfectly competitive markets, all firms sell the same standardized product. Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the market demand curve does not have to be perfectly elastic.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing price for this monopolist to charge is:

B, (MC = MR at F units of output. From the demand curve, we can see that this corresponds to a price of B.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing level of output for this monopolist is ______ units per day.

F, (MC=MR at F units of output)

The substitution effect of a change in the price of cauliflower is the portion of the change in the quantity of cauliflower demanded that can be attributed to the change in the price of a substitute vegetable such as asparagus.

False

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The socially optimal level of output is ______ units per day.

H, (The socially optimal level of output occurs where the marginal benefit of an additional unit of output (which is given by the demand curve) equals its marginal cost.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At the monopolist's profit-maximizing level of output, deadweight loss equals the area

JLN (The monopolist's profit-maximizing level of output is F and the socially optimal level of output is H. Deadweight loss is the area to the right of F below the demand curve and above the marginal cost curve.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, its total revenue equals the area:

OFJB (MC = MR at F units of output, and from the demand curve we can see that at that level of output, the monopolist will charge a price of B. Total revenue equals price times quantity.)

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's total cost at its profit-maximizing level of output is ________.

$1,600 (At Q = 80, ATC is $20. Thus, total cost (ATC × Q) is 80 × $20 = $1,600.)

Refer to Figure 5-1. With reference to Graph B, at a price of $5, total revenue equals:

$200

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 50 pizzas a day, its average variable cost is ________.

$5 (At 50 pizzas a day, total variable cost is $250, so average variable cost is $5 (= $250/50).)

Suppose that Mimi plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Mimi's demand curve?

1.0

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's profit-maximizing level of output is ________.

100 (At P = $30, P = MC at Q = 80, so this is the profit-maximizing level of output.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. This monopolist maximizes its profit by producing ______ textbooks per week and charging a price of ______ per textbook.

100; $80 (The monopolist chooses a quantity at which MC = MR, and charges the price that corresponds to that quantity on the demand curve.)

Suppose a monopolist faces the demand curve shown below. If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is:

20 units. (Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.)

Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 10-1 shows his total utility from different quantities of the two items. Refer to Table 10-1.What is Keegan's optimal consumption bundle?

3 pita wraps and 4 bubble teas

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

3.0

Refer to the figure above. Fixed cost for this firm is

$50

A perfectly elastic supply curve is:

horizontal.

What is behavioral economics?

the study of situations in which people act in ways that are not economically rational

The income effect of a price increase causes a decrease in the quantity of a normal good demanded.

true

Suppose a monopolist faces the demand curve shown below: If you were to draw the monopolist's marginal revenue curve, it would:

40 Units (For any straight-line demand curve, the corresponding marginal revenue curve will have twice the slope of the demand curve and the same vertical intercept as the demand curve. As a result, the horizontal intercept of the marginal revenue curve will be half the horizontal intercept of the demand curve.)

Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. When this monopolist maximizes its profit, consumer surplus equals the area:

ABJ (The monopolist will produce F units and charge a price of B. Consumer surplus is the triangular region above price and below the demand curve, to the left of the profit-maximizing level of output.)

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. In the graph above, the average variable cost curve is labeled ________, the average total cost curve is labeled ________, and the marginal cost curve is labeled ________.

C; B; A (The marginal cost curve must intersect both the average variable cost and average total cost at their respective minimum points. Average total cost is the sum of all payments made to a firm's fixed and variable factors of production divided by total output.)

Total revenue minus total explicit and implicit costs defines

Profit

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

The Cost-Benefit Principle (According to the Cost-Benefit Principle, a firm should produce another unit of output as long as the extra benefit of producing another unit is greater than the extra cost. This is just another way of saying that the firm should increase output whenever price is greater than marginal cost (and it should stop when price is equal to marginal cost).)

An imperfectly competitive firm is one that:

has at least some influence over the market price. (An imperfectly competitive firm can increase its price and still retain some customers.)

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce. (Since firms in perfectly competitive markets have no control over the market price, their most important challenge is deciding how much to produce at a given price.)

The longer the time period considered, the more the elasticity of supply tends to:

increase

A fixed factor of production

is fixed only in the short run.

A fixed factor of production:

is fixed only in the short run. (No factors are fixed in the long run, but in the short run, fixed factors of production cannot be changed.)

A variable factor of production

is variable in both the short run and the long run.

A profit-maximizing perfectly competitive firm must decide:

only on how much to produce, taking price as fixed. (A perfectly competitive firm is a price taker, so it only chooses how much to produce.)

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

price

Marginal cost is calculated as

the change in total costs divided by the change in output.

If, as a person consumes more and more of a good, each additional unit adds less satisfaction than the previous unit consumed, we are seeing the workings of

the law of diminishing marginal utility.

If a consumer always buys goods rationally, then

the marginal utility per dollar spent on all goods will be equal.

Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because

the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars.

Individual supply curves generally slope ________ because ________.

upward; of increasing opportunity costs. (Consistent with the Principle of Increasing Opportunity Cost, in expanding production of any good, firms will first employ those resources with the lowest opportunity cost, and only afterwards will turn to resources with higher opportunity costs.)