Microeconomics chapter 6, micro chapter 7, Micro Chapter 8, Micro chapter 9, Micro chapter 10, Micro Chapter 11, micro ch 12
Suppose that the pen-making industry is perfectly competitive. Also suppose that all current firms and any potential firms that might enter the industry have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect the equilibrium price to be in the long run?
$1.25
If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?
$24,000
What is the average fixed cost if the average total cost is $100 and the average variable cost is $75?
$25
If at 10 units of output, total fixed cost is $10 and total variable cost is $16, what is total cost?
$26
If total cost rises from $300 to $700 when one additional unit of output is produced, what is the marginal cost?
$400
What is the average fixed cost if total fixed cost is $100, total variable cost is $50, and output is 20?
$5
Suppose at an output level of 150 units a firm's average fixed cost is $25 and average variable cost is $50. Then the average total cost of the firm is ______.
$75
Your company's total sales revenue for the month is $150,000; the costs to produce your products are $12,000 for rent, $6,000 for utilities, and $42,000 for employee wages. What is your accounting profit?
$90,000
Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?
- In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost. - Price or marginal revenue will settle where it is equal to minimum average total cost. - In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.
Which of the following statements are true about allocative efficiency?
- It is impossible to produce net gains for society by altering the mix of goods and services produced. - The marginal cost and marginal benefit of producing each unit of output is equal. - The goods and services produced are those that society most wants to consume.
What are the effects of the "invisible hand" in a purely competitive economy?
- Maximum profits for individual producers - Resource allocation that maximizes consumer satisfaction
The government broke up Standard Oil in 1911 due to its breach of ______ (one word) laws.
antitrust
Suppose the cross elasticity of demand for products A and B is + 3.6 and for products C and D is −5.4. What can you conclude about how products A and B are related? What can you conclude about products C and D?
A and B are substitutes. C and D are complements.
As a result of having fixed or limited amounts of income, all consumers face which of the following?
A budget constraint
Which of the following describes what "no close substitutes" means as it relates to consumers and a pure monopoly?
A consumer must either buy the monopolized product or do without it entirely.
With economies of scale, a 10% increase in all resources that causes a 20% increase in output results in which of the following?
A decline in average total cost (ATC)
What is the framing effect?
Additional information about the same situation causes a different reaction.
Why might a monopolist accept a less-than-maximum per-unit profit?
Additional sales more than compensate for the lower profit per unit.
An increase in the price of labor has no effect on which cost curve?
Average-fixed-cost
What is the term for factors that prohibit firms from entering an industry?
Barriers to entry
Why will the coefficient for the price elasticity of demand always be a negative number?
Because price and quantity demanded are inversely related
Which of the following describes why marginal revenue is less than price for monopolists?
Because the lower price of the extra unit of output also applies to all prior units of output
How is total cost calculated?
By adding total fixed cost and total variable cost
How is a buyer's responsiveness to price changes measured?
By the price elasticity of demand coefficient
Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000.
Calculate the accounting profit and the economic profit for Gomez's pottery firm. Accounting profit = $35,000 Economic profit = $13,000
Which of the following are reasons for a monopoly's loss of economic profit?
Change in tastes reducing demand Upward-shifting cost curves caused by escalating resource prices
Which of the following best describes consumer choice in relation to preferences for goods and services?
Consumers have a good idea of how much marginal utility they will get from successive units of various products they might purchase.
The inelastic nature of farm products means that the increased output brought about by a good growing season results in which of the following?
Depressed total revenue Decreased prices
By using economies of scale, successful start-up firms are able to shift their short-run cost curves in which directions?
Downward and to the right
What is the shape of the product demand curve for a pure monopolist?
Downward sloping
In an increasing-cost industry, which of the following occur when an increase in product demand results in economic profits and attracts new firms to the industry?
Each firm's ATC curve shifts upward. Increased resource demand drives up resource prices.
Which of the following steps are necessary to determine the profit-maximizing level of output, profit-maximizing price, and economic profit in pure monopoly?
Employ the profit-maximizing rule of MR=MC. Identify the profit-maximizing price and output by finding the price/output combination at MR=MC.
According to behavioral economists which of the following heavily influence economic transactions?
Ethical factors Moral factors
Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?
In the long run all resources and inputs are variable.
Which type of elasticity shows how responsive demand is to a change in earnings?
Income elasticity of demand
Which of the following is a characteristic of utility?
It is difficult to quantify. It is subjective. It is not synonymous with "usefulness".
Which of the following describes consumer surplus?
It is the difference between the maximum price that consumers are willing to pay for a product and the market price for that product.
What will happen to a firm that finds a way to lower production costs through better technology or improved organization?
Its profits will increase.
The following table shows the amounts of additional satisfaction (marginal utility) that Ross would get from consuming successive quantities of products A and B. Fill in the MU/P column for each product.
MU/P for A MU/P for B 12 - 12 11 - 10.5 10 - 9 9 - 7.5 8 - 6 7 - 5 6 - 3 If Ross has an income of $64, how many units of each will he purchase to maximize his utility? 7 units of good A 5 units of good B Now suppose that the price of good A rises to $10. If he still has $64 to spend, then to maximize his utility, Ross should purchase: less of good A
Which of the following can cause X-inefficiency?
Maintaining a poorly motivated work force Avoiding business risk Hiring incompetent relatives
What may hardwired heuristics do?
Make it very difficult for people to alter detrimental behaviors
What type of cost can be saved by not producing the last unit?
Marginal
What is the term for the extra cost of producing one more unit of output?
Marginal cost
Which of the following costs can a firm control directly and immediately?
Marginal costs
If the objective of government is to achieve allocative efficiency, what kind of price should government establish for the monopolist?
One that is equal to its marginal cost.
Which of the following is considered a barrier to entry into an industry?
Ownership of essential property
Which of the following is considered a barrier to entry protecting an inventor from its rivals?
Patents
Which group of costs is the most accurate example of variable cost?
Payments for materials, fuel, power, and transportation services
Which best describes economic costs?
Payments that must be made to obtain a resource
What are actions that you take ahead of time to make it difficult for your future self to avoid doing what your present self wants?
Precommitments
Which cognitive bias occurs when a person assumes that anything that goes wrong was beyond the individual's control?
Self-serving bias
What is the term used to refer to a product's ability to satisfy a large number of consumers at the same time?
Simultaneous consumption
Which of the following is a determinant of the price elasticity of demand?
Substitutability
______ is the ease of switching from one good to another.
Substitutability
Why do people use heuristics even though the conclusions reached with them are often wrong?
The opportunity cost of perfection is too high. Too many resources are required to be perfect. There are diminishing marginal returns for using additional brain power.
What is the definition of total product (TP)?
The total quantity, or total output, of a particular good or service produced
How is average fixed cost determined?
Total fixed cost divided by output
Hiring incompetent relatives and poor supervision of workers can result in ______.
X-inefficiency
The exclusive right of an inventor to use, or to allow another to use, her or his invention is called:
a patent
Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the figure. What plant size will the firm choose in producing (a) 50, (b) 130, (c) 160, and (d) 250 units of output?
a. 50 units of output: 1 b. 130 units of output: 2 c. 160 units of output: 2 d. 250 units of output: 3
The data below represent a demand schedule. Product price quantity demanded $30 10 25 20 20 30 15 40 10 50 Using the midpoint approach, determine the price elasticity of demand between each of the following prices:
a. Between P1 = $30 and P2 = $25, Ed = 3.67 b. Between P1 = $25 and P2 = $20, Ed = 1.80 c. Between P1 = $20 and P2 = $15, Ed = 1.00 d. Between P1 = $15 and P2 = $10, Ed = 0.55
Suppose you are consuming two goods, A and B. Your marginal utility from good A is 20 while your marginal utility from good B is 4. In addition, good A costs $10 each and good B costs $2 each. a. According to the utility-maximizing rule, you are b. You should consume:
a. maximizing your total utility b. the same amount of good B the same amount of good A
If the objective of government is to achieve _______ efficiency, it should establish a legal price for the monopolist that is equal to its marginal cost.
allocative
What causes people to overestimate the likelihood of a particular event due to similar events that are highly memorable?
availability heuristic
A monopolist does not achieve productive efficiency because it produces a level of output that does not correspond to the minimum point of the ________ _________ cost curve.
average total
The monopolist's level of output is not at the minimum point of ______, meaning it will not be productively efficient.
average total cost
Which curve first falls and then rises?
average variable cost curve
Economists typically express the elasticity coefficient as an absolute value in order to ______.
avoid ambiguity
Calculating the percentage change in quantity demanded for a given product involves dividing the ______ by the ______.
change in quantity demanded; original quantity demanded
To calculate the ______, take the percentage change in quantity demanded of product X and divide by the percentage change in the price of product Y.
coefficient for the cross-price elasticity of demand
By comparing two different products, _____ elasticity of demand provides insight into consumer behavior concerning substitute and complementary goods.
cross
The Coca-Cola Company, in considering whether to lower the price of Sprite, would be interested in knowing the value of the ______ elasticity of demand between Sprite and Coke.
cross
Economies of scale refer to ______ average total costs with added firm size.
declining
The formula for the cross elasticity of demand is written as the percentage change in the quantity demanded of one product ______ by the percentage change in the price of another product.
divided
Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry is purely competitive, we would expect the long-run supply curve for mobile phones to be:
downward sloping.
The monopolist wants a price-quantity combination to fall in the _____ section of its demand curve, where a lower price means _____ total revenue.
elastic; greater
When playing games for real money, how do most people respond?
fairly and generously
A person's opinion as to whether a price, wage, or allocation is morally or ethically acceptable is ______.
fairness
One of the greatest moral and ethical factors that influences economic decisions is ______.
fairness
Which of the following are common heuristics?
gaze, steering, recognition
______ create(s) legal barriers to entry.
government
The supply curve for an increasing-cost industry slopes upward because:
greater output will be supplied at higher prices
Which of the following is not a cognitive bias?
hardwired heuristics
Higher resource prices will result in ______ total costs.
higher average
Supply is perfectly inelastic during the ______.
immediate market period
The length of time over which producers are unable to respond to a change in price with a change in quantity supplied is known as the ______.
immediate market period
When the price elasticity of demand for a product is relatively price elastic and price is ______, total revenue will ______.
increased; decrease
When consumers decrease their purchases of a good as their income rises, the good is known as a(n) ______ good.
inferior
A product that exhibits perfectly elastic demand has a price elasticity coefficient equal to ______.
infinity
In the _________ run, firms are able to adjust all resources.
long
The law of diminishing _______ utility states that added satisfaction declines as a consumer acquires additional units of a given product.
marginal
If all workers are hired at the same price, the marginal cost of producing each extra unit of output falls provided the ______ of each additional worker is rising.
marginal product
When the market demand curve crosses the long-run average total cost curve where average total costs are declining, the firm is called a(n)
natural monopoly
A _________-monopoly occurs when a single firm has the bulk of sales in a specific market.
near
What is marginal utility if total utility is falling?
negative
Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. This research indicates that the cross elasticity of the two products is
negative, and beer and marijuana are complements.
Average variable cost equals total variable cost divided by total ______.
output
The strongest barriers to entry effectively block all ______.
potential competition
At a pure monopolist's profit-maximizing output (Qm), its _______ exceeds marginal cost, resulting in allocative inefficiency.
price
Drawing a vertical line from the profit-maximizing output on the horizontal axis to the demand curve represents the ______.
price
Economic profit for a firm will result if:
price exceeds average total cost
Monopoly yields neither _______ efficiency nor allocative efficiency.
productive
______ efficiency means that goods are produced in the least costly way.
productive
A competitive market generates _______ efficiency and _________ efficiency.
productive; allocative
In terms of consumer choices, neoclassical economics focuses on which types of products?
products that yield positive marginal utility "good" products
Although we make a few mistakes, generally proceeding through life believing that we react sensibly and make good decisions means that we believe our decisions are
rational
When our decisions are ______, they maximize the chances that we will achieve what we want.
rational
Frank spends $75 on 10 magazines and 10 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:
reallocate spending from magazines to newspapers.
In the ultimatum game, fear of ______ results in a higher level of cooperation and utility.
rejection
If the quantity supplied by producers is relatively insensitive to price changes, supply is ______.
relatively price inelastic
Which system in the brain is responsible when a person experiences a "gut feeling"?
system 1
Which system in the brain is responsible when a person deliberates
system 2
What type of errors are those that people tend to make over and over again in the same situation?
systematic errors
By anchoring the minimum payment on a credit card to a low dollar amount, the borrower is more likely to
take a longer time to pay off their debt, thereby paying more in interest.
In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:
technological changes. resource supplies. consumer tastes.
Assuming that a person is more likely to be murdered than to die of stomach cancer is an example of the cognitive bias of
the availability heuristic.
The firm and ______ are synonymous in pure monopoly
the industry
Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. To maximize profit, the monopolist should charge a higher price to the group that has:
the lower elasticity of demand.
Consumers are willing to pay a much lower price for water than for diamonds because ______.
the marginal utility of water is low while the marginal utility of diamonds is high
A natural monopoly's economies of scale refers to one firm's ability to achieve the lowest long-run average total cost, also known as
the minimum efficient scale at a high level of output.
If you compute the price elasticity of demand using a quantity of tickets from 1 to 8 and using a quantity of tickets from 1,000 to 8,000, the value of the price elasticity of demand is
the same because the percentage change in quantity demanded will remain the same.
Utility is defined as:
the satisfaction or pleasure obtained by consumers from consuming a good or service
In the last decade or so, there has been a dramatic expansion of small retail convenience stores (such as 7-Eleven, Kwik Trip, and Circle K), although their prices are generally much higher than prices in large supermarkets. The success of these convenience stores can be partially explained by
the time consumers save when purchasing goods there.
True or false: When an increase in the price of one good decreases the demand for another good, the goods are called complementary goods.
true
True or false: When considering the price elasticity of supply, price and total revenue always move together.
true
How many products (goods and services) are considered when referring to the cross elasticity of demand formula?
two
What are the components of plant capacity?
Amount of machinery and equipment Size of the factory building
Which of the following does total utility refer to?
Amount of satisfaction a person gets from a good or service
Increased demand for a limited supply of antiques has resulted in which of the following?
An increase in the price of antiques
Which of the following does an increasing-cost industry experience?
An upward shifting average total cost (ATC) curve as the industry expands. A downward shifting average total cost (ATC) curve as the industry contracts.
Which of the following would describe the personal computer industry as a decreasing-cost industry?
As demand for computers rose, producers of the components experienced economies of scale.
What is meant by the phrase "spreading the overhead"?
As production increases, average fixed cost declines.
The table below shows cost and revenue information for Choco Lovers, a purely competitive firm producing different quantities of chocolate gift boxes. Fill in the blanks in the table.
Assume the profit-maximizing price is $4 per gift box, and then answer the following questions: a. Profit-maximizing quantity = 25 gift boxes b. Total revenue = $100 c. Profit = $7.50 d. Profit per unit = $0.30 per gift box
Which of the following statements explain why the average variable cost curve is U-shaped?
At low levels of output, production is relatively inefficient and costly. As output rises from the initial very low levels, greater specialization occurs, and average variable cost declines.
When people exchange a gift for a different item or for a cash refund, they are doing which of the following?
Attempting to maximize their total utility
Which of the following are examples of precommitments that will help control the time-inconsistency problem?
Automatic payroll deductions for retirement savings. Putting the alarm clock across the room. Weight loss competitions
Which of the following is true of average fixed cost when output increases?
Average fixed cost declines as output increases.
What happens to average product when marginal product exceeds it?
Average product continues to rise.
Total fixed cost divided by output plus total variable cost divided by the output yields which of the following?
Average total cost
Use those determinants (price elasticity of demand) and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic:
Bottled water: elastic toothpaste: inelastic crest toothpaste: elastic ketchup: inelastic diamond bracelets: elastic Microsoft's Windows operating system: inelastic
Suppose the total fixed cost of a firm is $500, the total variable cost is $200, and the output produced is 5 units. The average fixed cost of the firm is ______.
$100
What is the marginal cost when output changes from 300 to 301 units and total cost rises from $400 to $500?
$100
What is the total revenue if the economic profit is $24,000 and the economic costs are $96,000?
$120,000
When output is 10, what is the total cost if total fixed cost is $50 and total variable cost is $75?
$125
Fill in the blanks in the table below. The problem is a "puzzle" so the blanks are not necessarily filled in sequentially. (Hint: Determine the total fixed cost first.)
0: 0.00, 10.00 1: 19.76 2: 5.00 3: 27.90, 8.84 5: 7.99, 54.30
Which of the following statements is true?
Accounting profit equals revenue minus explicit costs.
A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. a. Use the table below to help you answer the following questions. How many bushels will each of the farmer's five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? b. If the marginal cost of planting and harvesting an acre is $7,000 per acre for each of the five acres, how many acres should the farmer plant and harvest?
Acre - bushel - rev - tr - mr 1 - 1,000 - 10,000 - 10,000 - 10,000 2 - 900 - 9,000 - 19,000 - 9,000 3 - 800 - 8,000 - 27,000 - 8,000 4 - 700 - 7,000 - 34,000 - 7,000 5 - 600 - 6,000 - 40,000 - 6,000 b. 4 acres
Which industry requires the most time for its firms to alter plant capacity?
Aircraft manufacturing
________ profits in a competitive industry will attract new firms into the industry.
Economic
What term is used to describe declining average total costs with added firm size?
Economies of scale
The U-shape of the long-run average-total-cost curve results from which of the following?
Economies of scale Diseconomies of scale
What happens to average product as additional units of labor are added to a fixed plant?
It increases, reaches a maximum, and then decreases.
Which of the following best describes the average variable cost curve?
It is U-shaped.
Strictly speaking, pure competition is relatively rare. Then why do we study it?
It produces ideal results in terms of low-cost production and allocative efficiency, which can be used as a basis of comparison.
A family that does not own a refrigerator likely has a strong desire for one, whereas a family with two refrigerators likely has a much-reduced desire for a third. Which of the following best explains this decrease in desire?
Law of diminishing marginal utility
A firm grows from one to three plants. As a result, the firm's sales increase, leading to greater marketing expertise. This is an example of which of the following?
Learning by doing
What are the two legal barriers to entry created by the government?
Licenses Patents
Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup, and to do so she took time off from a job that paid her $20 per hour.
Linda's accounting profit is $300 Linda's economic profit is $-100
Which of the following products are targeted by government legislatures for increased excise taxes
Liquor Cigarettes Gasoline
A planning curve is another term for which of the following?
Long run average-total-cost curve
How do economies of scale affect long-run average total costs for a firm?
Long-run average total costs decline over a wide range of output.
Which of the following provides an explanation for the endowment effect?
Loss aversion
What are heuristics?
Low-energy mental shortcuts
Which of the following does a decreasing-cost industry experience?
Lower costs as industry output expands.
By expanding the size of its operations, a growing firm is able to experience economies of scale to do which of the following?
Lower its average total costs
If producing is preferable to shutting down, a profit-seeking monopolist will produce up to the output at which _______.
MR = MC
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:
MR = MC.
Which of the following conditions are true when an average, or representative, firm in a purely competitive industry is in long-run equilibrium?
MR = MC. The firm is earning a normal profit.
The following table shows the amounts of additional satisfaction (marginal utility) that Ross would get from consuming successive quantities of products A and B. a. Fill in the MU/P column for each product.
MU/P for A MU/P for B 7 - 8 6 - 7 4 - 6 3 - 5 2.5- 3 2 - 2.5 1.5 - 2 If Ross has an income of $28, how many units of each good will he purchase to maximize his utility? 2 units of good A 3 units of good B
A firm's decision whether to produce a few more or a few less units of output is a decision based on which of the following?
Marginal data
What happens to marginal product when total product is increasing but at a decreasing rate?
Marginal product is positive but falling.
What happens to marginal product when total product is increasing at an increasing rate?
Marginal product is rising.
______ is the change in total utility that results from the consumption of one more unit of a product.
Marginal utility
The formula for the marginal utility per-dollar-spent of a product is which of the following?
Marginal utility of the product divided by the price of the product
Which best describes the relationship between total utility and marginal utility?
Marginal utility reflects the changes in total utility
Economic profit will fall to zero and firms will choose not to enter an industry when price is equal to which of the following factors?
Minimum average total cost Marginal cost
Which of the following can be a cause of extensive economies of scale?
Modern technology
Which of the following are characteristics of public utilities?
Monopolies or near monopolies Government owned or regulated
Which are reasons that costs differ between a purely competitive firm and a pure monopoly?
Monopoly-preserving expenditures The "very long run" perspective
What are two of the main reasons humans have a hard time with long-term planning and decisions involving trade-offs between the present and the future?
Myopia Time inconsistency
What may occur when only a single firm can achieve the economies of scale necessary to compete in an industry?
Natural monopoly
What is the term used to describe a situation where a single firm has the bulk of sales in a specific market?
Near-monopoly
How does a purely competitive market restore allocative efficiency when an increase in demand disrupts efficiency?
New firms enter and increase industry output until price and marginal cost are equal.
Which characteristic of pure monopoly requires a consumer to buy the monopolized product or do without it entirely?
No close substitutes
Which of the following are conditions necessary for price discrimination?
No resale Monopoly power Market segregation
Which of the following are the main characteristics of a pure monopoly?
Presence of a single seller Control over the price Blocked entry for other firms Unavailability of close substitutes for its products
With price elasticity of supply, the supply curve slopes upward because of the positive relationship between which of the following?
Price and amount supplied
What is the term used to refer to charging different prices to different buyers of a specific product?
Price discrimination
Which of the following are potential solutions to the economic losses incurred by a regulated monopoly caused by socially optimal pricing?
Price discrimination Public subsidies
Which of the following are entry barriers created by monopolists?
Price reductions Increased advertising
How is total revenue calculated?
Price × Quantity
Which of the following best illustrates diseconomies of scale?
The increase in average total costs as a firm expands the size of its plant in the long run
Which of the following explains why the demand curve for a given product is downward sloping?
The law of diminishing marginal utility
Which of the following supports the idea that price must fall in order for quantity demanded to increase?
The law of diminishing marginal utility
What happens when mental accounting causes people to view transactions, such as the purchase of a new television, in isolation?
The size of the potential loss is exaggerated.
Consider the graph below that shows a purely competitive market in a constant-cost industry. The initial equilibrium price and output level are indicated by point A. Suppose that demand for this product increases. The resulting change in demand, supply, and equilibrium is also shown in the graph below.
When all adjustments have occurred, there will be MORE firms in the industry
A restaurant offers a meal that includes a burger and a side dish. Available sides include russet potato fries, sweet potato fries, a salad, or steamed vegetables. Based on the implications of the status quo bias, when will diners be most likely to have a salad as their side dish?
When it is the default option
When is marginal cost at its minimum?
When marginal product is at its maximum
Two legal ________ to entry are patents and licenses.
barriers
As an example of ______, the Federal Communications Commission licenses only so many radio and television stations in each geographic area.
barriers to entry
The theory of consumer behavior accounts for time Consider the following comment: "Want to make millions of dollars? Invent a product that saves Americans lots of time. ''This statement recognizes that
because time can be used to earn money. time can be used to earn money.
Which of these goods is listed in the table as having the highest coefficient of price elasticity of demand?
beef
What type of economist focuses on the mental process behind behavior?
behavioral
The branch of economics that combines insights from economics, psychology, and biology is ______.
behavioral economics
What is it called when specific areas within the brain deal with specific sensations, activities, and emotions?
brain modularity
For a consumer with an average income, the ______ is greater than for a consumer with a high income.
budget constraint
People achieve ______ when they have "balanced their margins" according to the utility-maximizing rule.
consumer equilibrium
The difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay is known as _____.
consumer surplus
Simultaneous _______ is a product's ability to satisfy a large number of consumers at the same time.
consumption
Framing effects impact whether consumers view a situation as a gain or loss thereby altering ______.
consumption choices
A consumer's choices are directly influenced by all of the following except ______.
costs of production
Which best characterizes variable costs?
costs that change with the level of output
Marginal revenue is less than price at every unit of output because the monopolist
could have sold these prior units at a higher price if it had not produced and sold the extra output.
The transformative effects of competition are often referred to as:
creative destruction
The percentage change in quantity demanded of good X divided by the percentage change in the price of product Y is known as the ______.
cross elasticity of demand
If demand for the good decreases creating economic losses, firms will exit the industry in the long run. As firms exit in the long run, industry supply will ______ and market price will ______.
decrease; rise
In the personal-computer industry, increasing output drives up demand for computer parts. Suppliers of these parts respond by increasing production, and economies of scale eventually drive down the prices of the parts they produce, lowering the average cost of production for computer manufacturers. This is an example of a ____-cost industry.
decreasing
A pure monopolist must face a downward-sloping product ______ curve
demand
Creative _______ captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business.
destruction
The law of ______ returns states that as successive units of a variable resource are added to a fixed resource, beyond some point, the marginal product will decline.
diminishing
The marginal cost curve's shape is a consequence of the law of __________ returns.
diminishing
Assuming technology and production techniques are fixed and cannot change, if beyond some point of production a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the effects of the law of ______.
diminishing returns
Which of the following would be considered a luxury and thus exhibit a high price elasticity of demand?
dining out
Price _______, or charging different prices to different consumers, is widely practiced in the US economy.
discrimination
The practice of charging different prices to different buyers for a specific product is known as price
discrimination
The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:
downward sloping.
Price makers are firms with:
downward-sloping demand curves
Product ______ should be considered when discussing time as a determinant of price elasticity of demand.
durability
Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1 each, he sells 300. a. Is demand elastic or inelastic over this price range? b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?
elastic increase
Restaurant meals, smart watches, and concert tickets are all examples of goods that exhibit a high price ______ of demand
elasticity
The price _________ of demand measures the responsiveness, or sensitivity, of consumers to a price change.
elasticity
Which of the following typically varies over the different price ranges of the same demand curve?
elasticity
Which of the following would be considered a necessity and thus have a low price elasticity of demand?
electricity
Loss aversion provides an explanation for the ______ effect.
endowment
The _______ effect is the tendency that people have to put a higher valuation on anything that they currently possess than on identical items that they do not own.
endowment
In the long run in a purely competitive industry,
entry and exit of firms can occur
When efficiency is disrupted in pure competition, producers will reallocate resources until product supply is such that price will again _____ marginal cost.
equal
When demand is unit elastic, the percentage change in quantity demanded is ______ the percentage change in price.
equal to
The utility-maximizing rule assumes that people ______.
evaluate all of their potential consumption options simultaneously in order to maximize total utility
If the price elasticity of demand is unit elastic, the change in price is ______ the change in quantity.
exactly offset by
A constant-cost industry is one where ______ will not affect resource prices and production costs.
expansion or contraction
Accounting profit is what remains after a firm has paid its _______ costs.
explicit
________ costs are the monetary payments a firm makes to purchase resources from others.
explicit
Which of the following represents the most important factor that drives economic behavior?
fairness
is a person's opinion as to whether a price, wage, or allocation is considered morally or ethically acceptable.
fairness
As you move along the demand curve from higher to lower prices, the price elasticity of demand
falls
If marginal utility becomes negative, then total utility ______ as an extra unit of a good is consumed.
falls
If successive units of a good yield smaller and smaller amounts of marginal utility then the consumer will buy additional units of a product only if its price ______.
falls
True or False. The U shape of the long-run ATC curve is the result of diminishing returns.
false
True or False: The law of diminishing marginal utility predicts the consumption behavior of drug addicts quite well.
false
True or false: A firm is producing 24 units of output. At the 24th unit of output, marginal revenue is $5, and marginal cost is $4; at the 25th unit of output, marginal revenue is $4.50, and marginal cost is $4.50; at the 26th unit of output, marginal revenue is $4, and marginal cost is $5. This firm made the correct choice by producing only 24 units of output and then stopping.
false
True or false: Behavioral economics only focuses on goods that yield positive marginal utility.
false
True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.
false
True or false: Important determinants of an industry's structure are economies of scale and revenue.
false
True or false: In pure competition, consumers benefit from productive efficiency by paying the highest price possible.
false
True or false: Income elasticity for farm products is greater than income elasticity for automobiles.
false
True or false: Price discrimination is not practiced very often in the US economy.
false
True or false: Products seen as essentials tend to have higher income-elasticity coefficients than products seen as luxuries.
false
True or false: Proposers in the ultimatum game recognized that a highly unequal split was likely to be accepted and therefore offered splits that were significantly biased.
false
True or false: The degree of substitutability of products (measured by the cross elasticity of demand coefficient) is not important to businesses and government.
false
True or false: Utility is objective and easy to quantify.
false
True or false: Water has much lower total utility than diamonds and that is why the price of diamonds greatly exceeds the price of water.
false
A firm's insurance premiums are generally considered ______ costs
fixed
Which costs do not vary with changes in output?
fixed
_______ costs are part of the simple existence of a firm's plant and must be paid even when output is zero.
fixed
__________ effects are important to recognize because they can be manipulated by advertisers, lawyers and politicians in order to alter people's decisions.
framing
Changes in people's preferences that are caused by new information altering their sense of whether situations are gains or losses is referred to as ______.
framing effects
When a change in the context of information causes people to react differently to the same information or situation, it is called ______.
framing effects
Our brains are modular because they
have specific areas that deal with specific sensations, activities, and emotions.
A 5% decline in the price of cut flowers results in a 3% increase in the quantity demanded. Therefore, the demand for cut flowers is ______.
inelastic
A small percentage change in quantity demanded divided by a larger percentage change in price indicates _______ demand.
inelastic
An addict's demand for heroin is an example of a demand that is perfectly
inelastic
If a 4% decrease in the price of coffee leads to a 2% increase in the quantity demanded, the price elasticity of demand for coffee is relatively price
inelastic
If demand is ______, a price decrease will reduce total revenue.
inelastic
If the percentage change in quantity demanded is less than the percentage change in price, then the price elasticity of demand is ______.
inelastic
Legislatures tend to seek out products that have _______ demand when levying excise taxes.
inelastic
Lowering the price of a product along the ______ range of demand will decrease total revenue.
inelastic
The demand for a heart transplant would be considered price
inelastic
The short-run demand for gasoline has been shown to be more price ______ than long-run demand.
inelastic
What type of price elasticity of demand results from a relatively small percentage change in quantity demanded divided by a relatively larger percentage change in price?
inelastic
When demand is relatively price ______, the coefficient for the price elasticity of demand will be less than one.
inelastic
When price and total revenue move in the same direction along the demand curve, this indicates that demand is
inelastic
When the demand for a product is _____ and the price is reduced, total revenue will fall.
inelastic
When the price elasticity of demand is perfectly _______, a change in price causes no change in the quantity demanded.
inelastic
A company doing marketing research finds that a 10 percent increase in its product's price would create a 5 percent decrease in the quantity demanded of its product. a. Based on this information, demand for the company's product is b. Using this same information, the company should ________ the price of its product.
inelastic raise
As an example of price discrimination, airlines charge higher fares to business travelers whose demand for travel is ______ and offer lower, more restricted fares to vacationers and others with more _______ demand.
inelastic; elastic
If a good has a negative income elasticity coefficient, then it is classified as a(n) ____ good.
inferior
Explicit costs are payments the firm makes for
inputs such as wages and salaries to employees, whereas implicit costs are nonexpenditure costs that occur through the use of self-owned resources such as forgone income.
The substitution effect contributes to the ______ relationship between price and quantity demanded that is found along the demand curve.
inverse or negative
When total product declines, marginal product ______.
is negative
Demand is more price elastic toward the upper-left segment of the demand curve because the original reference quantity ______.
is small
In many large cities, the number of taxicabs allowed to operate is limited by the local government through the ______.
issuing of licenses
The socially optimal price (P = MC) is socially optimal because:
it achieves allocative efficiency.
If product demand is relatively elastic, what will be the effect on the total revenue if the price is increased?
it decreases
Which of the following is true of the coefficient of price elasticity of demand as price increases along a linear demand curve?
it increases
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. These companies, for profit reasons, oppose laws allowing re-importation of drugs to the United States because
it would make it much more difficult to maintain the different prescription drug prices.
Government creates _______ barriers to entry.
legal
When a monopolist charges a higher price than a purely competitive firm would, the monopolist essentially ______.
levies a "private tax" on consumers
The entry and the exit of firms in an industry are considered to be ______-run adjustments.
long
Economies of scale explain the downward-sloping part of the ______ curve.
long-run average-total-cost
A perfectly competitive firm that makes car batteries has total fixed costs of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm's minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a __________ and should __________ production.
loss; shut down
The entry and exit of firms in a purely competitive industry help to improve resource allocation because
losses result in firms exiting an industry, causing resources to flow to markets where there are profits.
A product that is considered to be a necessity would have a ______ price elasticity of demand.
low
Home-prepared meals, toothpaste, and toilet paper have income elasticities of demand coefficients that are ______.
low
The marginal utility (MU) of an additional unit of water consumed by a typical consumer is ______, and the MU of an additional unit of diamond purchased by a consumer is ______.
low; high
The iPad disrupted consumer equilibrium because spending shifted from alternative products with a(n) ______ marginal-utility-to-price ratio to iPads as a way to increase total utility.
lower
With a fixed downward sloping demand curve, the pure monopolist can only increase sales by charging a ______ price.
lower
A decreasing-cost industry is one in which firms experience ______ costs as their industry ______. (Check all that apply.)
lower; expands higher; contracts
Monopolists use economies of scale to block the entry of new firms into an industry by ______.
lowering prices so that another firm cannot compete
Consumers benefit from productive efficiency by paying the ______ product price possible under the prevailing technology and cost conditions, causing firms to earn only ______ profit.
lowest; a normal
Compared to neoclassical economics, behavioral economics is better able to ______.
make predictions about behavior
Firms with downward-sloping product demand curves are called price ______
makers
A marketing supervisor works in a small plant where she performs a range of duties. As the company grows and hires additional supervisors, she is able to spend the bulk of her time in her area of expertise. In this example, the company has increased its ______.
managerial specialization
A firm's decision about what output level to produce is typically a ______ decision.
marginal
The change in total revenue associated with a one-unit change in output is called ______ revenue.
marginal
In a pure monopoly, ______ is less than the price for every unit of output except the first.
marginal revenue
The marginal-product curve is a mirror image of the ______ curve.
marginal-cost
Consumer choice is influenced not only by the ______ utility that extra units of a good will yield, but also by how much ______ must be given up to obtain extra units of the good.
marginal; income
The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:
may be so low that the regulated monopoly can't break even
Evaluating consumption options in isolation rather than simultaneously is referred to as _________ accounting.
mental
Evaluating consumption options in isolation rather than simultaneously is referred to as:
mental accounting
The long run, every purely competitive firm tends to operate at its ______.
minimum ATC
In heavy industries, small firms are unlikely to realize ______ and will be unable to compete with large-scale producers.
minimum efficient scale
The lowest level of output at which a firm can minimize long-run average costs is called ______.
minimum efficient scale
Marginal utilities are expressed in a ______ basis in order to make the amounts of extra utility derived from differently priced goods comparable.
per-dollar spent
When a small change in price causes quantity demanded to increase from zero to all that buyers can obtain, the price elasticity of demand is considered ______.
perfectly elastic
When the price elasticity coefficient is equal to infinity, the product exhibits ______ demand.
perfectly elastic
When the price elasticity of demand for a product is ______, a small decrease in price causes buyers to increase their purchases from zero to all they can obtain.
perfectly elastic
When a change in price does not cause a change in the quantity demanded, the price elasticity of demand is considered ______.
perfectly inelastic
The size of the factory, the amount of machinery and equipment, and other capital resources define _______ ________
plant capacity
Which resource requires the most time for a firm to adjust, given a change in demand?
plant capacity
The formula for the marginal utility per-dollar-spent of a product is the marginal utility of the product divided by its
price
At the profit-maximizing output (Qm), a monopolist's ______ is higher than marginal cost; therefore, a monopolist has allocative inefficiency.
price (Pm)
Market segregation must exist in order for a monopolist to ______.
price discriminate
Variable costs change with the level of
output
A monopolist uses the profit-maximizing rule of marginal revenue equals marginal cost to determine the profit-maximizing ______ and ______
output; price
Incorrectly assuming that a large portion of your choices and opinions are correct is an example of the _______ effect.
overconfidence
A _______ (one word) is the exclusive right of an inventor to use, or allow another to use, her or his invention.
patent
Baseball ticket sellers charge a different price for adults and children. Ballpark concession stands charge the same prices for products sold to any customer. The baseball ticket sellers are providing a successful example of
price discrimination.
Other things being equal, there is greater ______ when the price of a good or service is high relative to consumers' incomes.
price elasticity of demand
The government pays close attention to the ______ when it selects which goods and services to tax.
price elasticity of demand
The proportion of consumers' incomes allocated to a particular good or service is a determinant of ______.
price elasticity of demand
There is no incentive for firms to enter or exit the industry in the long run when ______.
price equals minimum average total cost firms earn a normal profit MR = MC
A regulated monopoly is likely to suffer losses when ______.price is set to marginal cost (P = MC)
price is set to marginal cost (P = MC) price is set to achieve the most efficient allocation of resources
According to neoclassical economics, consumers care greatly about ______.
prices
Monopolists use economies of scale to block the entry of new firms into an industry by reducing ______ so that other firms cannot compete.
prices
An unregulated monopolist uses the marginal revenue equals marginal cost (MR = MC) rule to determine the ______.
profit-maximizing output and price
What are the major determinants of price elasticity of demand?
proportion of income luxuries versus necessities substitutability time
__________ (one word) theory deals with how consumers plan for and deal with life's ups and downs.
prospect
_______ utilities are government owned or regulated.
public
An individual's demand curve for a product shows how much of the product the individual will ______ at various ______
purchase; prices
All firms in a(n) ______ industry share the same basic efficiency characteristics.
purely competitive
What is it called when a firm spends significant money to maintain a monopoly through government legislation?
rent-seeking expenditures
_______ and development leads to most patentable inventions and products.
research
For policymakers to achieve the goal of higher total farm incomes, farm output must be ______.
restricted
Total ______ is the amount the seller receives from selling a product during some period of time.
revenue
Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _______ and Jermaine will _______ cucumbers for lettuce.
rise; substitute
As more of a product is consumed, total utility ______ at a diminishing rate, reaches a maximum, and then ______.
rises; falls
The percentage change in quantity demanded divided by the percentage change in price describes ______.
the basic formula for the price elasticity of demand coefficient
The explicit costs of going to college include
the cost of tuition and books, while implicit costs include forgone income
The tendency of people to put a higher valuation on anything that they currently possess than on identical items that they do not own is called ______.
the endowment effect
Behavioral economics complements neoclassical economics by helping to explain
the fact that people will buy things on impulse.
A negative income-elasticity coefficient means that
the good is inferior such that if income falls, the quantity demanded of the good will rise.
A monopolist does not have a supply curve because:
there is no single, unique price associated with each level of output it does not equate price with marginal cost
Consumers pay for overpriced warranties because ______.
they incorrectly view the purchase of a good that carries a warranty in isolation
__________ inconsistency is the tendency to systematically misjudge at the present time what you will want to do at some future time.
time
When your present self does not understand what your future self will want, this is ______.
time inconsistency
Which of the following is a major cause of self-control problems?
time inconsistency
Marginal revenue is the change in ______ revenue associated with a single-unit change in output.
total
The monopolist seeks maximum ______ profit, not maximum unit profit.
total
__________ cost is the sum of fixed cost and variable cost at each level of output.
total
After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average ______.
total cost where product price is equal to marginal revenue
What is the term for the total quantity of a specific good produced?
total product
What is the term for the total amount the seller receives from the sale of a product in a particular time period?
total revenue
Reginald buys a six-pack of soda. The amount of satisfaction he derives from his purchase is described in terms of ______.
total utility
For all down-sloping demand curves, the price elasticity of demand is more elastic ______.
toward the upper left
True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.
true
True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.
true
True or false: In an industry with an extended range of constant returns to scale, firms of varying sizes can coexist and be equally profitable.
true
True or false: Neoclassical economics focuses on providing people with more options to improve welfare.
true
True or false: Systematic errors occur when people make the same decision error in similar situations.
true
System ________ (number) uses the newer parts of the brain to undertake slow, deliberate, and conscious calculations.
two
When an increase or decrease in price does not change total revenue, demand is ________ elastic.
unit
If the loss in revenue from a lower price is exactly offset by the gain in revenue from the increase in sales, then the price elasticity of demand is ______.
unit elastic
If the total revenue remains unchanged when there is an increase or decrease in price, demand is ______.
unit elastic
Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, identify whether demand is elastic, inelastic, or unit-elastic over this price range. Demand is
unit-elastic
Complete the following table and answer the questions below:
units consumed total utility marginal utility 0 0 -- 1 10 10 2 18 8 3 25 7 4 30 5 5 33 3 6 34 1
The pleasure, satisfaction, or happiness obtained from consuming a good or service is known as
utility
Given the different combinations of goods and services a consumer can obtain within his or her budget, the ______ can determine the specific combination that will yield the most utility or satisfaction.
utility-maximizing rule
Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because
when profits are zero, firms are earning sufficient revenue to cover their opportunity costs.
Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This system contrasts with the former procedure of having a central meter for the entire complex and dividing up the collective water expense as part of the rent. Where individual meters have been installed, water usage has declined 10 to 40 percent. This decline in water usage
would be expected since people now have to pay according to the amount of water they use.
Soft drinks and sneakers would have a cross elasticity coefficient nearest to ______.
zero
When total product is at its maximum, marginal product is ______.
zero
In this graph, the equilibrium price is $50 and is equal to a firm's average total cost. Therefore, the firm is earning ______ economic profits, or a(n) ______ profit.
zero; normal
What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?
Externalities
If total variable cost is $100, total fixed cost is $100, and output is 10, what is average variable cost?
$10
What is average variable cost if total variable cost is $500, total fixed cost is $100, and output is 50?
$10
Strategies attempted by firms for increasing their profits include:
- lowering production costs through better technology. - developing a new product that is popular with consumers. - lowering production costs through improved business organization.
When discussing pure competition, the term long run refers to a period of time long enough to allow:
- new firms to enter or existing firms to leave. - firms already in an industry to either expand or contract their capacities.
Complete the following table Units Consumed Total Utility Marginal Utility
0 - 0 10 - 107 - 10.7 20 - 209 - 10.2 30 - 307 - 9.8 40 - 398 - 9.1 50 - 489 - 9.1 60 - 572 - 8.3
Currently, at a price of $1 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit-elastic (Es = 1.0). In the long run, a price increase from $1 to $2 has an elasticity of supply of 1.50. (Hint: Apply the midpoints approach to the elasticity of supply.) a. How many popsicles will be sold each day in the short run if the price rises to $2 each? b. How many popsicles will be sold per day in the long run if the price rises to $2 each?
200 300
Fill in the blanks in the table below. The problem is a "puzzle" so the blanks are not necessarily filled in sequentially.
20: 200 30: 9000 40: 700 50: 25000 60: 600, 1100
Lisa consumes only two goods, pizzas and burritos. In equilibrium, her marginal utility per slice of pizza is 32 and her marginal utility per burrito is 24. If a slice of pizza costs $4, then the price of a burrito must be
3
In which of the following ways does the law of diminishing marginal utility support and exemplify consumer behavior?
A downward-sloping demand curve
Which of the following illustrates constant returns to scale?
A firm's 10% increase in given inputs, causing a proportionate 10% increase in output
Which of the following explain the concept of explicit costs?
A firm's monetary payments made for the use of resources owned by others. A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services.
Why do economists classify normal profits as costs?
A normal profit is the amount required to ensure continued supply of the product
Which of the following does the monopolist not have?
A supply curve
How does a monopolist change the price of its product?
By changing the quantity of the product it produces.
With a fixed downward-sloping demand curve, how can a monopolist increase sales?
By charging a lower price
Which of the following best describes how a consumer's demand schedule or curve can be derived?
By considering alternative prices at which a good or service might be sold and then determining the quantity a consumer will purchase
How is marginal cost (MC) calculated?
By dividing the change in total cost by the change in output
Which of the following is a reason for a monopoly's loss of economic profit?
Changes in tastes that reduce demand for a product
Greater labor specialization has which of the following effects?
It eliminates the loss of time that occurs whenever a worker shifts from one task to another.
It is difficult to start up a major league sports team because existing professional teams have contracts with the best players and long-term leases on stadiums. Which barrier to entry does this illustrate?
Control of a key resource
Which statement is true about costs for purely competitive and monopolistic producers?
Costs for purely competitive and monopolistic producers may not be the same.
Why will firms choose not to enter an industry when marginal revenue, marginal cost, price, and average total cost are equal?
Existing firms are earning only normal profits.
Which of the following two terms are synonymous in a pure monopoly?
Firm and industry
If there are losses in the long run, what adjustments will take place?
Firms will exit the industry until losses are eliminated.
Which of the following statements is true regarding the costs associated with owning and operating an automobile?
Fixed costs include insurance, and variable costs include gasoline
Why do behavioral economists find it important to concentrate on the mental process of decisions?
It allows for better predictions about behavior. It helps us guide people to make better decisions.
Advertising hamburger as "80% lean" instead of "20% fat" is an example of what?
Framing effects
How does a monopoly generally transfer income?
From consumers to the owners of the monopoly
Classify the following as fixed or variable costs:
Fuel - Variable costs Interest on company-issued bonds - Fixed costs Shipping charges - Variable costs Payments for raw materials - Variable costs Real estate taxes - Fixed costs Executive salaries - Fixed costs Insurance premiums - Fixed costs Wage payments - Variable costs Depreciation and obsolescence charges - Fixed costs Sales taxes - Variable costs Rental payments on leased office machinery - Fixed costs
Which of the following are examples of variable costs? (Check all that apply.)
Fuel costs Materials costs Transportation services payments
Which of the following examples indicate that people are interested in fairness as well as self?
Giving to charity Purchasing "fair trade" products Obeying the law
Which of the following result from managerial specialization?
Greater efficiency Lower unit costs
Which of the following is an example of labor specialization?
Hiring more workers in order to subdivide tasks Assigning each worker one task instead of five or six
MUA = z = 10 − x MUB = z = 21 − 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. Note: Px = $1 and Py = $1.
How is the $10 best allocated between A and B? A: $3 B: $7 How much utility will the marginal dollar yield? 7 utils
Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. Then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels.
How many pieces of sushi and how many bagels did Deborah consume before the price change? - 30 pieces of sushi & 20 bagels At the new prices, how much money would it have cost Deborah to buy those same quantities (that is, the quantities that she consumed before the price change)? - $80 Given that it used to take Deborah's entire $100 to buy those quantities, how big is the income effect caused by the lower price of bagels? - $20
What leads to most patentable inventions and products?
Research and development
Which of the following form the basis of prospect theory?
Individuals experience diminishing marginal utility for gains. Good and bad events are judged in terms relative to the status quo. Individuals are loss averse. Individuals experience diminishing marginal disutility for losses.
Which of the following are examples of fixed costs?
Interest on a firm's debts Rental payments
In the ultimatum game, what does the threat of rejection result in?
It aligns personal interests with the interests of others.
How does labor specialization allow a worker to become more proficient?
It allows a worker to focus on fewer tasks and become more skilled in performing those tasks.
Which of the following are simplifying assumptions of human capabilities that neoclassical economists make?
People are good planners with plenty of willpower. People are almost entirely selfish and self-interested. People have stable preferences that aren't affected by context.
What has been consistently shown by studies on fairness?
People care a great deal about fairness and not only about their own gain.
a. What is the formula for measuring the price elasticity of supply? b. Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro's supply. c. Is its supply elastic, or is it inelastic?
Percentage change in quantity supplied/percentage change in price ES = 1.91 elastic
Which of the following are considered cognitive biases?
Planning fallacy Confirmation bias Overconfidence effect Hindsight bias Self-serving bias
Which of the following factors have increased the demand for antiques over time?
Population growth Rising incomes
What is the best action for fighting self-control problems?
Precommitments
________ are the key to fighting self-control problems.
Precommitments
A firm's manager is given the following information: To sell 4 units of output, a price of $132 must be charged; this level of output reflects marginal revenue of $102 and marginal costs of $60. If the firm wants to sell 5 units of output, a price of $122 must be charged; this reflects marginal revenue of $82 and marginal costs of $70. To sell 6 units of output, a price of $112 must be charged; at this level of output, marginal revenue will be $62 and marginal costs $80. What should the manager do?
Produce 5 units of output and charge $122.
The table below shows the total cost and marginal cost for Choco Lovers, a monopolistic firm producing different quantities of chocolate gift boxes. Fill in the blanks in the table.
Profit-maximizing quantity = 45 units Profit-maximizing price = $21 Profit = $787
According the utility-maximizing rule, consumers achieve the greatest amount of satisfaction by doing which of the following?
Purchasing a combination of goods or services whereby the last dollar spent on each yields the same amount of marginal utility
Which of the following is an example of heuristics?
Purchasing the same brand of paper towel every time you shop for paper towels
Which type of market produces the most efficient use of society's resources?
Pure competition
Which of the following exists when a single firm is the sole producer of a product for which there are no close substitutes?
Pure monopoly
When consumers seek to maximize their total utility, they are engaging in which of the following?
Rational behavior
Which of the following add nothing to the firm's output, but increase the firm's costs?
Rent-seeking expenditures
Why does an inventor need to have her or his invention protected from rivals?
Rivals will use the invention without having shared in the effort and expense of developing it.
Which of the following contributes to the inverse relationship between price and quantity demanded that is illustrated by a downward sloping demand curve for a normal good?
Substitution effect Income effect
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
TR exceeds TC by as much as possible.
Why do we often have trouble with long-term planning?
The ancient human brain was primarily focused on immediate concerns.
Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a book. Will the author and the publisher want to charge the same price for the book?
The author would prefer a lower price than the publisher.
What is the effect of an increase in the price of labor on the ATC, AVC, and MC curves?
The average-variable-cost, average-total-cost, and marginal-cost curves shift upward. The average-fixed-cost curve remains the same.
Marginal cost includes which of the following?
The cost savings resulting from not producing the last unit of output All the cost associated with producing the last unit of output
a. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? b. Why does it differ? Of what significance is the difference? c. Complete the following statement.
The demand curve faced by a purely monopolistic seller is - downward sloping, whereas that facing the purely competitive firm is perfectly elastic. The demand curve facing a - purely competitive firm is perfectly elastic, because it may sell all that it wishes at the equilibrium price. The pure monopolist's demand curve is not - perfectly inelastic, because MR is negative when demand is inelastic, so MR = MC < 0.
What is the primary cause of diseconomies of scale?
The difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer
If an individual has no preexisting preferences for a specific option, they are likely to choose the default option and stick with the default option. What explains this kind of behavior?
The endowment effect
Which of the following contribute to the status quo bias?
The endowment effect Loss aversion
Which of the following occur only in the long-run?
The entry and exit of firms The expansion or contraction of plant capacity
Which of the following best explains why the long-run supply curve of a constant-cost industry is perfectly elastic?
The entry and exit of firms changes industry output bringing the price back to its original level, where it is equal to the constant minimum ATC
Which best describes marginal utility?
The extra satisfaction a consumer gets from buying an additional unit of a product
Which of the following are assumptions made in the model of pure monopoly?
The firm is a single-price monopolist and charges the same price for all units of output. No unit of government regulates the firm. Patents, economies of scale, and resource ownership secure the firm's monopoly.
If a firm is found guilty of achieving a monopoly through anticompetitive actions, then which of the following may occur?
The firm may be expressly prohibited from engaging in certain business activities. The firm may be broken into two or more competing firms.
In a pure monopoly, marginal revenue is less than price for every unit of output except which one?
The first
Which of the following sections of a long-run average total cost curve depicts constant returns to scale?
The flat section
The cross-price elasticity of demand measures which of the following?
The responsiveness of consumer purchases of one product due to a change in the price of some other product
Over what period of time can an industry and firms in that industry adjust all resource inputs used?
The long run
What does the long-run average-total-cost curve show?
The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size
Which of the following are reasons that a monopolist is considered a price maker?
The monopolist controls the total quantity supplied. The monopolist exerts control over the price.
Which of the following is true when the demand is unit elastic?
The percentage change in quantity demanded is equal to the percentage change in price.
If a university passed a rule stating that university students must live in university dormitories, what effect would this have on the price elasticity of demand for dorm space? How might this rule affect room rates?
The price elasticity of demand would be more inelastic, and room rates would increase
According to this figure, what could cause the quantity demanded for oranges to increase from four to six?
The price of oranges has to fall to $1.
Excise taxes are levied on which of the following?
The production of specific products Products with a low elasticity of demand The quantity of products sold
Which rule assumes that people simultaneously consider all of their potential consumption options when attempting to get the most out of their total utility?
The utility-maximizing rule
You are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs would you take into account in making your decision?
The variable costs of the trip, the opportunity cost of your time, and the need for transportation in Florida
As firms exit the industry in the long run, market price rises and the losses for the remaining firms begin to subside. Firms will continue to exit until which of the following happens?
There are no economic losses.
Which of the following explains why a pure monopolist is able to maintain an economic profit in the long run?
There are no new entrants to increase supply, drive down price, and eliminate profit.
Why do neoclassical economists make unrealistic assumptions about human capabilities?
They allow elegant and solvable mathematical models of human behavior with precise predictions of human behavior.
Which statement about hardwired heuristics is true?
They are impossible to avoid.
When playing games for real money how do most people respond when other players are acting selfishly?
They are uncooperative.
The outcome of the dictator game illustrates which of the following about how most people behave?
They are very concerned about being fair to others.
What happens to fixed costs when the level of production output reaches zero?
They remain unchanged.
Which of the following explain why the price of water per gallon is lower than the price of a diamond per carat?
Water is in great supply relative to demand and thus has a very low price per gallon. Diamonds have high marginal utility, and therefore, their price is very high per carat. Diamonds are in small supply relative to their demand, thus their price is very high per carat.
According to the basic model of pure competition, in the long run all firms in a purely competitive industry will earn normal profits. If all firms earn only a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods?
To innovate and possibly earn an economic profit in the short run.
Which of the following reasons explains why marginal utilities must be put on a per-dollar-spent basis?
To make the amounts of extra utility derived from differently priced goods comparable
Which of the following best describes the meaning of the utility-maximizing rule?
To maximize satisfaction, consumers should allocate income so that the last dollar spent on each product yields the same marginal utility.
What methods can be used to calculate average total cost?
Total cost divided by output (Q) Average fixed cost plus average variable cost
What is the definition of average variable cost?
Total variable cost divided by output (Q)
How much will a profit-seeking monopolist produce if producing is preferable to shutting down?
Up to the output at which marginal revenue equals marginal cost
When a firm produces a specific output level at a higher cost than the necessary cost for that level of output, it is called ______.
X-inefficiency
The figure illustrates that in an industry with an extended range of ______ returns to scale, firms of varying sizes can coexist and be equally profitable.
constant
Given are the following income elasticities of demand: Product Income Elasticity Movies +3.4 Dental services +1.0 Clothing +0.5
a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent.
Demand curves slope downward because, other things equal,
a decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units.
A monopolist will never choose a price-quantity combination where price reductions cause:
a decrease in total revenue
Which of the following would most exemplify perfectly inelastic demand?
a diabetic's demand for insulin
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
a horizontal line at 2 cents per paper clip.
Answer the following questions about the barriers to entry that shield monopolies from competition.
a. Which of the following is not a major barrier to entry into an industry? - Diminishing marginal returns b. Which of the following is a true statement? - Unfair competition is a barrier with no social justification.
An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ______.
constant-cost industry
Mylie's total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, −50 utils after five repetitions, and −200 utils after six repetitions, as shown in the table below. a. Write down her marginal utility for each repetition. b. Once Mylie's total utility begins to decrease, does each additional singing of the song hurt more than the previous song or less than the previous song?
a. 50, 50; 90, 40; 70, -20; 20, -50; -50, -70; -200, -150 b. more than the previous song
a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? b. True or False. "A rational consumer will purchase only 1 unit of the product represented by these data, because that amount maximizes marginal utility." c. True or False. "It is possible that a rational consumer will not purchase any units of the product represented by these data."
a. A decreasing rate, because marginal utility is declining. b. False, because rational consumers maximize total utility. c. True, because this product's price could be high relative to the first unit's marginal utility.
Indicate how each of the following would shift the (1) MC curve, (2) AVC curve, (3) AFC curve, and (4) ATC curve of a manufacturing firm. In each case specify the direction of the shift.
a. A reduction in business property taxes MC & AVC= No change AFC & ATC= shift down b. An increase in the nominal wages of production workers MC, AVC, ATC= shift up AFC= no change c. A decrease in the price of electricity MC, AVC, ATC= shift down AFC= no change d. An increase in insurance rates on plant and equipment MC & AVC= no change AFC & ATC = shift up e. An increase in transportation costs MC, AVC, ATC= shift up AFC= no change
Columns 1 through 4 in the following table show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of A, B, C, and D are, respectively, $18, $6, $4, and $24 and that Ricardo has an income of $106. a. What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility? b. How many dollars will Ricardo choose to save? c. Check your answers by substituting them into the algebraic statement of the utility-maximizing rule.
a. A=4; B=3; C=3; D=0 b. $4 c. ($18 x 4 + $6 x 3 +$4 x 3 + $24 x 0 + $4) = $106
Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, as shown by the following tables.
a. Calculate the missing TR and MR amounts for Group 1 b. Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market? - Group 1: 6 units will be produced at a price of $48 - Group 2: 6 units will be produced at a price of $33 c. Based solely on these two prices, which market has the higher price elasticity of demand? - The second market has the higher price elasticity of demand. d. What will be this monopolist's total economic profit? - $330
Suppose a pure monopolist faces the following cost data, as shown by the table on the left, and the demand schedule, as shown on the right.
a. Calculate the missing TR and MR amounts. b. What is the profit-maximizing price for this monopolist? - $63 What is the profit-maximizing output? - 4 units c. What is the monopolist's profit? - $42
You just bought a motorcycle for $8,000. You plan to ride the motorcycle for two years, and then sell it for $3,200. During this two-year period, you expect to ride the motorcycle 10,000 miles each year, and you expect the motorcycle to get 50 miles per gallon of gasoline. The annual cost of insurance is $960, registration costs are $80 (good for two years), and the price of gasoline is $2.50 per gallon. During this same two-year period, you will need to service your motorcycle five times, at $240 per service check, and obtain five oil changes. Each oil change costs $35. You will also need to replace your tires once during this two-year period, for a total cost of $400.
a. Calculate the total fixed cost, total variable cost, and cost per mile for the two-year period, and then complete the table below. TFC= $6800 TVC= $2775 CPM= $0.48 b. Suppose you want to lower the cost per mile. You should focus on: - fixed costs, because they represent a majority of the total costs
Look at the demand curves in the figures below. a. Use the midpoint formula and points referenced to calculate the elasticity of demand for that range of the demand curve. b. Do the same for the demand curve in the figure below.
a. Elasticity of demand for D1 (points a to b in the left figure) = 1.8 Elasticity of demand for D2 (points c to d in the right figure) = 0.56 b. Elasticity of demand for D3 (points e to f in the above figure) = 1
Farley's Frozen Yogurt is a purely competitive firm that makes frozen yogurt cakes. The market price is currently $7 per cake. Assume that AVC is $6 per cake, AFC is $4 per cake, and Farley's sells 200 frozen yogurt cakes.
a. Farley's Frozen Yogurt - should produce in the short run; will incur a short-run loss b. Suppose the marginal cost of a frozen yogurt cake is $7. Farley's Frozen Yogurt should - produce the same quantity
The table below shows the total cost (TC) and marginal cost (MC) for Choco Lovers, a purely competitive firm producing different quantities of chocolate gift boxes. The market price for a box of chocolates is $5 per box.
a. Fill in the marginal revenue (MR) and average revenue (AR) columns. - MR & AR= 5 for all b. Given a price of $5 per gift box, how many boxes of chocolate should Choco Lovers produce? - 25 gift boxes What will profit or loss be per gift box? - $-.08 per gift box c. Suppose that Choco Lovers raises the price to $7 per gift box. Now how many boxes should Choco Lovers produce? - 30 gift boxes What will the new profit or loss be per gift box? - $1.60 per gift box
The phenomenon where irrelevant information unconsciously influences people's estimates about the value of goods and services is referred to as ________
anchoring
Which of the following refers to the phenomenon where irrelevant information unconsciously influences people's feelings about the status quo?
anchoring
There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $10,000 per mile to set up.
a. How much would it cost to fence a single property whose area is one square mile if that property also happens to be perfectly square, with sides that are each one mile long? - $40,000 b. How much would it cost to fence exactly four such properties, which together would contain four square miles of area? - $160,000 c. Now consider how much it would cost to fence in four square miles of ranch land if, instead, it comes as a single large square that is two miles long on each side. - $80,000 d. Which is more costly—fencing in the four, one-square-mile properties or the single four-square-mile property? - Four, one-square-mile properties
The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Buddies, a purely competitive firm that produces novelty ear buds. Assume the market for novelty ear buds is a competitive market and that the price of ear buds is $6.00 per pair.
a. If Buddies wants to maximize profits, how many pairs of ear buds should it produce each week? - 35 pairs b. At the profit-maximizing quantity, what is the total cost of producing ear buds? - $157.50 c. If the market price for ear buds is $6 per pair, and Buddies produces the profit-maximizing quantity of ear buds, what will Buddies profit or loss be per week? - $52.50 d. Now assume the market price is $5.50 per pair, and Buddies produces the profit-maximizing quantity of ear buds. What Buddies profit or loss be per week? - $37.50 e. Buddies earns a normal profit when - marginal cost equals average cost at the minimum of average cost
You are a newspaper publisher. You are in the middle of a one-year factory rental contract that requires you to pay $500,000 per month, and you have contractual salary obligations of $1 million per month that you can't get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.10 per paper.
a. If sales fall by 20 percent from 1 million newspapers per month to 800,000 newspapers per month, what happens to the AFC per newspaper? - AFC per newspaper RISES from $1.50 to $1.88 b. What happens to the MC per newspaper? - MC per newspaper DOES NOT CHANGE c. What happens to the minimum amount that you must charge to break even? - It RISES from $1.85 to $2.23
The cashew industry is perfectly competitive and until now each of the identical firms in the industry have been earning zero economic profits while selling q1 units of output each (for a combined industry-wide total of Q1 units) at a market equilibrium price of P1 per unit. An unexpected increase in the demand for cashews raises the market equilibrium price to P2, which creates a situation in which P2 exceeds MC at q1 units of output.
a. If the firms continued producing q1 units each, would their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? - too little b. In the long run, what will happen to the supply of cashews and the price of cashews? - The industry's supply of cashews will exceed Q1 and the price of cashews will equal P1 c. Use a supply-and-demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews. - graph 1 highlight triangle [100,20,(40,60)]
Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced.
a. If this firm keeps increasing its output level, will ATC per bag ever increase? - No Are there economies of scale at all levels of output? - Yes b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? - $1 per bag At that price, what will be the size of the firm's profit or loss? - Loss of $10 million Will the firm want to exit the industry? - Yes c. You find out that if you set the price at $2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price? - $0 million d. If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or less be? - Profit of $10 million e. Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit. - $1.50
Imagine you have some workers and some handheld computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers sharing a computer can together inventory 150 items per hour. Three workers sharing a computer can together inventory 160 items per hour. And four or more workers sharing a computer can together inventory fewer than 160 items per hour. Computers cost $100 each and you must pay each worker $25 per hour.
a. If you assign one worker per computer, what is the cost of inventorying a single item? -$1.25 b. What is the cost if you assign two workers per computer? -$1 What if you assign three? -$1.09 c. How many workers per computer should you assign if you wish to minimize the cost of inventorying a single item? - 2 workers
The table below shows the daily costs of Corny's Corn Cobs. Corny's sells corn by the dozen in a purely competitive market. The market price is $2.20 for a dozen ears of corn.
a. In the short run, if Corny's wants to maximize profits, how much corn should it produce? - 70 dozen ears of corn per day b. Assuming that Corny's produces in the short run, what will Corny's profit or loss be per day? - $-7 per day c. In the short run, assuming nothing else changes, Corny's should - produce the same quantity of corn per day d. If the short-run price of corn falls to $1.30 per dozen, Corny's should - shut down, because the market price is below the AVC
a. The equality of MR and MC is essential for profit maximization in all market structures because if b. Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because c. In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving d. The equality of P and MC means the firm is achieving
a. MR and MC are equal, any other output level will result in reduced profits. b. price is constant regardless of the quantity demanded. c. productive efficiency d. allocative efficiency, since the industry is producing the amount of product that equates society's valuation of that product and the price of the product.
Consider a firm that has no fixed costs and that is currently losing money. a. Are there any situations in which it would want to stay open for business in the short run? b. A firm with no fixed costs
a. No, the firm will want to shut down. b. is really in the long run
In the ultimatum game when an unfair offer was made, responders usually responded in which way?
angrily
Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. a. Is she buying the utility-maximizing combination of bread and milk? b. If not, how should she reallocate her expenditures between the two goods?
a. No, the marginal utility per cent spent on bread is 0.80 and the marginal utility per cent spent on milk is 0.875. b. She should buy more milk and less bread.
How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged?
a. Price falls and demand is inelastic: Decrease b. Price rises and demand is elastic: Decrease c. Price rises and supply is elastic: Remain unchanged d. Price rises and supply is inelastic: Remain unchanged e. Price rises and demand is inelastic: Increase f. Price falls and demand is elastic: Increase g. Price falls and demand is of unit elasticity: remain unchanged
Which of the following are short-run adjustments, and which are long-run adjustments?
a. Wendy's builds a new restaurant: Long-run adjustment b. Harley-Davidson Corporation hires 200 more production workers: Short-run adjustment c. A farmer increases the amount of fertilizer used on his corn crop: Short-run adjustment d. An Alcoa aluminum plant adds a third shift of workers:Short-run adjustment
A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.
a. What are the firm's ATC per unit at these three levels of production? - At 1,000 units per day, ATC = $.45 - At 800 units per day, ATC = $.38 - At 500 units per day, ATC = $.55 b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? - No c. From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? - $.38 d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then what will each firm's accounting profit per unit be? - 3.8 cents per unit
Suppose a monopolist's profit-maximizing output is 200 units per week and that the firm sells its output at a price of $60 per unit. The firm has total costs of $9,000 per week. Assume the monopolist is maximizing its profit and earns $30 per unit from the sale of the last unit produced each week.
a. What are the firm's weekly economic profits? - $3000 b. What is the firm's marginal cost? - $30 c. What is the firm's average total cost? - $45
Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.
a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? - $0.25 What if she prints 2,000 posters? - $0.13 What if she prints 10,000 posters? - $0.03 b. What is her ATC per poster if she prints 1,000? - $1.25 What if she prints 2,000? - $1.03 What if she prints 10,000? - $0.81 c. If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately? - NO
A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders.
a. What is its percentage rate of return? - 11 percent b. Is the firm earning an economic profit? - YES If so, how large? - 6 percent c. Will this industry see entry or exit? - ENTRY d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium? - 5 percent
There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested.
a. What is the percentage rate of return for these 298 dairies? - 8 percent b. The other two dairies have a cost structure that generates profits of $22 for every $200 invested. What is their percentage rate of return? - 11 percent c. Assuming that the normal rate of profit in the economy is 10 percent, and that firms cannot copy each other's technology, will there be entry or exit? - Exit d. Will the change in the number of firms affect the two that earn $22 for every $200 invested? - Yes, because those two firms can claim a larger market share. e. What will be the rate of return earned by most firms in the industry in long-run equilibrium? - 10 percent f. If firms can copy each other's technology, what will be the rate of return eventually earned by all firms? - 10 percent
Given the cost information below, answer the following questions.
a. When output is 1, total variable cost is $9.76 b. When output is 2, average fixed cost is $5 c. When output is 3, average variable cost is $9.3 d. When output is 4, average total cost is $11.58 e. When output is 5, marginal cost is $7.99
Assume that the cost data in the following table are for a purely competitive producer:
a. Yes, Profit-maximizing at output of 8 units per firm, Profit $7.87 per unit b. Yes, Loss-minimizing at output of 6 units per firm, Loss of $6.50 per unit c. No, N/A at output 0 units per firm, Total loss = $60 d. (from top to bottom) (2) Quantity Supplied, Single Firm - 0, 0, 5, 6, 7, 8, 9(3) Profit (+) or Loss (-) - -60, -60, -55, -39, -8, 63, 144 e. (4) Quantity Supplied, 1500 Firms - 0, 0, 7500, 9000, 10500, 12000, 13500 f. Equilibrium price = $46 Equilibrium output = 10500 for industry 7 per firm Loss per unit = $1.14 for industry $7.98 per firm The industry will contract
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Into which of these market classifications does each of the following most accurately fit? In each case, justify your classification.
a. a supermarket in your hometown - Oligopoly b. the steel industry - Oligopoly c. a kansas wheat farm - Pure competition d. the commercial bank in which you have an account - Monopolistic competition e. the automobile industry - Oligopoly
John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. a. Does John show diminishing marginal utility for Coke, or does he show increasing marginal utility for Coke? b. Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke, too? c. What about the third dollar? d. If John's marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke?
a. increasing marginal utility b. yes c. yes d. yes
a. The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true b. When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
a. the last unit produced adds more to revenue than costs, and its production must necessarily increase profits or reduce losses. b. the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so MR is constant and equal to price.
a. Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is b. The firm should produce in the short run as long as the price
a. true, if the loss is less than the fixed cost. b. exceeds the average variable cost.
You are choosing between two goods, X and Y, and your marginal utility from each is shown in the following table. a. If your income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of each will you purchase to maximize utility? b. What total utility will you realize? c. Assume that, other things remaining unchanged, the price of X falls to $1. What quantities of X and Y will you now purchase? d. Using the two prices and quantities for X, complete the table to derive the demand schedule (a table showing prices and quantities demanded) for X.
a. x=2 y=5 b. 48 c. x=4 y=5 d. price of x: $2, $1 quantity of x: 2, 4
Monopoly yields neither productive nor ________ efficiency.
allocative
________ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society.
allocative
Competitive market economies generate ______.
allocative efficiency productive efficiency
Average fixed cost equals total fixed cost divided by the ______.
amount of input
Which of the following goods or services is more likely to be price inelastic?
an appendectomy
Because a monopoly is a price maker and prices its products in the elastic portion of the demand curve, its output is less than that required to achieve minimum average total cost. In addition, the monopoly's price will exceed its marginal cost at this level of output. Monopoly therefore creates
an efficiency loss.
The upward sloping supply curve in this figure represents the long-run supply curve for:
an increasing-cost industry
A credit card company that quotes a minimum payment that is typically less than what a borrower owes is making use of ______.
anchoring
__________ bias occurs when a misrepresentation results in systematic errors. (Enter one word in the blank.)
cognitive
What is it called when misunderstandings result in systematic errors?
cognitive bias
Digital cameras and memory sticks are what type of goods?
complementary
What cognitive bias refers to the human tendency to pay attention only to information that agrees with one's preconceptions?
confirmation bias
A natural monopoly occurs when the market demand curve crosses the long-run average total cost (ATC) curve where average total costs are still ______.
declining
With a natural monopoly the demand curve intersects the long-run average total cost curve where the long-run average total cost curve is still ______
declining
An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.
decrease; losses
The downward sloping demand curve illustrates the declining nature of marginal utility because ______.
each point on the demand curve meets the utility-maximizing rule
The ______ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use.
economic
Economists maintain that new firms are attracted into an industry due to:
economic profits
Behavioral economics combines insights from which three of the following?
economics, psychology, and biology
A firm's long-run average total costs may decline over a wide range of output due to ________ of scale.
economies
Start-up firms achieve ________ of scale from learning by doing and through increased specialization of labor, management, and equipment.
economies
What is another term for economies of scale?
economies of mass production
Learning by doing contributes to a firm's ______.
economies of scale
Modern technology can be a cause of extensive ______.
economies of scale
The demand curve intersects the natural monopolist's long-run average total cost curve at a point where long-run average total costs are still falling, due to ______.
economies of scale
When productive efficiency and allocative efficiency are not achieved in a market, it is called a(n) ______.
efficiency loss
A coefficient of price elasticity of demand that is greater than 1 indicates that demand is
elastic
If the quantity supplied by producers is relatively responsive to price changes, supply is relatively price
elastic
Suppose the price of movie tickets changes. The price change leads to a 20 percent increase in the quantity demanded of movie tickets. This causes the total revenue from movie tickets to increase by 10 percent. Is the demand for movie tickets elastic, inelastic, or unit-elastic?
elastic
The demand for Reebok sneakers is relatively price
elastic
What type of demand is represented by a given change in price that leads to a larger change in the quantity demanded?
elastic
A luxury cruise will exhibit a relatively ______ price elasticity of demand.
high
X-inefficiency occurs when a firm operates at a cost that is _________ (higher/lower) than the lowest cost for a particular level of output.
higher
The iPad disrupted consumer equilibrium because consumers concluded en masse that iPads had a marginal-utility-to-price ratio (MU/P) that was ______ the ratios for other products.
higher than
Water is much more widely used than diamonds. However, the price of water is much lower than the price of diamonds because water has a much ______ than diamonds for a typical consumer.
higher total utility
What causes people to massively overestimate their predictive abilities?
hindsight bias
The shape of the long-run supply curve for a constant-cost industry can best be described as:
horizontal
Which of the following resources can a firm easily and quickly adjust?
hourly labor, fuel, raw materials
Behavioral economists focus on ______.
improving outcomes by improving decisions, while neoclassical economists focus on giving people more options
The entry of new firms entering an increasing-cost industry increase resource prices particularly:
in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand
Productive efficiency requires that goods be produced ___.
in the least costly way
What is a major contribution by neoclassical economists regarding our understanding of shopping behavior?
incentives matter
The percentage change in quantity demanded divided by the percentage change in income is the formula for the ______ elasticity of demand.
income
The ______ is the impact that changes in the prices of goods and services have on consumers' real earnings.
income effect
New firms entering an increasing-cost industry will usually ________ resource prices
increase
The purpose of charging different prices to different groups of customers is to
increase revenue and in turn profits. Lower afternoon movie prices are an example of this type of pricing.
Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is as though her income _______.
increases
In an increasing-cost industry, increases in resource prices and the minimum average total cost (ATC) are a result of ______.
increases in product demand resulting in economic profits and industry expansion
Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing __________ returns to scale.
increasing, then decreasing
An industry whose average total cost curve shifts upward as the industry expands and shifts downward as the industry contracts is known as a(n) ______ industry.
increasing-cost
If the market price exceeds the firm's minimum average total cost (ATC), then it will ______.
incur an economic profit
Walnuts and screwdrivers would be classified as what type of goods?
independent
A(n) ______ is able to maintain an economic profit in the long run because there are no new entrants to increase supply, drive down price, and eliminate economic profit.
monopoly
Network effects may drive a market toward _________, because consumers tend to choose standard products that everyone else is using.
monopoly
Patents, economies of scale, and resource ownership are all assumptions of the pure ______ model.
monopoly
Slashing prices is an example of an entry barrier created by a(n) ______
monopoly
The main characteristics of a pure _______ are a single seller, no close substitutes, a price maker, blocked entry, and non-price competition.
monopoly
In the upper-left portion of a linear demand curve, price elasticity of demand tends to be which of the following?
more elastic
According to the diamond-water paradox, some "essential" goods have ______ prices than some "unimportant" goods.
much lower
Total revenue is calculated by __________ (multiplying/dividing) the product price by the quantity sold.
multiplying
Feeling no sense of urgency to save for retirement might be considered _____.
myopia
People can easily weigh current benefits and current costs but have an extremely difficult time conceptualizing future benefits and costs. Which of the following explains this situation?
myopia
A ______ is a relatively rare market situation in which average total cost is minimized when only one firm produces the good.
natural monopoly
What type of economists focus almost entirely on predicting behavior?
neoclassical
The fact that shoppers respond strongly to price is best explained by ___________ economics while impulse buying is better explained by ________ economics.
neoclassical behavioral
_______ effects exist if the value of a product to each user increases as the total number of users increase.
network
How often do perfectly competitive firms engage in price discrimination?
never
For a consumer with a household income of $50,000, which item would have the greatest price elasticity of demand?
new car
People would rather receive cash gifts over noncash gifts because ______.
noncash gifts may not match recipients' preferences and therefore not maximize total utility
Any good for which more is demanded as income rises is a(n) ______ good.
normal
In the long run, a purely competitive firm will only earn a ______ profit.
normal
In general, as shown in the figure, a fair return price will lead to ______ and a socially optimal price will lead to ______.
normal profit; economic loss
System ________ (number) uses a lot of heuristics in the older parts of the brain to make quick, unconscious reactions.
one
In the dictator game, ______ of dictators kept all of the money and in the ultimatum game, almost ______ of the proposers kept all of the money.
one third; none
Time inconsistency is a major cause of ______.
self-control problems
According to Adam Smith, which of the following strongly contribute to people's decisions?
self-interest selflessness charity
A firm cannot avoid paying fixed costs in the _______ run.
short
The ______ run is a period of time that is not long enough to change plant capacity.
short
In the ______, a farmer would have time to cultivate a crop more intensively by applying more variable inputs, such as labor, fertilizer, and pesticides.
short run
A competitive firm may realize an economic profit or loss in the _______ run but will earn only a normal profit in the _______ run.
short; long
Which of the following products would be price elastic based on their substitutability?
snickers candy bar
A purely competitive market leads to the efficient use of:
society's scarce resources
Which item, when purchased new, would have the lowest price elasticity of demand?
socks
Increased labor ______ becomes more achievable as a plant increases in size.
specialization
One explanation for the U-shaped average variable cost curve is that greater ______ yields more efficiency and variable cost per unit of output declines
specialization
The tendency that people have to favor any option that is presented to them as being the default option is the _______ _______ bias.
status quo
Brand loyalty is best explained by which of the following?
status quo bias
Talia always drinks Pepsi products. When she goes to her local market, however, they are out of Pepsi, and Talia spends several minutes deciding from her other options. What explains Talia's reluctance to purchase a different brand of soda?
status quo bias
The tendency for people to favor any option that is presented to them as the default option is called ______.
status quo bias
There is a much higher participation rate in organ donation when participation in the program is the default option. What does this situation illustrate?
status quo bias
Two solutions to the economic losses caused by socially optimal pricing are providing public ______ and condoning price discrimination.
subsidies
Larger positive cross elasticity implies greater ______ between two products.
substitutability
A pure monopoly exists when a single firm is the sole producer of a product for which there are no close ___.
substitutes
If the cross-price elasticity of demand between two goods is positive, then the pair must be ______.
substitutes
The ______ is the impact that a change in a product's price has on its relative expensiveness.
substitution effect