Microeconomics Test Prep 2

Suppose that you used $100,000 of your own business, you could have invested that money elsewhere and made a $15,000 return, you also had to quit your $70,000 per year job to run business. At the end of the year, your accountant congratulates you because you had an accounting profit of $85,000, economically speaking your profit was actually

$0

If you have $1,000 worth of fixed costs and variable labor costs of $2,000 per day (you can produce 100 units per day), when output is 0 your total costs are

$1,000

If you have $1,000 worth of fixed costs and variable labor costs of $5,000 per day (you can produce 10 units per day), when output is 0 your total costs are

$1,000.

Based on the graph, a $3 tax on the product will cause the market price to rise by _____.

$1.50

The maximum profit this firm can earn is

$2,520.

If you have sold 50 units of a product for a price of $80, your total revenue is

$4,000.

The third unit of output has a marginal cost of ______.

$400

If a business sells 100 units at a price of $3, and accumulates a total cost of $250 while doing so the profits are _____.

$50

The average total cost of 5 units of output is

$540.

When output is 4 units, the average total cost is

$575.

If the market price drops from the current $60 price to a price of $40, the long-run output of the firm will be

0.

When the price Steak increases by 20%, and the quantity of fish demanded increases by 10%, the cross price elasticity of demand is _____

0.5

When your income rises by 10%, you decide to increase your consumption of steak by 5%, the income elasticity of demand is _____.

0.5

True or false: Agricultural products are the only markets that are truly perfectly competitive.

False

True or false: If a firm is experiencing losses, it should shut down.

False

Based on the graph, profits will be maximized at the point which

MC = MR

A firm will always produce at the output at which _____.

MR = MC

_________________ analysis is the basis of much of microeconomic decision making.

Marginal

We calculate a firm's total losses by ______.

Output × (Price-ATC)

We calculate a firm's total profit by

Output × (Price−ATC)

When the cross elasticity of demand is positive, the goods are

Substitutes

When the average total cost is rising as output rises, there is

diseconomies of scale.

The long-run average cost curve represents

all the different plant sizes the firm can afford.

Because the law of diminishing returns means that initially variable cost will be falling but will eventually start rising and the average fixed costs is declining by smaller amounts, the average total cost curve is

U-shaped.

An example of an elastic demand would be

a steak dinner

If you have a business that has an accounting profit less than the salary you could have earned at another job, your economic profits

are negative.

Businesses earning zero economic profit

are still earning an accounting profit.

Two products are identical when the _______________ say they are.

buyers

If the price elasticity of demand is 10, we would say that the demand is

elastic

If the demand for a good or service is inelastic, if we were to lower the price, total revenue would

fall

If the price falls and demand is inelastic total revenue will

fall

When a firm has shut down, its total costs are ______ zero because of ________ costs.

greater; fixed

If the price of wheat is $3 per bushel, a farmer must sell his entire crop at that price because

he is a price taker.

A firm will be maximizing its profits (or minimizing losses) when the MR

is equal to MC.

When the market price does not change, the demand

is the same as the marginal revenue.

A product will be more elastic if:

it has more uses. close substitutes are available. the price of the product is high relative income.

Demand for a product would tend to be more elastic when:

it is a luxury item. its price is a significant portion of your income.

If we do not know total cost and total revenue, we can calculate profits using

marginal analysis.

Based on the law of diminishing returns, as a firm increases the number of employees, eventually

marginal production will decline and may even become negative placing a maximum on the number of employees.

Because the demand curve is downward sloping the price elasticity of demand will always be

negative

Since we need to replace worn out equipment to stay in business, and this is usually done on an as needed basis we will

never get to the long run.

A ________ is a technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs

production function

Subtracting total cost from total revenue helps us calculate total

profit

If the demand for a good or service is inelastic, if we were to raise the price, total revenue would

rise

If the price falls and demand is elastic, total revenue will

rise

If the price rises and demand is inelastic, total revenue will

rise

When the level of output rises, the variable costs will

rise

If the Cookie Monster only buys cookies with his income, his demand is

unit elastic.

If your current total revenue is $10,000 and increasing your sales by 1 unit causes your total revenue to increase to $12,000, your marginal revenue is

$2,000.

Suppose that you have fixed costs of $1,000, when the output is 4, the AFC equals ______.

$25

When output is 4 units, the total profits are

$3

Based on the graph, if supply shifted from S1 to S2 as a result of a tax, the per unit tax is

$3 with the buyer paying $1.50 of it due to the higher price.

Suppose that you used $200,000 of your own business, you could have invested that money elsewhere and made a $20,000 return, you also had to quit your $50,000 per year job to run business. At the end of the year, your accountant congratulates you because you had an accounting profit of $100,000, economically speaking your profit was actually

$30,000.

Suppose that your total cost of production is $1,000 and you are selling 200 units. If you are selling them at a price of $6 dollars each, your profit is

$6 − $1,000/200 = $1 per unit.

The marginal cost of the fourth unit of output is _____.

$600

When your income rises by 10%, you decide to reduce your consumption of Ramen noodles by 50%, the income elasticity of demand is _____.

-5

If an increase in price from $20 to $25 causes the number of unit sold to fall from 500 to 400, the elasticity of demand is _____.

1

If demand is unit elastic, the elasticity of demand is

1

If we have a straight line demand curve, at the center of the line the elasticity of demand is

1

Suppose that you are selling 100 products per day at a market price of $100, if a major technological advance lowers the price to $50 causing sale to rise to 300, the elasticity of demand form your product must be _____.

1.5

A price elasticity of demand of 3.1 means that there is a

3.1% change in quantity when the price changes by 1%.

This firm will shut down if the quantity is

3.3 units or less

On the graph, the AVC and MC curves intersect at a quantity of

3.5 units.

On the graph, the ATC and MC curves intersect at a quantity of

5.25 units.

This firm's break-even point is at a quantity of

6-units.

In order to determine profits on a graph, the graph would need to include:

ATC. D. MC.

To determine the profits of a firm from a graph, the graph must include:

ATC. D. MC.

Suppose that a firm is currently producing 100 units of output using ATC1, if sales increase to 300 units, we would produce using

ATC1 in the short run and ATC3 in the long run.

Suppose that a firm is currently producing 225 units of output using ATC2, if sales decrease to 175 units, we would produce using

ATC2 in both the short and long run.

The marginal cost curve intersects the _____________________ at its minimum point and the ATC at its ____________________ point.

AVC; minimum

On the graph, the more inelastic demand would be represented by

D2

We can find the income elasticity of demand by _____.

EIEI=PercentagechangeinquantitydemandedPercentagechangeinincome

True or false: On a supply and demand graph, the relative elasticities between supply and demand determine tax incidence with the more elastic curve paying more.

False

Based on the graph, during the market period the supply for a perishable good would most likely be

Graph A

Based on the graph, during the market period the supply for a nonperishable good would most likely be

Graph B

The most profitable output occurs when

MR = MC. the total revenue exceeds to total cost by the greatest amount.

We can find the ATC by _____.

TC/Q; AFC+AVC

When you run your own business, implicit costs include:

a return on investment. the rent on space in your home used for the business. the wear and tear on your car when used for business. wages you could have earned elsewhere.

One potential cause of diseconomies of scale is

as firms require more resources the bid up the price.

The demand for vital heart medicine is not perfect inelastic despite being necessary because:

at high enough prices some consumers will decide it is not worth it. at higher prices some consumers can no longer afford it.

Because a perfectly competitive firm is operating at the minimum ATC, they are producing

at peak efficiency.

The most important influence on the elasticity of demand for a good or service is the

availability of substitutes.

Select all that apply The marginal cost curve must cross the ________ at its minimum point

average total cost average variable cost

If you had an electric bill that had a set access charge and you also pay per kilowatt used, this cost would

be considered as a fixed cost.

This firm will product in the short run but go out of business in the long run if the market price is

between $28 and $48.

Based on the graph, profits will be maximized with an output of

between 5 and 6 units.

A firm may be able to lower its cost by building a ________________ factory.

bigger

Maximum efficiency occurs when the firm is operating at the

break-even point.

The point at which the MC curve crosses the ATC is the

break-even point.

When the economic profit becomes negative, a person who is still earning an accounting product may decide to ________________ the business.

close

The long-run average cost curve is a ____________________ of all possible short run cost curves.

compilation

If the cross elasticity of demand is negative, the two goods are

complementary

Since motor oil and gasoline are ______________ goods, an increase in the price of gas will cause the demand for motor oil to fall.

complementary

Examples of goods that would have a positive income elasticity of demand would include

concert tickets; albums

Along a straight line demand curve, the elasticity of demand is

constant for all demand curves.

The transition from the short run to the long run is a _______________ process

continuous

Perfect competition is good for consumers since they can buy at

cost.

If we have economies of scale, we will experience ____________________ in average total cost as output rises.

decline

According to the law of diminishing returns, as we continue to add variable resources to our production, eventually the extra output we would receive from them would start to

decline.

As output increases, the average fixed cost

decreases because of the higher quantity.

We know that in the 1970s the price of oil tripled and the sale of gasoline dropped dramatically, but in 1999-2000 when oil prices tripled there was no appreciable cutback in sales, just a shift in the grade of gasoline purchased. Based on this information,

demand may have become more inelastic since the 1970s.

The tax incidence of an indirect tax is

difficult to determine, the seller will try to put the tax on the buyer, but the law of demand says buyer will be less likely to buy.

Eventually, most large corporations will grow and ultimately have ________________ of scale.

diseconomies

The idea that "work expands to occupy the people available for its completion" indicates the onset of

diseconomies of scale.

Fixed costs are costs that

do not change with output.

Based on the graph, the seller pays a greater burden of the tax when demand is

elastic.

Over time the demand for a particular good often becomes more

elastic.

Since steak has a number of reasonably close substitutes, its demand will be relatively

elastic.

The __________________ of demand measures the in the quantity demanded in response to a change in price.

elasticity

The measure of the change in quantity demanded in response to a change in price is known as

elasticity of demand.

If there are profits in a perfectly competitive market, new firms will ____________________ the market eventually causing the price (and profits) to ____________________.

enter; fall

If there are profits in a competitive industry,

entry into the industry will drive the price downward until the profits have been eliminated.

Select all that apply As we increase plant size,

eventually the minimum ATC will start to rise in the long run. initially the minimum ATC will fall in the long run.

As output rises, initially average variable costs will be falling,

eventually they will level off and begin to rise.

Accounting profit is the total revenue minus

explicit costs.

If the demand for a good or service is elastic, if we were to raise the price, total revenue would

fall.

As output rises, initially both average variable and average total cost curves ____________________, reach ___________________ points, and begin to _________________.

fall; minimum; rise

Since variable costs increase with output, initially average variable cost will be ______________________ as output is increased, as output gets larger the average variable cost be _______________________.

falling; rising

McDonald's offers to sell you a second McRib sandwich for $1 (well below the price of the first one) because in this case as output rises, marginal cost

falls

Advertising attempts to change the way we __________________ about a product.

feel

If there are losses in a perfectly competitive market,

firms will exit the industry, when enough firms leave the price will begin to rise until there are no longer losses.

Because we are dividing by larger quantities, as output increases, the average _________________ costs are declining.

fixed

In the short run, a business firm has a _____________ productive capacity.

fixed

In the short run, there will always be

fixed costs.

When a firm has shut down, it will still have

fixed costs. total costs.

The total cost is the sum of the costs and the costs.

fixed; variable

A ticket scalper has a short run of

from now to the start of the event.

As we move down to the right along a straight line demand curve, elasticity of demand

gets smaller

In the long run, when there are losses a perfectly competitive firm will

go out of business.

We typically see economies of scale in industries were there are

high fixed cost and low marginal costs.

The more uses there is for a product the __________________ the elasticity.

higher

We create a sample demand curve with a much larger percentage change in price than quantity. While calculating elasticity and total revenue, we can derive that ________________ prices lower revenue when demand is elastic.

higher

The demand curve for a perfectly competitive firm is _______________ at the market price.

horizontal

When prices are held constant, the marginal revenue line is

horizontal.

If a firm has losses, it will

immediately shut down.

In calculating accounting profits, ______________ costs are not considered.

implicit

Perfectly competitive firms will make zero profits in the long run because

in the long run there is time for firms to enter or leave the industry.

On a straight line demand curve, the elasticity of demand in unit elastic

in the middle of the demand curve.

We can distinguish between normal good and inferior goods using

income elasticity of demand.

If I increase my plant size from ATC1 to ATC2, the shutdown point will

increase as will the break-even point.

Since steak and fish are substitutes, an increase in the price of steak will

increase the demand for fish.

Advantages of economies of scale include

increased specialization. lower cost per unit. potentially lower prices to consumers.

Select all that apply Advantages of economies of scale include

increased specialization. lower cost per unit. potentially lower prices to consumers.

Based on the graph, the buyer pays a greater burden of the tax when demand is

inelastic

By brand identification, advertising can make demand more

inelastic

Higher prices will lead to more total revenue only when the demand is

inelastic

If the price elasticity of demand is 0.10, we would say that the demand is

inelastic

Over short time periods supply tend to be

inelastic

Imagine you own a small diner with a 5 × 10 kitchen area. Due to the volume of customers you need to hire more cooks. As you hire,

initially teamwork may drive productivity upward but eventually the cooks will be getting in each other's way. the declining productivity along with the higher costs will strain the potential profits of the business.

The average total cost curve is U-shaped because

initially the decline in AFC overcomes the increase in AVC but eventually the AVC overcomes the AFC.

Examples of fixed costs include

insurance premiums. rent. interest on business loans.

Demand for a product would tend to be more inelastic when:

it is a necessity. its price is a small portion of your income.

We study perfect competition because

it is an ideal form of competition that we can compare other markets to.

For a straight line demand curve that is downward sloping:

it will become inelastic at a low enough price. it will become elastic if the price is high enough. it will be unit elastic in the middle.

Advertisers try to make the demand for a product greater and at the same time ________________ elastic.

less

The purpose of advertising is to make demand:

less elastic. greater.

Suppose we have a production function with labor as the only input, if we are experiencing the law of diminishing returns, the productivity of a new hire will be

less than the prior workers hired.

In the short run, the ability of a business firm to increase output is

limited

Firms have sufficient opportunity to alter their productive capacity in the __________________ run

long

Business firms will have more options in their production decisions in the

long run

When all costs are variable, we are in the

long run

When all costs are variable and a firm can enter or exit an industry is the

long run.

Using a graph of supply and demand, we can determine the tax incidence by

looking at how much the market price increased relative to the tax.

Creating a sample demand curve with a much larger percentage change in price than quantity and looking calculating the elasticity and total revenue we can derive that higher prices ____________________ revenue when demand is elastic

lower

We can increase our total revenue by:

lowering prices when demand is elastic. raising prices when demand is inelastic.

The time after a price is changed but before the seller can adjust the quantity offered is the _________________ period

market

The period during which sellers are unable to change the quantity offered for sale in response to a change in the price is the

market period

Efficiency can be defined as when

maximum output is produced with given inputs. the average total cost is at its minimum.

The most difficult part of graphing the ATC and the AVC curves is making sure that they are crossed at their ________________ points by the MC Curve

minimum

Perfect competition has many firms, by this we mean

no one firm can influence the market.

Implicit costs are a firms _______________ cost.

opportunity

To find the points of the ATC curve, we would plot the _______ on the horizontal axis and the _____ on the vertical one.

output; ATC

To find the points of the AVC curve, we would plot the _______ on the horizontal axis and the _____ on the vertical one.

output; AVC

When a firm is producing at the point when the ATC is minimized, it is operating at

peak efficiency.

The price elasticity of supply is given by _____.

percentagechangeinquantitysuppliedpercentagechangeinprice

When all of the buyers, sellers, and resource owners know where to go to get the highest possible return, we have perfect

perfect knowledge

When all of the buyers, sellers, and resource owners are free to go anywhere to get the highest possible return, we have

perfect mobility.

The graph represents (horizontal line)

perfectly elastic supply.

If the price elasticity of demand is infinite, we would say that the demand is

perfectly elastic.

The graph represents (vertical line)

perfectly inelastic supply.

For a perishable item like fresh fruit, during the market period supply is

perfectly inelastic, since the product cannot be saved the seller must sell everything at any price or it will be worthless.

If the price elasticity of demand is 0, we would say that the demand is

perfectly inelastic.

Examples of goods that would have a negative income elasticity of demand would include

potatoes. courses in cosmetology. rice.

Industries where we are likely to see huge economies of scale include

prescription drugs. music CDs. computer software.

If demand is perfectly elastic, the percentage change in

price is 0%

If demand is inelastic, the percentage change in

price is greater than the percentage change in quantity.

Most business owners would choose

profit over efficiency so they will produce were the MR = MC.

The number of units sold multiplied by the price per unit net of total costs is

profit.

In perfect competition, at the point where the demand curve is tangent to the ATC curve,

profits are zero. P = ATC. MR = MC.

When the average total cost is constant as output rises, there is

proportional returns to scale.

If demand is perfectly inelastic, the percentage change in

quantity is 0%.

If demand is elastic, the percentage change in

quantity is greater than the percentage change in price.

The production function shows us the

relationship between the maximum amount of output a firm can produced with various inputs.

For a nonperishable item like gasoline, during the market period supply is

relatively inelastic, although production cannot change changes to inventories can change sales until production can be altered.

The different reactions to the tripling of oil price in the 1970s and in 1999 may not indicate a change in the elasticity of demand because:

relatively speaking gasoline was significantly cheaper in 1999 when adjusted for inflations so we could still afford it. shortages prevented people from purchasing gas in the 1970s we don't know if they would have purchased gas because they did not have the opportunity.

If you are currently selling 10 units of output at $7.50, if you can sell as much output as you want at the current price, if you doubled your production, your marginal revenue would

remain the same.

Goods that would have elastic demand would include

restaurant meals. motor vehicles.

As the elasticity of supply rises, the tax burden is shifted from the _________________ to the ___________________

seller; buyer

Supply tend to be inelastic during very _______________ periods of time.

short

We never really get to the long run because

short-run decision keeps pushing the long run further away.

The competitive firm illustrated by this graph has

short-term losses.

Under perfect competition, the firm illustrated by this graph has

short-term profits.

When the AVC is at its minimum, a firm is at the

shutdown point

According to Adam Smith in his book "Wealth of Nations," if a firm can provide ____________________ jobs for its workers, it will have economies of scale

specialized

The typical stages of growth for a large corporation is

start with economies of scale, move through proportional returns to scale, eventually ending with diseconomies of scale.

In the long run, the firm can choose to

stay in business. go out of business.

To the extent that advertising is successful the demand curve is made __________________ and is pushed further to the ___________________

steeper; right

if the demand for a good or service is elastic, if we were to lower the price, total revenue would _________________ and is pushed further to the _________________.

steeper; right

The determination of whether a competitive firm has profits or losses is determined by

supply and demand

Buyers will pay the entire burden of a tax when:

supply is perfectly elastic. demand in perfectly inelastic.

Regardless of how it is implemented, the seller will face the full burden of a tax when

supply is perfectly inelastic. demand is perfectly elastic.

________________ and ________________ determine if a perfectly competitive market has profits or losses.

supply; demand

The perfect competitor is a price ______________ not a price _________________.

taker; maker

Profits are zero when the demand curve (marginal revenue) is

tangent to the ATC.

The determination of who really pays a tax in known as

tax incidence.

Select all that apply The marginal cost curve intersects

the ATC at its minimum point. the AVC at its minimum point.

When comparing the ATV and the AVC curves

the AVC will start to rise first.

When calculating the price elasticity of demand

the answer will always be negative but by convention we ignore the sign.

The most efficient output occurs when

the average total cost curve is at its minimum point. ATC = MC.

The sum of the average fixed costs and the average variable cost is

the average total costs.

If we vary out plant size,

the costs may change shifting the break-even and shutdown points.

Examples of costs that have both a fixed and a variable component would be

the electric bill. the phone bill.

If a firm has $4 million in revenue, and $3 million in variable cost, it will shut down if the fixed cost is

the firm will not shut down at any fixed cost.

Your marginal revenue is

the increase in total revenue when output sold goes up by 1 unit. the additional revenue derived from selling one more unit of output.

The short run lasts for.

the length of any long-term contracts.

In a perfectly competitive market that has losses, as firms go out of business, the reaming firms will see

the losses will be reduced. the quantity they produce will grow slightly. the market price begin to rise.

BOGO (buy one get one) offers make sense to the retailer when

the marginal costs fall as output increases.

If a seller can sell as much output as they would like at a price of $10, if they sell 100 units,

the marginal revenue is $10 and the total revenue is $1,000.

The vertical distance between the demand curve and the ATC curve when the output is 11 units represents

the per unit profits.

The relationship between the percentage change in quantity supplied and the percentage change in the price is

the price elasticity of supply.

We can use elasticity to look at the responsiveness of changes in quantity demanded caused by changes in:

the price of related goods. the income of the buyer. the price of the good.

Factors that will make the demand for a product more inelastic include

the product is a necessity rather than a luxury. we are looking at shorter time frames.

The price elasticity of demand measures the

the responsiveness of the quantity demanded to price changes.

Industries that are close to perfectly competitive include:

the stock market. wheat. the foreign exchange market.

The long run only exists in

theory

Because Bayer aspirin has been able to convince people that it is better than other brands:

they may be able to raise their prices without losing sales. they made their demand more inelastic.

For a firm to stay in business in the long run, its total revenue must exceed its

total costs.

The rectangle JKLM represents

total losses.

The rectangle EFGH represents

total profits.

If you multiply the price times the quantity sold, you would calculate the

total revenue

Total profit can be calculated by _____.

total revenue - total cost

Since the Cookie Monster spends all of his income on cookies, his demand is _______________ elastic.

unit

If the elasticity of demand is 1, the demand is

unit elastic.

A firm will shut down when the _________________ cost exceed the revenues.

variable

The increase in total costs is based entirely on the increase in ________________ costs.

variable

Cost that vary with output are known as

variable costs.

The speed at which a market transitions between the short run and the long run

varies depending on the market.

Examples of goods that may have a nearly perfectly inelastic demand include

water when stranded in the desert. heart medicine.

Perfect competition is a market structure with

well-informed buyers and sellers. many buyers and sellers. identical products.

If the market price of a good is $5, a perfectly competitive firm

would loss all of their customer if they tried to charge $5.01. would loss profits of $0.01 per unit if they charged a price of $4.99.

You would still operate a business when economic profit are zero because

you're your own boss. you are still earning an accounting profit. you could not have invested your money better anywhere else.

Under long run perfect competition, a firm will have

zero economic profits but a positive accounting profits.

We might summarize diseconomies of scale with the phrase

"become a lean-mean fighting machine."

We might summarize economies of scale with the phrase

"bigger is better."

We might summarize proportional returns to scale with the phrase

"size doesn't matter."