Midterm 2 Micro
short run
some inputs are fixed
sunk cost
spend or invested money that there is no way of getting back
utility
the satisfaction, reward, or benefit that a consumption of production yields
The price of season tickets to a performing arts theater decreases by 3%. As a result, the quantity demanded increases by 6%. The price elasticity of demand for season tickets is
2
implicit costs
an income a company forgoes when they choose to do or not to do something (op cost of owners time and resources)
elasticity of demand formula (from the law of demand; this will always be negative)
change in quantity demanded / change in prices
marginal cost formula
change in total cost (or variable cost) / change in quantity
marginal product
change in total product / change in variable resources
The basic formula for the price elasticity of demand coefficient is...
the midpoint formula
Which of the following is most likely to be a variable cost for a firm?
the payroll taxed that are paid on employee wages
Total revenue minus total cost equals
profit
income elasticity of demand
ratio of...% change in quantity demanded / % change in income
The price elasticity of demand is a measure of the...
responsiveness of buyers of a good to changes in its price.
zero cross
price elasticity implies that there is no relationship between the two goods
negative cross
price elasticity of the goods are compliments
positive cross
price elasticity of the goods are substitutes
In some markets consumers may buy many different brands of a product. Which of the statements below best represents a situation where demand for a particular brand would be very elastic?
"The different brands are almost identical. I always buy the cheapest."
characteristics of competition
# and size of firms, similarity of the products, ability fir new firms to enter or exit
elasticity of supply
% change in quantity supplied / % change in price
A 3% increase in the price of tea causes a 6% increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is
+2.0
If the supply of oranges is unit elastic, the price elasticity of supply of oranges is
1.0
A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 40 units and that of Y is 16 units. If the unit price of X is $5, then the price of Y must be
2 $ per unit
The price elasticity of demand for a popular sporting event is 2. If the price of a ticket to this event increases by 10%, the quantity of tickets demanded will decrease by
20%
When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is ________ customers served per hour.
30
SCENARIO 1: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
30,000
What is the marginal utility of the fourth unit?
44
The Sweet Success Bakery sells 500 cakes at a price of $10 per cake. Its total economic costs for producing 500 cakes are $500. The Sweet Success Bakery's economic profits are
4500
SCENARIO 1: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year. Refer to Scenario 1. Your accounting profit last year was
50,000
The supply of product X is inelastic (but not perfectly inelastic) if the price of X rises by
7% and quantity supplied rises by 5%
leisure time
= opportunity cost of working
long run equilibrium
A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms.
cross minimization
ATC > P > AVC, firms will operate at a loss, as long as they cover variable costs, and pay down part of fixed costs
economies of scale
ATC falls as Q increases
diseconomies of scale
ATC rises as Q increases
constant returns to scale
ATC stays the same as Q increases
shut down
AVC > P, firms cant cover variable costs, better off producing only at certain times
At a price of $4, quantity supplied is 100; and at a price of $6, quantity supplied is 120. Using the midpoint formula, calculate the price elasticity of supply. Is supply elastic or inelastic?
E = .45, inelastic
inelastic demand
Ed < 1
Perfectly Inelastic
Ed = 0
Unitary elasticity
Ed = 1
Perfectly Elastic
Ed = ∞, infinite change in demand to price change
elastic demand
Ed > 1
The cross-price elasticity of demand between good X and good Y is 0.5...meaning
Goods X and Y are substitutes.
You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues from that product, you should
Increase the price of the software
_______ are likely a fixed cost of a firm.
Lease payments for office space
profit maximization
P > ATC, everything is fine, operate as usual
revenue
Price x Quantity
Which of the following is not an assumption of the theory of consumer behavior described in this chapter?
The consumer's tastes and preferences continually change within the period studied
Which situation is consistent with the law of diminishing marginal utility?
The more pizza Joe eats, the less he enjoys an additional slice.
elasticity
a measure of the responsiveness of one variable to a change in another variable (% change in Quan/ % change in price)
marginal utility
additional satisfaction or usefulness a consumer gets from having one more unit of a product
long run
all inputs are variable
income effect
as the wage rate increases, we can afford to purchase more of all goods and services
Determinants of Elasticity
availability of close substitiutes (more subs- more elastic), necessity vs luxury (luxuries- more elastic), time horizon (long run- more elastic) , definition of market (more narrowly defined market- more elastic), share of good in a consumers budget (larger share of budget- more elastic)
The determinants of elasticity include
availability of substitutes, price relative to income, and time
If marginal cost is above average variable cost, then
average variable cost is increasing.
variable costs
costs that vary directly with the level of production (ex. fuel and power payments)
The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the price elasticity of demand is -2.5, the company must
decrease price by 2.0%.
fixed costs
don't change no matter how much is produced
diminshing marginal utility
each additional unit of a good that is consumed generates less satisfaction than the previous goods
The price elasticity of demand of a straight-line demand curve is
elastic in high-price ranges and inelastic in low-price ranges.
The price elasticity of demand for bottled water in Texas is -2, and the price elasticity of demand for bottled water in California is -0.5. In other words, demand in Texas is ________ and demand in California is ________.
elastic, inelastic
When the price of coffee increases 5%, quantity demanded decreases 10%. The price elasticity of demand for coffee is ________ and total revenue from coffee sales will ________.
elastic; decrease
Marginal cost is ________ average variable cost when ________.
equal to; average variable cost is minimized.
lowest price possible
every firm produces the exact same product, individual firms are price takers
economic costs
explicit costs + implicit costs
cross price elasticity of demand
f% change in QD of good /% change in good Y
Total revenue decreases if price ________ and demand is ________.
falls, inelastic
price takers
firms that take or accept the market price and have no ability to influence that price
average fixed cost
fixed cost divided by the quantity of output
total cost (market value)
fixed costs plus variable costs
In the long run there are no...
fixed factors of production.
cost of saving
give up consumption
cost of borrowing
give up future consumption
A perfectly price elastic demand curve will be a ________ line.
horizontal
loss
if # < 0
normal profit
if # = 0
economic profit
if # > 0
Explain why it would make sense for a firm to operate at a loss in the short run, as long as the price is greater than their average variable cost.
if they produce nothing, they loose their fixed cost. If price is greater than variable cost, the difference goal toward their fixed cost, thus reducing the size of the loss
Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that
in order to maximize utility, Ellie should buy more of Alpha and less of Beta.
benefit of borrowing
increase the current consumption
If the price of product X rises, then the resulting decline in the amount purchased will
increase the marginal utility of the last unit consumed of this good.
What is the most likely effect of the development of DVDs, rental movies,and online movie streaming on the movie theater industry?
increased price elasticity of demand for movie theater tickets
If the price-elasticity coefficient for a good is -.75, the demand for that good is described as
inelastic
A negative income elasticity of demand coefficient indicates that the product
is an inferior good.
Marginal cost
is the increase in total cost resulting from producing one more unit.
perfect competition
large numbers of small firms, have homogeneous production, and companies can enter or exit easily
when the total revenue earned by a firm is less than the total cost of production, the firm faces a ___
loss
ways of distributing limited supply
lottery system, rationing coupons
minimun efficient scale
lowest level of output at which the long run average total cost is minimized
The added revenue that a firm takes in when it increases output by one additional unit is ________ revenue.
marginal
market price is equal to
marginal revenue, average revenue, and demand
After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the
marginal utility is positive for the fourth slice and negative for the fifth slice.
A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the
marginal utility per dollar spent is the same for all goods.
goal of firms
maximize profit
We would expect the demand for Coca-Cola to be ____ price elastic than the demand for soft drinks in general.
more
ability to control price/quantity shows the level of competition
more comp = less control, less comp = more control
benefit of saving
more consumption in the future
A mass transit authority charges bus fares of $1.25 during morning rush hours but only $1.00 during late morning non-rush hours. Economists explain the fare difference by the fact that the demand for bus rides during the morning rush hours is ________ but during the late morning it is ________.
more inelastic; more elastic
The more time that elapses, the...
more price elastic is the demand for the product.
The total revenue received by sellers of a good is computed by
multiplying the price times the quantity sold.
E1 < 1 means _____, E2 > 1 means ____
necessity, luxury
We would expect the cross elasticity of demand between dress shirts and ties to be
negative, indicating complementary goods.
For a firm in a perfectly competitive industry, the period of time referred to as the short-run is...1 week, month or year
none of the above
positive elasticity of demand implies a ___ good, negative implies an ___ good
normal, inferior
If an individual perfectly competitive firm charges a price above the industry equilibrium price, it wil
not sell any of what it produces.
explicit costs
payments made to non-owners of a firm for their resources (cash expenditures)
The law of supply suggests that the price-elasticity of supply is always:
positive
We would expect the cross elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods.
elasticity has an inverse relationship between ___ and __
price and revenue
substitution effect
the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
The price-elasticity of demand is always negative because of
the law of demand
choice-set
the set of options that is defined and limited by a budget constraint
total utility
the total amount of satisfaction obtained from consumption of a good or service
average total cost
total cost divided by the quantity of output
total product
total output produced by the firm
average product
total product/units of labor(resources)
competitive firm profit
total revenue - total cost
Profit-maximizing firms want to maximize the difference between
total revenue and total cost.
t/f When marginal utility is positive, an increase in the quantity consumed will increase total utility
true
For which product is the income elasticity of demand most likely to be negative?
used clothing
The satisfaction or pleasure one gets from consuming a good or service is called
utility
average variable cost
variable cost divided by the quantity of output
cost-benefit analysis
what do I get/loose if I make one more unit
