ECO 201 Elliott Final Review

Economic is less than accounting profit because

Economic costs are greater than accounting costs because economic costs include opportunity costs

Losses- Long Run

Exit Decreases Supply Pushes up price reduce loss profits=0

True, False, or Uncertain: It is possible to increase social welfare from that achieved at the equilibrium price and quantity.

False

Total Cost

Fixed Cost+Variable Cost

Profit

revenue-costs

Assume market is at equilibrium. Saudi Arabia restricts sales in crude oil market pushing up the price of oil, which is the main input in gasoline. In this case (supply)...

supply of gasoline decreases.

Dead weight loss

the area on a markets graph that is not part of the consumer or the producer surplus that we would see if we were in perfectly competitive equilibrium

Marginal Revenue Line

P* line Demand line

Revenue

P*Q

If we consider ordinal utility, if person A has utility of $12 for good X and person B has utility of $6 for good X we can say...

Person A likes good X more (can't say twice as more)

PPF: Toaster pastries y-axis. Laptop computers x-axis. A is inside the curve. B is on the curve. C is beyond the curve. True or False: Point C is impossible to get to today.

True as there aren't enough resources to make this possible.

True, False, or Uncertain: A firm earning positive economic profit will chose to operate

Uncertain. To operate a firm must cover all its accounting costs plus the opportunity costs.

AVC

VC/quantity

Assume the market for a local athletic club memberships starts in equilibrium. At the same time that that health experts announce that cardiovascular exercise leads to early death, the rent on the athletic club's building increases. What will happen to the equilibrium number of members?

We can't tell.

Economic rationality

We will not do things that make us worse off.

Positive economic analysis (or positive economic view)

What does the world look like? How are things allocated? You buy a house in a different way than you buy potato chips. Objective descriptions of the way things are.

Perfect Competition Assumptions-long run

all inputs can be changed (No fixed costs) easy entry and exit profit induces entry product homogeneity

A firm in the short run has output of 20 with one worker, 35 with two workers, and 45 with three workers. If the firm hires a fourth worker we would expect output to be A.more than 55 B.Equal to 55 C.Less than 55 D.We cannot determine

c. less than 55

In Connecticut, the apple market is perfectly competitive. Suppose that consumers'tastes change so that people like apples more than they used to. The demand curves faced by individual firms will A.not change B.become less elastic C.shift upward D.shift leftward E.shift downward

c. shift upward

In long-run equilibrium for a perfectly competitive industry, firms earn ______ economic profits and produce ______. A.zero, inefficiently B.positive; efficiently C.zero; efficiently D.positive; inefficiently

c. zero, efficiently

Assume market is at equilibrium. Saudi Arabia restricts sales in crude oil market pushing up the price of oil, which is the main input in gasoline. In this case (demand)...

demand for gasoline stays the same.

Rational

doing things you believe will make you better off

Profits- Long Run

entry increases supply push down price reduce profit profit=0

Outcome of long run perfect competition

equilibrium profits=0 supply=demand supply=MC demand=price price=MC

Supposed Herb has 3 slices of pizza. He decided that the 3rd slice was just worth the price he paid. If the slices have a price of $1...

he may have earned consumer surplus on the first 2 slices

Economics can best be described by the study of how...

individuals decide to use scare resources in an attempt to satisfy unlimited wants.

Natural monopoly

industry costs create barrier to industry

solutions to externalities

internalize externality sell permits allowing a certain amount of pollution allow firms to trade them

Perfect Competition Assumptions-short run

many buyers many sellers perfect information easy entry and exit product homogeneity

Monopolistic Competition

most likely to see in real life easy entry and exit product heterogeneity lots of sellers

Cartel

organization formed from an agreement of producers to regulate supply in order to regulate or manipulate prices acts as a monopoly

negative externality-free market

over provided

Elasticity of Supply

percent change in quantity supplied given the percent change in the price of a good

positive externality-free market

under provided

Without prices and income, we would consume until...

we are full and marginal utility is 0

Prisoners Dilemma

worst possible outcome. 2 rational individuals do not cooperate even though it might be in their best interest to do so

Cross Price Elasticity

% change in demand for once good given a % change in price for another good >0-Substitutes <0-Complements

Determinants of supply

-Change in input prices -Changes in technology -Change in the number of producers

What is land?

-Natural Resources (Air, Water, Trees, Crude Oil, Space, Atmosphere, Oxygen)

Determinants of demand

-price of related goods -change in price -tastes and preferences -income -number of buyers -expectations

For a graph where we shifted supply curve up, market is at equilibrium and demand is elastic... Consumer surplus after tax is...

A (Top triangle)

Assume the market for a local athletic club memberships starts in equilibrium. At the same time that that health experts announce that cardiovascular exercise leads to early death, the rent on the athletic club's building increases. The change in demand happens because...

A change in tastes and preferences.

If income increases and the demand for a good increases the good is called...

A normal good

For a perfectly competitive firm, A.P = MR at all levels of output B.P = MR at the profit-maximizing quantity only C.P> MR at all output levels D.P < MR at the profit maximizing quantity only E.P < MR at all output levels

A. P=MR at all levels of output

The Law of one price states that A.Price of a good sold in different markets should become equal across those markets B.The price of two different goods sold in the same market should become equal across those two goods. C.The price of the same good sold in same market will have different prices because of perfect information D.None of these E.B and C

A. price of a good sold in different markets should become equal across those markets

Marginal Utility

Additional satisfaction obtained form consuming one more unit of the good

When supply of a product falls, this implies that...

An increase in the price of a resource used in the goods production.

Average Total Cost

Average Fixed Cost+Average Variable Cost

For a graph where we shifted supply curve up, market is at equilibrium and demand is elastic... Tax Revenue is...

B+D (middle rectangle)

Suppose that Gag-in-a-Bag restaurant is part of a perfectly competitive food industry ina certain small Southern Ohio town. Their rent, which is one of several fixed costs they pay whether they sell food or not, has gone up. In the short run, the Gag-in-a-Bag should A.Pay the higher rents and increase menu prices B.Pay the higher rent and leave menu prices unchanged C.Pay the higher rent and lower prices D.Go out of business E.Shut down

B. Pay the higher rent and leave menu prices

The Buckeye Bus Company contemplates expanding its service by offering service from Oxford to Columbus for football games. The total cost of the trip would be $120, of which $50 is fixed cost, which it has already paid. The firm expects to earn $60 in revenue from the first trip. The Buckeye Bus Company should A.offer this service because it will earn a positive economic profit B.not offer this service because the marginal revenue is less that the marginal cost C.offer this service because the revenue exceeds fixed cost D.offer this service because the total cost exceeds the total revenue E.offer this service because the added revenue exceeds the added cost of this service

B. not offer this service because the marginal revenue is less than the marginal cost

For a graph where we shifted supply curve up, market is at equilibrium and demand is elastic... What areas represent the loss to society due to less than socially optimal output being produced?

C+F (small right triangle)

If at q units of output, AVC = $200, AFC = $10 and Total Cost = $2,100, what must the level of output for the firm be? A.1 B.5 C.10 D.15 E.none of these

C. 10

A firm in perfect competitionsuffers a loss if its_____ is above it its ______. A.ATC; MC B.MC; AVC C.ATC; Demand D.Demand; ATC

C. ATC: Demand

True or False: Computers are not technology.

Computers are capital.

If the at a price of $1demand for a good is 10 unites, and the elasticity of demand is unit elastic, we know the slope is: -10. An increase in the price of the good will lead to _____________ revenue

Constant

For a graph where we shifted supply curve up, market is at equilibrium and demand is elastic... Producer surplus before tax is...

D+F+E (Bottom half triangle)

If Totalcost for 10 units is $120 and fixed cots are $10, what is Average Variable Costis A.$1 B.$7 C.$10 D.$11 E.We cannot determine average variable cost with the above information.

D. $11

For constant economiesto scale, a(n) ________________ in the firm's outputleads to _________ average total costs A.increase; lower B.increase; higher C.decrease; a change in D.decrease; no change in

D. decrease; no change in

Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of professors' rise, A.her accounting profit will rise B.her accounting profit will fall C.her accounting costs will rise D.her economic profit from textbooks will fall E.her economic profit from textbooks will rise

D. her economic profit from textbooks will fall

Assume market is at equilibrium. Saudi Arabia restricts sales in crude oil market pushing up the price of oil, which is the main input in gasoline. Demand in the SUV automobile market will...

Decrease.

Assume the market for a local athletic club memberships starts in equilibrium. At the same time that that health experts announce that cardiovascular exercise leads to early death, the rent on the athletic club's building increases. What will happen to the equilibrium price of memberships at the local athletic club?

Decrease.

Assume market is at equilibrium. Saudi Arabia restricts sales in crude oil market pushing up the price of oil, which is the main input in gasoline. Equilibrium quantity in the gasoline market...

Decreases.

In a perfectly competitive market: A.Long run profits are possible B.Short run profits are possible C.Short run negative profits are possible D.All of the above E.B and C

E. B and C

How long is the long-run?

How ever long the amount of one input may be fixed

What is labor?

Human Inputs -A person working in a managerial position -A salaried employee -An employee who cannot work overtime

What is Capital?

Human created inputs. Stuff that makes stuff. NOT MONEY. machine (table, chair, paper)

Diminishing Marginal Utility

I get more enjoyment out of the first piece of candy than the last one. As I keep consuming, my marginal utility decreases

The demand curve for a good that has many perfect substitutes in consumption is likely to be

Nearly horizontal

The market for all goods starts in equilibrium. Good A has an income elasticity of 2.5. What do we expect to happen to the equilibrium quantity for good A if income rises for workers?

Increase

The market for cell phones starts in equilibrium and there is a decrease in the income tax rate that increases the amount of money that people are able to spend after taxes. What will happen to the equilibrium price of smart phones?

Increase.

The market for cell phones starts in equilibrium and there is a decrease in the income tax rate that increases the amount of money that people are able to spend after taxes. What will happen to the equilibrium quantity of smart phones?

Increase.

Assume market is at equilibrium. Saudi Arabia restricts sales in crude oil market pushing up the price of oil, which is the main input in gasoline. Equilibrium price in the gasoline market...

Increases.

Why is the production possibilities curve bowed out?

Increasing opportunity costs

What are the 3 resources?

Land, Labor, Capital (Entrepreneurship is a resource in this class)

PPF: Toaster pastries y-axis. Laptop computers x-axis. A is inside the curve. B is on the curve. C is beyond the curve. At point B on the graph the cost of more toaster pastries is....

Less laptop computers.

If elasticity of supply is inelastic we know that a 1% change in price leads to a _________ change in quantity supplied

Less than 1%

Where are profits maximized?

MR=MC

Rational Spending Rule

MU1/P1=MU2/P2 cross multiply gives point on demand curve

If a consumer allocates income between goods x and y, consumer equilibrium occurs where a)the indifference curve nearest from the origin is reached b)MUx/Px= MUy/Pyand the budget is exhausted c)Marginal utility is maximized d)MUx-MUy for the last unit consumed of each good e)consumer surplus equals 0

MUx/Px=MUy/Py and the budget is exhausted

Unit Elastic point

Maximizes revenue

A movement along the production possibilities curve implies that...

Society has chosen a different set of outputs.

What is entrepreneurship?

Someone who brings together land, labor, and capital to produce a good.

The market for cell phones starts in equilibrium and there is a decrease in the income tax rate that increases the amount of money that people are able to spend after taxes. What will happen to the supply of smartphones?

Stay the same.

The market for all goods starts at equilibrium. Good A has a cross price elasticity of 2.5 with good B. How are goods A and B related?

Substitutes

Marginal Cost Line

Supply Line

Assume the market for a local athletic club memberships starts in equilibrium. At the same time that health experts announce that cardiovascular exercise leads to early death, the rent on the athletic club's building increases. What will happen to the demand for athletic club memberships?

The demand decreases.

Producer Surplus

The difference between the price that the producer receives and their costs of production.

Self Interested

The impact of things on me. Consider others but only as far as it affects me.

For a graph where we shifted supply curve up, market is at equilibrium and demand is elastic... If demand for the good were inelastic relative to supply we would expect...

The impact or incidence of the tax to fall more on the consumers

Income Elasticity of Demand

The percent change in demand give a percent change in income

Demand is inelastic if...

The percent change in price is greater than the percent change in quantity demanded

Supply

The positive direct relationship between price and quantity brought to market.

Best way to describe the production possibility curve between candy bars and video game consoles?

The possible maximum combinations of video game consoles and candy bars that the society can produce today.

A surplus of goods in the market occurs when...

The price in the market is above equilibrium and there is no more supply than demand

Suppose A and B are substitute goods and the cost of resources used in the production of A increases. What happens to the price?

The price of both A and B rise.

What is technology?

The process by which we bring resources together to produce a good.

PPF: Toaster pastries y-axis. Laptop computers x-axis. A is inside the curve. B is on the curve. C is beyond the curve. At point A on the graph the cost of more toaster pastries is...

There is no cost due to unemployed resources.

Comparative Advantage

When one person (or firm or country) can produce a good at a lower opportunity cost than another. A master chef buying pastries from a bakery down the street.

Absolute Advantage

When one person (or firm or country) can produce a good using less time or resources than another. A master chef buying beef from a local farmer outside of the city.

Will a price floor always reduce consumer surplus?

Yes.

Assume that for quantity of 160 units, price elasticity of demand for a good is -0.25. At that point the slope of the demand curve is -4. If we assume that demand for this good is linear (the slope remains constant at -4) we know that a(n) ___________in price will lead to a(n) _____________ in revenue. a)Increase, increase b)Decrease, increase c)Increase, no change d)Decrease, uncertain e)None of the above.

a) increase, increase

A government wants to increase ridership on pubic transportation such as buses by 10%. The elasticity of demand is -0.5. The government must _______ the bus fare by _______. a) lower; 20.0% b) raise; 20% c) raise; 10% d) lower; 10% e) None of these

a) lower; 20.0%

Marginal Revenue

additional revenue from selling an additional unit of a good

The Supply Room, a mail-order school supply store, is growing rapidly. As a result of achieving larger size, the firm realizes (1) volume discounts when buying from its suppliers, and (2) lower transportation costs by bulk shipping. The best explanation for these events is that the SupplyRoom is experiencing ______ of scale. A.economies B.constant economies of scale C.diseconomies of scale D.None ofthe above

a. economies

Inperfect competition, an increasing cost industry. A.Has falling costs of inputs as demand falls B.Has increasing costs of inputs as demand falls. C.Has no change in costs of inputs as demand falls D.A and B E.None of these

a. has falling costs of inputs as demand falls

If the marginal productivity of labor is falling, what must be true of Marginal costs. A.Marginal costs are increasing B.Marginal costs are decreasing C.Marginal costs are staying the same D.The effect on marginal costs are uncertain.

a. marginal costs are increasing

Any profit greater than zero should keep a firm open. A.True if we are considering economic profit B.True if we are considering accounting profit C.False if we are considering only accounting costs D.False if we are not considering economic costs E.None of the above.

a. true if we are considering economic profit

If the at a price of $1 demand for a good is 10 unites, and the elasticity of demand is unit elastic, we know the slope is: a)10 b)-10 c)100 d)-100 e)None of these

b) -10

Assume that for quantity of 160 units, price elasticity of demand for a good is -0.25. At that point the slope of the demand curve is -4. At this point we know demand is... a)Inelastic as a 1% change in quantity demanded will lead to a 0.25% change in price b)Inelastic as a 1% change in price will lead to a 0.25% change in quantity demanded. c)Elastic as a 1% change in quantity demanded will lead to a 0.25% change in price d)Elastic as a 1% change in price will lead to a 0.25% change in quantity demanded.

b) inelastic as a 1% change in price will lead to a .25% change in quantity demanded.

A perfectly competitive firm will earn positive economic profits in the range of output for which the firm's price is _______it's minimum average total cost. A.below B.above C.equal to D.below its marginal cost

b. above

The market for bubble gum is competitive with a current price of 50 cents and a quantity of 100,000 units. Which of the following events would lead to a new equilibrium price of 75 cents and a new quantity of 125,000 units? a.an increase in the price of the ingredients used to make bubble gum b.an increase in the price of other kinds of gum and candy c.an agreement by workers in the bubble gum industry to work for lower wages d.a decrease in income.

b. an increase in the price of other kinds of gum and candy

In an increasing cost industry it is assumed that if demand A.Increase then average costs will increase due to high fixed costs in the short run B.Increases thenresources costs increaseas firms enter. C.Decreases then decreasing prices for the good increase demand for its substitutes. D.All of these E.None of these

b. increased then resources costs increases firms enter

The short-run supply curve of a perfectly competitive firm is the portion of A.the average variable cost curve that lies above its marginal cost curve. B.its marginal cost curve that lies above its average variable cost curve. C.its marginal cost curve thatlies above its average total cost curve. D.its average total cost curve that lies above its marginal cost curve.

b. its marginal cost curve that lies above its average variable cost curve

Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computers per day. At this output level, price exceeds the firm's marginal cost. It follows that producing one more computer will cause this firm's A.total cost to decrease. B.profits to increase. C.profits to decrease. D.profits to remain unchanged.

b. profits to increase

Perfectly competitive firms are price takers. A.True, this means their demand curves are positively sloped and equal to their marginal revenue curve B.True; this means they must accept the market price and this sets their demand equal to their marginal revenue. C.False, goods are homogenous so the firm must accept the market price which is less than their marginal revenue. D.False, goods are the same which means thatmarginal revenue is less than demand because in order to increase output they must lower the price on all units that might have sold at a higherprice.

b. true. this means they must accept the market price and this sets their demand equal to their marginal revenue

A decrease in demand is caused by... a.A decreasethe demand of a substitute b.An increase in income for an inferior good. c.An increase in the price of a complement good. d.An increase in the income if the good is normal good. e.None of these

b.An increase in income for an inferior good

Implications of Perfect Competition

buyers go to lowest possible price only thing that matters to buyers is price firms are price takers

1) The market for notebooks is in an initial equilibrium in a perfectly competitive market. Then, an environmental regulation makes paper, a factor of production for notebooks, more expensive. At the same time, users lose some of their desire to use notebooks because of paperless alternatives. How will the equilibrium quantity and price of notebooks change? a.Q goes down; P goes down b.Q goes down; P goes up c.Q goes down; the change in P is indeterminate d.The change in Q is indeterminate; P goes up e.The change in Q is indeterminate; P goes down

c. Q goes down the change in p is indeterminate

Which of the following could lead to profit in a monopolistic competition? a. economies of scale b. diseconomies of scale c. brand loyalty e. easy factor mobility

c. brand loyalty

If marginal costs are equal to average total cost then average total cost must be A.Increasing B.Decreasing C.Constant D.Any change in average total cost is uncertain.

c. constant

Assume the peanut butter industry is perfectly competitive and in long-run equilibrium with a market price of $5, Ifthe demand for peanuts increases in this constant-cost industry, long-run equilibrium will be reestablished at a price A.greater than $5. B.less than $5. C.equal to $5. D.either greater than or less than $5, depending on the number of firms that enter the industry.

c. equal to 5

If the firm is earning negative economic profits in the short run it will shut down only if. A.Its revenue cannot cover all of its fixed costs and at least some of its variable costs. B.Its revenue cannot cover all of its total costs C.Its revenue cannot cover all variable and some fixed costs D.It will never operate at a loss in the short run.

c. its revenue cannot cover all variable and some fixed costs

The reason price elasticity of demand for fresh green beans is greater than 1 is... a) there are many other vegetables other than green beans b) There are many types of green beans like frozen or canned c) green beans are a small part of most peoples budgets d) all of the above e) none of the above

d) all of the above

which of the following is NOT a feature of monopolistic competition? a. many buyers b. many sellers c. perfect information d. barriers to entry e. easy factor mobility

d. barriers to entry

A natural monopoly is created when all of demand can be satisfied by one firm where it's AC are __________ which means it is experiencing _____________ of scale. A.Increasing; economies B.Constant; constant C.Increasing; diseconomies D.Decreasing; economies E.Decreasing; diseconomies

d. decreasing, economies

Suppose we know that a monopolist is maximizing profits. Which of the following is a correct inference? The monopolist has A.maximized its total revenue. B.set price equal to demand in all cases C.maximized the difference between marginal revenue and marginal cost. D.equated marginal revenue and marginal cost.

d. equated marginal revenue and marginal cost

In a constant cost industry, whendemand falls, long run market price will _________ because costs will ____________ A.Increase, stay the same as entry occurs B.Decrease, stay the same as exit occurs. C.Stay the same, decrease as there is no entry or exit D.None of these

d. none of these

What are Marginal costs A.The additional quantity produced given an additional dollar in variable costs B.The additional quantity produced given an additional dollar in fixed costs C.The additional quantity produced given an additional dollar of opportunity cost D.None of these

d. none of these

If a monopolist must lower the price on all units in order to sell an additional unit, A.it is impossible for the monopolist to maximize profits B.the monopolist will always lose profits when it increases quantity C.the monopolist will always lose revenue when it increase quantity D.price will always be greater than marginal revenue E.price will always be less than marginal revenue

d. price will always be greater than marginal revenue

Which of the following is NOTan assumption of Perfect Competition? A.Product many buyers B.Many sellers C.Perfect information D.Product heterogeneity E.All are assumptions of perfect competition

d. product heterogeneity

If a firm is able to change the amount of capital it employees, but is unable to change the amountof labor due to union contracts the firm is making ________________ decisions A.Account cost. B.Long run C.Economic cost D.Short run E.None of these

d. short run

True or False and why: The firm always wants to operate where price elasticity is equal to 1 because this is where they are always able to maximize profits. a)True in all cases b)True only if the good is normal c)False in all cases d)False if the good is normal e)False if costs are non-zero

e) False if costs are non-zero

Assume that the equilibrium price of Corn is $4 per bushel. Government puts a price floor on at $3 per bushel. We should expect a)Increase producers' surplus b)A change in price toall customers and increase output. c)Create a surplus of supply d)All of these e)None of these

e) None of these

Assume that for quantity of 160 units, price elasticity of demand for a good is -0.25. At that point the slope of the demand curve is -4. What is the price of the good at that point? a)$1 b)$5 c)$200 d)We cannot determine with this information e)None of the above

e) none of the above

A piece ceiling can be expected to... a) increase producers' surplus b) lower price to all consumers and increase output c) create a surplus of supply d) all of these e) none of these

e) none of these

An increase in quantity demanded could be caused by... a. an increase in the price of a substitute b. an increase in income for a normal good c. a decrease in the price of a complement d. All of the above e. None of the above

e. None of the above

Determinants of demand include... a.Change in price b.Change in technology c.Producers bringing more good to market d.a. and c. e.None of these

e. None of these

A firm in a perfectly competitive market A.can raise the price of its product and sell more output B.can lower the price of its product and sell more output C.can increase its supply to lower the price D.can decrease its supply to raise the price E.accept the market price for its product

e. accept the market price

DeBeers, the Diamond Company holds a monopoly because: A.They hold a patent on Diamonds B.They have a government granted monopoly because of economies of scale C.They have a copyright on the phrase "Diamonds are forever" D.All of these E.None of these.

e. none of these

In the long run, what happens to cartels' prices?

they decrease prices until the point where P=MC