ECO 561 - Week 2

If demand is elastic with respect to price, total expenditure will ________ in response to a price increase.

decrease

In general, price subsidies will ______ total economic surplus

decrease

Economic Rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

If firms are not free to enter and exit the market, then

the allocative function of price cannot operate

The economic surplus of an action is:

the difference between the benefit and the cost of taking an action.

Total Expenditure = Total Revenue

the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive

When the costs and benefits to individual participants in the market differ from those experienced by society as a whole,

the market equilibrium will not be socially optimal.

Normal Profit

the opportunity cost of the resources supplied to a business by its owners (the difference between a business's accounting profit and its economic profit)

You paid $35 for a ticket (which is non-refundable) to see SPAM, a local rock band, in concert on Saturday. Assume that $35 is the most you would have been willing to pay for a ticket. Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert. You would have to work 4 hours and she would pay you $11/hr. The psychic cost to you of working is $2/hr. Your economic surplus from going to work instead of seeing SPAM on Saturday is:

$1

A firm pays Pam $40 per hour to assemble personal computers. Each day, Pam can assemble 4 computers if she works 1 hour, 7 computers if she works 2 hours, 9 computers if she works 3 hours, and 10 computers if she works 4 hours. Pam cannot work more than 4 hours day. Each computer consists of a motherboard, a hard drive, a case, a monitor, a keyboard, and a mouse. The total cost of these parts is $600 per computer. What is the marginal cost of producing the computers that Pam can assemble during her 2nd hour of work?``

$1840

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is equal to...

0.5

If the quantity of Big Macs demanded decreases by 4 percent in response to an 8 percent decrease in the price of Whoppers, then the cross-price elasticity of demand for Big Macs with respect to the price of Whoppers is

0.5 -4/-8 = 0.5

If a 5 percent increase income leads to a 2.5 percent decrease in the quantity of oatmeal demanded, then the absolute value of the income elasticity of demand for oatmeal is

0.5 Explanation: the income of elasticity of demand is -0.5 = -2.5/5

If the quantity supplied decreased by 2 percent in response to a 4 percent drop in prices, then the price elasticity of supply is

0.5 (2 divided by 4)

If the market for calculators is in a long run equilibrium, and the demand for calculators increases, then we would expect......

1) Firms to earn an economic profit in the short run 2) The price of calculators to rise in the short run

If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls falls, then we would expect......

1) Firms to exit the market in the long run 2) The price of soccer balls to fall in the short run

If the market equilibrium is efficient, then:

1) It's not possible to find a transaction that will make some people better off without harming others. 2) Economic surplus is maximized, enabling society to easily achieve its goals

The market equilibrium is only efficient if....

1) The market is perfectly competitive 2) The market supply curve captures all of the relevant costs of producing another unit of the good. 3) The market demand curve captures all of the relevant benefits of buying another unit of the good.

long-run market equilibrium key points

1)In a perfectly competitive market, demand is perfectly elastic. This means the demand curve is a horizontal line. 2)Once equilibrium has been achieved, firms in a perfectly competitive market can't achieve economic profit; it can only break even.

If the income elasticity of demand for pasta is -1.0, then a 10 percent decrease income will lead to a ________ in the quantity of pasta demanded.

10 percent increase: Explanation: a 10 percent inc

If the income elasticity of demand for iPhones is 1.3, then a 10 percent decrease income will lead to a ________ in the quantity of iPhones demanded.

13 percent decrease Explanation: 1.3 x -10 = -13

If 20 percent increase in the price of a good leads to a 60 percent decrease in the quantity demanded, then what is the price elasticity of demand?

3

If the price elasticity of demand for pineapples is 0.75, then a 4 percent increase in the price of pineapples will lead to a:

3 percent decrease in the quantity of pineapples demanded.

If the quantity of peanuts demanded increases by 6 percent in response to a 3 percent increase in the price of almonds, then the cross-price elasticity of demand for peanuts with respect to the price of almonds is:

6/3 = 2. Explanation: The cross-price elasticity of demand for peanuts with respect to the price of almonds is the percentage by which the demand for peanuts changes in response to a 1 percent change in the price of almonds.

Accounting Profit formula

Accounting Profit = Total Revenue - Explicit Costs

Invisible Hand Theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.

If the income elasticity of demand for lottery tickets is negative, then lottery tickets are

An inferior good

If the percentage increase in price is less than the percentage decrease in quantity demanded, then the total expenditure will ________...

Decrease

The elasticity of demand ___________ as you move downward along a straight-line demand curve

Decreases

economic profit formula

Economic Profit= Total Revenue - Explicit Costs - Implicit costs

If price elasticity of demand for restaurant meals is 1.63, then the demand for restaurant meals is

Elastic (because the price elasticity of demand is greater than 1)

If the price elasticity of supply for dishwasher is 0.2, then if the price of dishwashers goes up by 8 percent, the quantity of dishwashers supplied will..

Go up by 1.6 percent. (0.2 x 8 = 1.6)

All else equal, compared to small-budget items such as paper towels, the price elasticity of demand for big-ticket items such as refrigerators is:

Higher

If the price elasticity of demand is greater than 1 and price decreases, then total expenditure will....

Increase

If the price elasticity of demand is less than 1 and the price increases, then total expenditure will

Increase

If the price of lawnmowers goes up by 9 percent and the quantity of lawnmowers demanded falls by 5 percent, then the total expenditure on lawn mowers will

Increase

If the cross-price elasticity of demand for motorcycles with respect to the price of cars is 0.05, then if the price of cars increases by 10 percent, the quantity of motorcycles demanded will

Increase by 0.5 percent

If the demand for economy-class airline tickets is elastic with respect to price, then if the price of economy-class airline tickets decreases, then total expenditure will..

Increase: If the demand is elastic with respect to price, total expenditure will increase in response to a price decrease.

If the price elasticity of demand for shoes is 0.70, then the demand for shoes is

Inelastic: if the price elasticity of demand is less than 1, then demand is inelastic with respect to price.

A consumer's weekly demand for gasoline is likely to be _______ price elastic than his or her yearly demand for gasoline.

Less: The price elasticity of demand will be lower in the short run than in the long run.

Food has few (if any) substitutes, so the price elasticity of demand is relatively

Low

Given that most people spend a relatively small share of their budget on pencils, we would expect the elasticity of demand for pencils to be relatively...

Low

The elasticity of demand for a good that has very few substitutes is usually relatively

Low

When goods or services are produced using unique essential inputs, the price elasticity of supply is likely to be very...

Low

All else equal, the price elasticity of demand for small-budget items such as soap tends to be ______ than the price elasticity of demand for big-ticket items such as flat-screen TVs.

Lower

Assume the price of gasoline doubles tonight and remains at that price for the next two years. Compared with the long-run price elasticity of demand for gasoline, the short-run price elasticity of demand for gasoline will be ______.

Lower

You should not continue to operate your business/store if economic profit is

Negative

The broader interests of society are ______________ promoted by the individual pursuit of self-interest.

Not always

The formula for the price elasticity of demand is:

P/Q x 1/slope

If the price elasticity of supply is infinite, then demand is

Perfectly Elastic

If the price elasticity of demand is infinite, then demand is

Perfectly elastic

If the price elasticity of demand is zero, then demand is

Perfectly inelastic

If the price elasticity of supply is zero, then supply is....

Perfectly inelastic

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

Normal Profit

The difference between a business's accounting profit and its economic profit

long-run market equilibrium

The long-run equilibrium of a perfectly competitive market occurs when marginal revenue equals marginal costs, which is also equal to average total costs.

income elasticity of demand

The percentage by which a good's quantity demanded changes in response to a 1 percent change in income

Superstar professional athletes can sustain their economic rents because:

They have unique talents that they can sell to the highest bidder

Price X Quantity =

Total Revenue

The Equilibrium Principle States that:

When the market is in equilibrium, there are no further opportunities for gain available to individuals.

Suppose your cousin makes cutting boards that he sells on Etsy. Can he increase his total revenue by increasing the price of his cutting boards?

Yes, but only if the price elasticity of demand is greater than one.

In a market in which firms are earning a positive economic profit, entry will occur until all firms earn...

Zero Economic Profit

In the long run, all firms in an industry will tend to earn.

Zero economic profit

Which of the following best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand curve would shift to the right, leading to:

a higher equilibrium price in the short run and entry into the market in the long run.

efficient (or Pareto efficient) means

a situation is efficient if no change is possible that will help some people without harming others

The supplier of a factor of production has a reservation price of $100. The purchaser of the factor of production has a reservation price of $200. If the factor of production is unique, then:

a transaction will occur, and the price paid for the factor of production will be $200.

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.

allocative

If the price of a product is below the equilibrium price, then it's ________ possible to design a transaction that will make both buyers and sellers better off.

always

The elasticity of supply along any straight-line supple curve that passes through the origin is

always equal to one

Economic Loss

an economic profit that is less than zero. (a negative economic profit)

Barrier to entry

any force that prevents firms from entering a new market.

Dividing the total cost of undertaking n units of an activity by n reveals the:

average cost

The allocative function of price cannot operate unless there is:

both free entry and free exit.

In an industry with free entry and exit, positive economic profit:

cannot be sustained indefinitely.

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly.

Price controls are often designed to help the poor, but the fact that they reduce total economic surplus means that alternative policies such as direct income transfers to the poor:

could make everyone better off

If the cross-price elasticity of demand for bike helmets with respect to the price of bikes is -0.25, then if the price of bikes increases by 10 percent, the quantity of bike helmets demanded will

decrease by 2.5 percent

If the price of sofas goes up by 10 percent and the quantity of sofas demanded falls by 15 percent, then the total expenditure on sofas will

decrease: If the percentage increase in price is less than the percentage decrease in quantity demanded, then the total expenditure will decrease

The allocative function of price is to:

direct resources away from markets that are overcrowded and toward markets that are underserved.

The difference between a firm's total revenue and the sum of its explicit and implicit costs is the firm's

economic profit

If a firm's economic loss is $10,000, then it's ___________ is -$10,000.

economic profit (a negative economic profit is an economic loss

A firm should exit the market if...

economic profit is negative

It's always possible to design a transaction that will help both buyers or sellers whenever the price of a product is...

either above or below the equilibrium price.

When the price of NBA tickets is $25 each, 30,000 tickets are sold. After the price rises to $30 each, 20,000 tickets are sold. At the original price, the demand for NBA ticket is:

elastic

Suppose the price P on a given demand curve results in a price elasticity of demand equal to 1. Any price higher than P will lie on the ______ part of the demand curve, and any price lower than P will lie on the ______ part of the demand curve.

elastic ; inelastic

If the firms in a market are earning a positive economic profit, then in the long run, __________ the market will lead economic profit to __________.

entry into ; fall

economic loss creates an incentive for....

existing firms to exit the market (if firms are earning an economic loss, then this implies that they are earning less than their opportunity cost of being in the market, so they will exit)

The actual payments a firm makes to its factors of production and other suppliers are its....

explicit costs

If the price elasticity of demand for beer is 1.19, and the price of beer goes up by 1 percent, then the quantity of beer demanded will...

go down by 1.19 percent: Explanation: The elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price. In this case, quantity demanded goes down since price goes up.

If the price elasticity of supply for tobacco is 5, then if the price of tobacco goes down by 1 percent, the quantity of tobacco supplied will

go down by 5 percent. The price elasticity of supply is the percentage change in quantity supplied that results from a 1 percent change in price. In this case, since price goes down, quantity supplied goes down.

If the price elasticity of demand for milk is 0.4, then if the price of milk goes up by 20 percent, the quantity of milk demanded will

go down by 8 percent (0.4 x 20 = 8)

If the price elasticity of supply for dishwashers is 0.2, then if the price of dishwashers goes up by 8 percent, the quantity of dishwashers supplied will

go up by 1.6 percent (0.2 x 8 = 1.6)

The demand for a good is elastic if the price elasticity of demand is:

greater than one

In a free market economy, the decisions of buyers and sellers are:

guided by prices.

If a store has 10% off everything sale, then the store's total revenue will fall

if the demand for the store's products is inelastic with respect to price.

If the percentage increase in price is greater than the percentage decrease in quantity demanded, then total expenditure will

increase

If an early frost damages this year's orange crop, causing the supply curve for oranges to shift to the left, then total revenue from the sale of oranges will

increase if the demand for oranges is elastic with respect to price

Prices tend to be volatile in markets where both supply and demand are

inelastic

Suppose the company that owns the vending machines on your campus has doubled the price of a can of soda. They then notice that they are selling approximately 15 percent fewer sodas. The price elasticity of demand for sodas from the campus vending machines, therefore, is:

inelastic

Suppose that the short-run price elasticity of demand for electricity is 0.03, and the long-run price elasticity of demand is 1.2. One would classify the short-run elasticity as being ___________ and the long-run elasticity as being ____________.

inelastic; elastic

Which of the following is a characteristic of economic rent?

it can never be negative

Demand tends to be ______ in the short run than in the long run.

less elastic

Jeans in general have fewer close substitutes than a specific brand of jeans. Therefore, the demand for jeans in general will be _______ than the demand for a specific brand of jeans.

less elastic

If all firms in a market earn zero economic profit, then we would expect

neither entry into nor exit from the market

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.

often

implicit costs

opportunity costs

In the line is horizontal, supply is

perfectly elastic with respect to price

If consumers completely cease purchasing a product when its price increases by any amount, then demand is:

perfectly elastic.

If the demand curve for open-heart surgery is vertical for people with serious heart conditions, then the demand for open-heart surgery is ______ with respect to price.

perfectly inelastic

In the long run, new firms will enter a market if existing firms are earning a ....

positive economic profit

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that:

positive economic profit is only possible in the short run.

You notice that the price of your favorite candy bar has been relatively stable over time. A possible explanation for this is that both supply and demand are....

price elastic

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

supply; right

cross-price elasticity of demand

the percentage by which the quantity demanded of the first good changes in response to a 1% change in the price of the second.

Price Elasticity of Demand

the percentage change in the quantity demanded of a good or service that results from a 1% change in its price. Example: If the price of beef falls by 1% and the quantity demanded rises by 2%, then the price elasticity of demand for beef has a value of -2

A firm that adopts a new cost saving innovation will earn an economic profit in....

the short run

The price elasticity of supply will be higher when:

the time horizon is longer, it's easy to find or produce substitute inputs.

economists believe that...

there are important social goods

Economic efficiency is important because when markets are efficient

there are more resources available to achieve all our other goals

When a market reaches equilibrium...

there are no further opportunities or gain are available to individuals

If all firms in a perfectly competitive industry are earning a normal profit, then:

there is no incentive for firms to enter or exit the industry.

economists believe that market efficiency makes clear that....

there must be a better alternative policy

Given that there are only so many operations the world's top brain surgeon can perform every year, the price elasticity of supply for his/her services is likely to be

very low: when goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

A demand curve that is drawn as a vertical line has a price elasticity of demand equal to:

zero