ECO201 Final Study Guide

What is the formula for elasticity?

% change in quantity demanded / % change in price

What is the formula for TC?

(ACxQ)

What is the formula for TR?

(PxQ)

What is the difference between a normative and a positive statement?

A normative statement is based on opinion or judgement, whereas a positive statement is based on fact and can be tested or proven.

What does the LRATC curve connect?

All minimums of SRATC curves

Where does MC intersect AVC and ATC?

At their minimums because of the "avg marginal" rule

What is the CRS region?

Constant Returns to Scale. No cost advantage from increasing Q.

What is the DOS region?

Diseconomies of Scale. AC increases as Q increases.

What is the EOS region?

Economies of Scale. AC decreases as Q increases

How do you define elastic, inelastic, and unitary elastic?

Elastic > 1, Inelastic <1, Unitary Elastic = 1

What happens when marginal costs exceed marginal revenue?

Firms leave the market

What is the difference between perfect competition and monopolistic competition?

In perfect competition, demand and supply forces determine the price for the whole market, in monopolistic competition, firms set their own price

Why is price discrimination good?

It prevents arbitrage where people buy things cheaper in one market and sell it for a profit in another

What are the characteristics of monopolistic competition?

Many sellers, slightly differentiated product, easy entry/exit of mkt

What are the formulas for profit?

Q(P-AC) OR TR-TC

Fundamentally, economics deals with what?

Scarcity

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

Sell the ticket because the marginal benefit exceeds the marginal cost

What are three characteristics of a monopoly?

Single seller, completely homogenous product, significant barriers to enter/exit the market

What is Qmes?

The point at which all Economics of Scale (EOS) are exhausted

What is accounting profit?

Total revenue minus explicit costs

What is economic profit?

Total revenue minus opportunity costs (explicit and implicit)

Does trade allow or reduce specialization? How does this impact costs?

Trade allows specialization, which reduces costs

What goes away when a firm shuts down?

VC and TR

Where is profit maximized?

Where MR = MC

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her? a. Lower the price to increase total revenue. b. Leave the price at 25 cents and be patient. c. There isn't enough information given to answer this question. d. Raise the price to increase total revenue

a. Lower the price to increase total revenue

If a firm produces nothing, which of the following costs will be zero? a. Variable cost b. Total cost c. Opportunity cost d. Fixed cost

a. Variable cost

Suppose that for a particular business there are no implicit costs. Then a. accounting profit will be the same as economic profit. b. the relationship between accounting profit and economic profit cannot be determined without more information. c. accounting profit will be less than economic profit. d. accounting profit will be greater than economic profit

a. accounting profit will be the same as economic profit

The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as a. arbitrage. b. collusion. c. sabotage. d. conspiracy

a. arbitrage

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents

a. average fixed cost is 50 cents

On a graph, consumer surplus is represented by the area a. below the demand curve and above price. b. below the price and above the supply curve. c. between the demand and supply curves. d. below the demand curve and to the right of equilibrium price

a. below the demand curve and above price

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the a. buyers will bear a greater burden of the tax than the sellers. b. buyers and sellers are likely to share the burden of the tax equally. c. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information. d. sellers will bear a greater burden of the tax than the buyers

a. buyers will bear a greater burden of the tax than the sellers

Negative externalities lead markets to produce a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. b. efficient output levels and positive externalities lead markets to produce greater than efficient output levels. c. smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. d. greater than efficient output levels and positive externalities lead markets to produce efficient output levels

a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels

An example of positive analysis is studying a. how market forces produce equilibrium. b. whether equilibrium outcomes are fair. c. if income distributions are fair. d. whether equilibrium outcomes are socially desirable

a. how market forces produce equilibrium

A difference between explicit and implicit costs is that a. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do. b. explicit costs must be greater than implicit costs. c. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do. d. implicit costs must be greater than explicit costs

a. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do

When marginal revenue equals marginal cost, the firm a. may be minimizing its losses rather than maximizing its profit. b. must be generating positive economic profits. c. should increase the level of production to maximize its profit. d. must be generating positive accounting profits

a. may be minimizing its losses rather than maximizing its profit

The quantity demanded of a good is the amount that buyers are a. willing and able to purchase. b. willing, able, and need to purchase. c. able to purchase. d. willing to purchase

a. willing and able to purchase

Cindy's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm's total cost is a. $300. b. $500. c. $100. d. $200

b. $500

Which of the following is true about a monopolistically competitive firm? a. It can earn an economic profit in the short run and the long run. b. It can earn an economic profit in the short run, but not the long run. c. It can earn an economic profit in the long run, but not the short run. d. It cannot earn an economic profit in either the short or long run

b. It can earn an economic profit in the short run, but not the long run

Which of the following is a capital input? a. $50,000 b. A computer c. An hour of a worker's time d. A share of stock

b. a computer

If the demand for a product increases, then we would expect equilibrium price a. to decrease and equilibrium quantity to increase. b. and equilibrium quantity both to increase. c. and equilibrium quantity both to decrease. d. to increase and equilibrium quantity to decrease

b. and equilibrium quantity both to increase

The price elasticity of demand measures a. how much more of a good consumers will demand when incomes rise. b. buyers' responsiveness to a change in the price of a good. c. the movement along a supply curve when there is a change in demand. d. the extent to which demand increases as additional buyers enter the market

b. buyers' responsiveness to a change in the price of a good

Price ceilings and price floors that are binding a. can have the effect of restoring a market to equilibrium. b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price. c. are imposed because they can make the poor in the economy better off without causing adverse effects. d. are desirable because they make markets more efficient and more fair

b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price

For a self-sufficient producer, the production possibilities frontier a. is less than the consumption possibilities frontier. b. is the same as the consumption possibilities frontier. c. is greater than the consumption possibilities frontier. d. is always a straight line.

b. is the same as the consumption possibilities frontier

A monopolistically competitive industry is characterized by a. a few firms, identical products, and free entry. b. many firms, differentiated products, and free entry. c. a few firms, differentiated products, and barriers to entry. d. many firms, differentiated products, and barriers to entry

b. many firms, differentiated products, and free entry

The market demand curve a. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good. b. represents the sum of the quantities demanded by all the buyers at each price of the good. c. is found by vertically adding the individual demand curves. d. slopes upward

b. represents the sum of the quantities demanded by all the buyers at each price of the good

The primary determinant of a country's standard of living is a. the average age of the country's labor force. b. the country's ability to produce goods and services. c. the country's ability to prevail over foreign competition. d. the total supply of money in the economy.

b. the country's ability to produce goods and services

The term tax incidence refers to a. widespread view that taxes (and death) are the only certainties in life. b. the distribution of the tax burden between buyers and sellers. c. whether the demand curve or the supply curve shifts when the tax is imposed. d. whether buyers or sellers of a good are required to send tax payments to the government

b. the distribution of the tax burden between buyers and sellers

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest? a. One month after the price increase b. Immediately after the price increase c. One year after the price increase d. Three months after the price increase

c. One year after the price increase

Which of the following events could cause an increase in the supply of ceiling fans? a. The average temperature rises over time. b. There is an increase in the price of the motor that powers ceiling fans. c. The number of sellers of ceiling fans increases. d. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as substitutes

c. The number of sellers of ceiling fans increases

A monopoly can earn positive profits because it a. can sell unlimited quantities at any price it chooses. b. can set the price it charges for its output but faces a horizontal demand curve. c. can maintain a price such that total revenues will exceed total costs. d. takes the market price as given and can sell unlimited quantities

c. can maintain a price such that total revenues will exceed total costs

Price discrimination a. can occur in both perfectly competitive and monopoly markets. b. is illogical because it does not maximize profits. c. can maximize profits if the seller can prevent the resale of goods between customers. d. is illegal in the United States and Europe

c. can maximize profits if the seller can prevent the resale of goods between customers

In both perfect competition and monopolistic competition, each firm a. faces a downward-sloping demand curve for its product. b. has some monopoly power. c. has many competitors. d. sells a product that is at least slightly different from those of other firms

c. has many competitors

If the price elasticity of supply is 1.2, and price increased by 5 percent, quantity supplied would a. increase by 4.2 percent. b. decrease by 4.2 percent. c. increase by 6 percent. d. decrease by 6 percent

c. increase by 6 percent

A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. firms have price setting power. c. producers sell nearly identical products. d. firms minimize total costs

c. producers sell nearly identical products

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the a. demand curve for physicals shifts to the right. b. supply curve for physicals shifts to the left. c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases. d. number of physicals performed stays the same

c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases

How do you calculate MR?

change in TR/change in Q

In which of the following market structures can firms earn economic profits in the long run? a. Perfect competition only b. Monopolistic competition and monopoly c. Monopolistic competition only d. Monopoly only

d. Monopoly only

When a firm has a natural monopoly, the firm's a. total cost curve is horizontal. b. marginal cost always exceeds its average total cost. c. marginal cost curve must lie above the firm's average total cost curve. d. average total cost curve is downward sloping

d. average total cost curve is downward sloping

Ryan produces hair clips and earrings. Celia also produces hair clips and earrings, but Ryan is better at producing both goods. In this case, trade could a. benefit Celia, but not Ryan. b. benefit Ryan, but not Celia. c. benefit neither Celia nor Ryan. d. benefit both Celia and Ryan

d. benefit both Celia and Ryan

Trade between countries tends to a. reduce competition and increase specialization. b. increase competition and reduce specialization. c. reduce both competition and specialization. d. increase both competition and specialization

d. increase both competition and specialization

Goods with many close substitutes tend to have a. less elastic demands. b. income elasticities of demand that are negative. c. price elasticities of demand that are unit elastic. d. more elastic demands

d. more elastic demands

Total revenue equals a. (price × quantity) − total cost. b. price/quantity. c. output − input. d. price × quantity

d. price × quantity

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. total revenue is equal to total cost. b. total revenue is equal to variable cost. c. total revenue is equal to fixed cost. d. profit is maximized

d. profit is maximized

In monopolistically competitive markets, economic losses a. are minimized through government-imposed barriers to entry. b. suggest that new firms will enter the market. c. are never possible. d. suggest that some existing firms will exit the market

d. suggest that some existing firms will exit the market

According to the Coase theorem, private parties can solve the problem of externalities if a. the number of parties involved is sufficiently large. b. property rights aren't clearly defined. c. the initial distribution of legal rights favors the person being adversely affected by the externality. d. the cost of bargaining is small

d. the cost of bargaining is small