ECON 130 Exam FC

If TR < TVC, a firm would ________ in the short run and ________ in the long run.

shut down, exit the industry

if P< AVC

shutdown

When the decrease in the price of one good causes the demand for another good to decrease, the goods are

substitutes

the short run and longrun outcome will be the same when

- firms are all making super normal profits - firms have set their capital levels such that they ar producing at minimum efficient scale - firms are setting output such that MC=MR

iso-expenditure curve

- gives us the cost of bundles (l,k) for a fixed cost (lowest cost)

perfect substitutes

- no diminishing marginal product - factors do not make other factors more productive - factors do not become less productive as you use more of them

for a price taking firm

- revenue rises by P each time Q increases by 1 - costs rise by MC each time Q increases by 1

Which of the following will definitely occur when there is an increase in demand for and a decrease in supply of milk?

an increase in equilibrium price

post hoc, ergo...

"Since event Y followed event X, event Y must have been caused by event X."

If a firm shuts down in the short run, then

its losses are equal to its fixed costs

Let FC = fixed cost, Q = quantity of output, MC = marginal cost, TC = total cost, and VC = (total) variable cost. Using this notation, average cost equals:

(FC+VC)/Q

iso-expenditure slope

-r/w

The average variable cost of producing ice cream sundaes are minimized when 100 sundaes are produced. The total cost of producing 100 sundaes is $500. If fixed cost of production is $200, what is the marginal cost of producing the 100th sundae?

3

The Lawn Ranger, a landscaping company, has total costs of $4,000 and total variable costs of $1,000. The Lawn Rangers total fixed costs are

3000

Refer to Scenario 7.2 below to answer the questions that follow. SCENARIO 7.2: 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.

50000

economics theory

Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve these economic phenomena

once diminishing marginal product starts, ____________ rises as we increase ____

MC, Q

as long as ____________________ firms will continue to supply products in the long run

MC=P=AVC

Suppose a firm produces a level of output that minimises the firm's average total cost. At this level of output:

Marginal cost equals average total cost.

every time the firm increases output by one unit, TR increases by ____

P

as long as _______________ then making one more unit of Q will ________________ profit

P>MC, increase

if it is a competitive market, P does not change when __ does

Q

SCENARIO 3.1: Rented DVDs and movies shown in theaters are substitutes. Rented DVDs and plasma TVs are complements. Plasma TVs and movies shown in theaters are normal goods. People watch rented DVDs more often in the winter than in the summer. Refer to Scenario 3.1. Most plasma TVs sold in the United States are imported from Japan. If the United States government reduces the number of plasma TVs that can be imported into the United States, ceteris paribus, what would happen?

The price of plasma TVs would increase and the rental price of DVDs would decrease.

descriptive economics

The purpose of descriptive or positive economics is to study what is

The supply curve of a firm which is considering entering a competitive industry is

The section of its marginal cost curve which lies above the minimum point of its average cost function.

Assume the wool industry is perfectly competitive. Why is it difficult for a wool producer to make excess profits in the long run

There is free entry into the wool industry.

Consider a production function with one (variable) input. Which of the following statements is true?

When marginal cost is increasing, marginal product will be decreasing

The explanation for why marginal cost is positive and rising in the short run is ________ marginal product of labor in the production process.

a diminishing

Which of the following will definitely occur when there is an increase in the supply of and decrease in demand for MP3 players?

a decrease in equilibrium price

Which of the following will shift the short-run industry supply curve of a perfectly competitive industry?

a decrease in the price of an input

SCENARIO 3.1: Rented DVDs and movies shown in theaters are substitutes. Rented DVDs and plasma TVs are complements. Plasma TVs and movies shown in theaters are normal goods. People watch rented DVDs more often in the winter than in the summer. Refer to Scenario 3.1. To raise additional revenues, the government imposes an entertainment tax on movie tickets, but there are no new additional taxes levied on rented DVDs. This would lead to

an increase in the price of movie tickets and the rental price of DVDs.

If marginal cost is between average variable cost and average total cost, then

average variable cost is increasing and average total cost is decreasing.

increased # of firms entering the industry ____________- prices

decreases

for inferior goods, an increase in income will cause the

demand to fall

Suppose average fixed cost is plotted on a graph against output, with output on the horizontal axis and average fixed cost on the vertical axis. The average fixed cost curve is:

downward sloping

A firm that is earning positive profits in the short run has an incentive to ________ its scale of operation in the long run

expand

perfect complements

factors of production only work in conjunction withthe other factors - no slope (marginal product of labor is zero at the corner) - increasing an input past this optimal mix has MP=0 (does not increase output)

Refer to Scenario 9.5 below to answer the questions that follow. SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 per cent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal. Refer to Scenario 9.5. In the short run, if the restaurant shuts down, its losses will equal its ________ costs of $________.

fixed; 2,000

marginal revenue for a perfectly competitive firm is

horizontal

demand curves are derived while holding constant

income, tastes and the prices of other goods

The short-run supply curve of a competitive firm is the portion of

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

If improvements in technology have reduced the cost of producing personal computers, you accurately predict that in the market for personal computers, there will be a(n)

increase in the supply of personal computers, a decrease in the price, and an increase in the quantity demanded.

Wheat is produced in a perfectly competitive market. Market demand for wheat increases. This will cause the individual wheat farmers marginal revenue to ________ and their profit maximizing level of output to ________.

increase, increase

Diminishing marginal returns implies

increasing marginal costs.

If the demand for sardines increases as income decreases, sardines are a(n)

inferior good

normative economics

is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.

Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computers per day. At this output level, price equals this firms marginal cost. To maximize profits, Dell should

make no adjustments as they are already maximizing their profits.

If TR > TVC but TR < TC, a firm would ________ in the short run and ________ in the long run.

operate, exit the industry

econometrics

the branch of economics concerned with the use of mathematical methods (especially statistics) in describing economic systems.

In the short run, as output increases

the difference between average total cost and average variable cost decreases.

if P< AC but P>AVC

the firm will still produce in the short run but exit in the long run

The price of mozzarella cheese, which is used in making pizza, increases. In the market for pizza you would expect that

the supply of pizza would decrease and the price of pizza would increase.

if P>AC

they are making supernormal profits

positive economics

to describe the state of something but to make no judegments - is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories.

in the long run a firm will only operate as long as it can cover its

total costs

in the short run a firm will only operate as long as it can cover its

variable costs

fallacy of composition

when an individual infers that something is true of the whole because it is true of part of the whole. In economics, this reasoning often leads to incorrect conclusions

profit =

when the slope of the TR curve is equal to the slope of the TC curve (gap between then is largest)