ECON 2020 Study Guide for Exam 2
Suppose that when the price of good X falls from $6 to $4, the quantity demanded of good Y rises from 30 to 40 unites. using the midpoint method, the cross price elasticity of demand is what?
-0.71 and X and Y are complements
When income increases $30,000 to $40,000, and the quantity of good A purchased goes from 2 to 6, and the quantity of good Y goes from 20 to 10. using the midpoint method, the income elasticity of demand for good Y is
-2.33 and Y is an inferior good
If sellers do not adjust their quantity supplied at all in response to a change in price, the price elasticity of supply is...
0 and the supply curve is vertical
Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue?
0.3
Using the midpoint method, what is the price elasticity of supply between $6 and $8 with quantity changing from 25 to 35
1.17
A t-shirt maker would be willing to supply 75 t-shirts per day at a price of $18.00 each. At a price of $20.00, the t-shirt maker would be willing to supply 100 t-shirts. Using the midpoint method, the price elasticity of supply for t-shirts is about
2.71 and supply is elastic
Using the midpoint method, between prices of $70 and $80 with changes in quantity from 15 to 10, the price elasticity of demand is
3
If the price elasticity of demand for a good is 1.2, then a 3 percent decrease in price results in a
3.6 percent increase in the quantity demanded of that good
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15%, then the quantity supplied of cheese will increase by...
9% in the short run and 21% in the long run
Jenna says she would buy 10 gallons of gas per week regardless of price. If this is true, then Jenna's demand for gas is represented by what kind of demand curve?
A perfectly inelastic curve (vertical)
Marginal cost tells us the
Amount by which total cost rises when output is increased by one unit
Which of the following statements about costs is correct
As the quantity of output increases, marginal cost eventually rises
Where in the supply curve is the supply the least elastic?
At its steepest point where it is the most inelastic
A decrease in supply will cause the smallest increase in price when
Both supply and demand are elastic
Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten year period because
Buyers tend to be much more sensitive to a change in price when given more time to react
Marginal cost equals
Change in total cost divided but he change in quantity produced, change in variable cost divided by change in quantity produced, the average fixed cost of the current unit
Which of the following (chocolate, Godiva, or Hershey's) is likely to have the most price inelastic demand?
Chocolate (most general)
Why was OPEC unable to maintain high oil prices in the long run?
Demand and supply are both elastic in the long run compared to the short run
When the price of chair lattes is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. Maxines demand for chai tea lattes is
Elastic, and her demand curve would be relatively flat
If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used to compute the elasticity, then demand is
Elastic, and the demand curve is something other than a straight downward sloping line
Explicit costs do what?
Enter into the accountants and economists measurements of a firms profits
Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 20% increase in the price of peanut butter will cause the quantity of jelly purchased to
Fall by 50%
Demand is inelastic if the price elasticity of demand is greater than 1, true or false
False
Fixed costs are those that remain fixed no matter how long the time horizon is
False
Regardless of whether a tax is levied on sellers or buyers, taxes encourage market activity
False
The shape of the total cost curve is unrelated to the shape of the production function, true or false
False
Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by 10%. The Price elasticity of demand for this good is equal to 2.0, true or false
False, it would be greater than 2
Which statement does not help to explain why government drug interdiction increases drug-related crime?
Government drug programs are more lenient now with drug offenders than they were in the 1980s
Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The change in equilibrium quantity will be...
Greater in the beef market than in the milk market
Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50%. The change in equilibrium of price will be what
Greater in the beef market than in the milk market
The price elasticity of supply along a typical supply curve is higher or lower at what?
Higher at low levels of quantity supplied and lower at high levels of quantity supplied
Industrial organization is the study of
How firm's decisions regarding prices and quantities depend on the market conditions they face
If an increase in income results in a decrease in the quantity demanded of a good, then for that good, what is the income elasticity of demand?
Income elasticity of demand is negative
Suppose the income elasticity of demand is -0.5 for good X. This implies that a 5% decrease in income will cause the quantity demanded of good X to do what?
Increase by 2.5% and X is an inferior good
Suppose that demand is inelastic within a certain price range. For that price range, an increase in price would do what to revenue?
Increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price
An increase in price from $10 to $15 with quantity changing from 400 to 33 would do what to total revenue
Increase total revenue by $500
In a decreasing portion of a graph that depicts average total cost function for a firm that produces automobiles
It experiences economies of scale
When the price ceiling is below the market equilibrium price
It is binding, it causes a shortage, and it causes the quantity demanded to exceed the quantity supplied
When the government imposes a price ceiling or price floor on a market,
Loss of economic efficiency
The price received by sellers in a market will decrease if the government
Not any of the following: increase a binding price floor or ceiling in that market, decrease a tax on the good sold in that market
The marginal product of labor can be defined as a change in
Output divided by the change in labor
Marcus says that he would smoke one pack of cigarettes each day regardless of the price. If he is telling the truth, Marcus's demand for cigarettes is what?
Perfectly inelastic
Rent control in general
Serves as an example of a price ceiling
If a tax is levied on the buyers of a product, then the supply curve will
Shift to the right (more will be supplied)
When a supply curve is relatively flat, what is true about supply?
Supply is relatively elastic
Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Variable costs for Sonia's yoga studio include the cost of the
Tank tops, and wages paid to the other yoga instructors
Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,
The equilibrium quantity changed but price remains unchanged
The demand curve representing the demand for a luxury good with several close substitutes is
The flattest curve that isn't total elasticity
For a particular good, a 2% increase in price causes a 12% decrease in quantity demanded. What is most likely applicable to this good?
The good is a luxury
The value of the price elasticity of demand for a good will be relatively large when
The good is a luxury rather than a necessity
Which statement is true about marginal cost
The marginal cost curve eventually rises with the quantity of output
Under what conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users?
The price elasticity of demand for illegal drugs is 1.3
If a binding price ceiling is imposed on the baby formula market
The quantity of baby formula demanded will increase, the quantity of baby formula supplied will decrease, a shortage of baby formula will develop
Generally, a firm is more willing and able to increase quantity supplied in response to a price change when
The relevant time period is long rather than short
As price falls on a graph from point A to point B, which of the demand curves would produce the smaller elasticity?
The steepest demand curve (the most inelastic)
Which of the following was NOT a result of the luxury tax imposed by Congress in 1990?
The tax was never repealed or even modified
Shelley's sales produces and sells organic salsa. Last year it sold 3 million tubs of salsa at a price of $3 per tub. For the last year, the firms
Total revenue was $9 million
A binding minimum wage raises the incomes of some workers, but it lowers the incomes of workers who cannot find jobs, true or false
True
A tax on buyers decreases the quantity of the good sold in the market
True
A tax on sellers shifts the supply curve to the left, true or false
True
Because of the greater flexibility that firms have in the long run, all short run curves lie on or above the long run curve, true or false
True
Cross Price elasticity is used to determine whether goods are substitutes or complements, true or false
True
Economists and accountant usually disagree on the inclusion of implicit costs into the cost analysis of a firm, true or false
True
The Cross Price elasticity of demand for bacon and eggs likely would be negative because bacon and eggs are complements, true or false?
True
The average fixed cost curve is constant, true or false
True
The opportunity cost of capital is an implicit cost almost every business incurs, true or false
True
The demand for rice krispies treats is more elastic than the demand for cereal in general, true or false?
True (because it is a narrowly defined good)
When will total revenue increase?
When price elasticity of demand is 1.2 and the price of the good decreases; Price elasticity of demand is 0.5 and the price of a good increases; Price elasticity of demand is 3.0 and the price of a good decreases
The federal government is concerned about obesity in the United States. Congress is considering two plans. One will ban the production and sale of "junk food." The other will increase nutrition-education programs and include substantial advertising campaigns to encourage healthy eating habits. The junk-food ban program
Will reduce the quantity of junk food sold and raise the price. The education program will reduce the quantity of junk food sold and lower the price
An outcome that can result from either a price ceiling or a price floor is
a non-binding price control
If the quantity demanded of a certain good responds only slightly to a change in the price of a good, then the demand is what?
demand for the good is said to be inelastic
If the government wants to reduct the burning of fossil fuels, it should impose a tax on what
either buyers or sellers of gasoline
When small changes in price lead to infinite changes in quantity demanded, demand is perfectly what?
elastic, and the demand curve will be horizontal
If, holding the supply curve fixed, there were an increase in demand that cause the equilibrium price to increase from $6 to $7, then sellers' total revenue would do what?
increase
Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. Total consumer spending on milk will...
increase and total consumer spending on beef will decrease
If the price elasticity of supply is 0.8 and the price increased by 5%, quantity supplied would
increase by 4%
Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The equilibrium price will what?
increase in both the milk and beef markets
Average total cost is increasing whenever
marginal cost is greater than average total cost
For a firm, the production function represents the relationship between
quantity of inputs and quantity of outputs
The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should...
raise the price of cinnamon rolls
When a supply curve is relatively flat, the supply is what
relatively elastic
A key determinant of the price elasticity of supply is what?
the ability of sellers to change the amount of the good they produce
Elasticity of demand is closely related to the slope of the demand curve. The less Responsive buyers are to a change in price...
the steeper the demand curve will be
Whether tax levies on sellers or buyers, buyers and sellers usually share the burden of taxes, true or false
true
Good news for farming can be bad news for farmers because the demand for food stuffs is what?
usually inelastic, meaning that factors that shift supply to the right decrease total revenues to sellers
Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10% of their land, then...
wheat farmers would experience an increase in their total revenue
A manufacturer produces 1,000 units regardless of the market price. For this firm, the price elasticity of supply is
zero, total inelasticity