ECON 2106 UGA review
Assume Tom is on budget constraint AC and the price of a hamburger is $4.00. Tom's monthly income is
$80
Suppose a monopolist faces the demand and costs in the figure and is able to perfectly price discriminate. How much surplus is realized by consumers?
$0.
Assume that there are only two people in the market for baseball caps: Alex and Ryan. Along the market demand curve for baseball caps, at a price of _____, quantity demanded would be _____.
$10; 11
If this farmer is producing the profit maximizing level of output, her profit is
$2,000.
Assume that initially there is free trade. If the United States then imposes a $25 tax per barrel of imported oil, the tax revenue generated will equal
$50 million per day.
You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Your economic profit last year was
-$10,000
In the area around a local university, a number of food vendors gather each lunchtime to sell food to university students who are tired of dorm food. The university and the town have no license fees that apply to food vendors, preferring to let the market dictate how many and which vendors show up. Many different cuisines are represented on the street corner, including a cart sponsored by Madame Defarge selling gumbo and jambalaya. Madame Defarge sells a plate of either gumbo or jambalaya for $6. The food is made in the morning at her nearby restaurant, when the kitchen is otherwise unoccupied. Her crew of three, each of whom earns $14 per hour, takes 1.5 hours to make the 110 meals required by Madame Defarge. In creating these meals, they use ingredients equal to $110. Madame Defarge hires another worker to load her cart with food and sell it during the lunch hours. That worker costs $9 per hour and typically sells out the entire cart of 110 meals in 2 hours. The cart is rented for $100 per 5-day week. (The carts are not in operation on the weekends, when Madame Defarge is too busy at her restaurant.) What factors make this a monopolistically competitive market?
---->A. There are many types of food from which students can choose. B. Madame Defarge only operates on specific days. C. Madame Defarge sells out the entire cart in 2 hours. ---->D. There are no licensing fees for food-cart vendors. ---->E. Madame Defarge is one of many vendors. Madame Defarge's profit per meal is equal to $ 4.09.
The slope of budget constraint AC is
-2.0.
According to the CDC, the price elasticity of demand for cigarettes is ____, which sugggests that a tax increase will ______ revenue.
.3 to .5, increase
The marginal utility of the fourth video game rental is
0.
Katarina and Ivanna are sisters and plant lovers and have saved a total of $640 to spend on plants for their new apartment in Miami. They have decided to use this money on orchids and ferns. Their original budget constraint is shown in the graph on the right. Let X represent orchids and Y represent ferns. What is the equation of the original budget constraint?
16X+20Y=$640 The price of an orchid is $16 and the price of a fern is $20.
Assume that the marginal cost of hiring a police officer is $100. If A and B are the only two people in the society, the optimal number of police officers is
2.
Suppose a monopolist faces the demand and costs in the figure and is able to perfectly price discriminate. How many widgets does the monopoly supply when they act so as to maximize their profits?
400
Assume a price change occurs and Katarina and Ivanna now face the new budget constraint. What is the equation of the new budget constraint?
40X+20Y=$640 With a new budget constraint, the price of an orchid is $40 and the price of a fern is $20.
This farmer's profit-maximizing level of output is _____ units of output.
500
At the world price of $125 per barrel of oil, the United States imports _____ million barrels of oil per day.
6
The marginal product of the fourth worker is
8.
A treatment plant dumps polluting chemicals into the Twine River. Thousands of citizens live along the river, and they bring suit, claiming damages. The court is considering four possible solutions. Comment on the efficiency and/or equity of each. a. Deny the merits of the case and affirm the polluter's right to dump. The parties will achieve the optimal solution without government.
A. Efficient outcome is hindered by the "drop-in-the-bucket problem." B. Efficient outcome is hindered by the "free-rider problem." C. Equitable with a smaller number of claimants. ---->D. All of the above. E. None of the above.
d. Refer the matter to the Environmental Protection Agency, which will impose a tax on the factory equal to the marginal damage costs. Proceeds will not be paid to the damaged parties.
A. Equitable if the damaged parties do not have an incentive to avoid the damages. ---->B. Efficient if marginal damages can be measured accurately. C. Inefficient if marginal damages can be measured accurately. D. All of the above.
c. Order an immediate end to the dumping, with no damages awarded.
A. Works well in the case where the damages are very high. B. Does not work well if pollution damage was small relative to the benefits of production on the site. C. It is inefficient to stop production cold. ---->D. All of the above.
You are certain that a normal rate of return is 18% for the computer industry. What do you expect for a normal rate of return in the computer software industry, which is considered to be much riskier than the computer industry?
Above 18%
Alexi and Tony own a food truck together that serves only two items, street tacos and Cuban sandwiches. Some customers purchase both goods together; therefore, they will always produce both goods. Alexi and Tony can sell all the street tacos and Cuban sandwiches that they are able to produce, and will split the revenue equally.
Alexi's opportunity cost of producing one taco is 0.67 Cuban sandwiches. (Round your response to two decimal places.) Tony's opportunity cost of producing one taco is 1.29 Cuban sandwiches. (Round your response to two decimal places.) Tony has a comparative advantage in the production of Cuban sandwiches. Alexi has a comparative advantage in the production of street tacos. Assume that Alexi works 20 hours per week in the business. Further assume that Alexi devoted half of his time (10 of the 20 hours) to making street tacos and half of his time to making Cuban sandwiches. 1.) Using the line drawing tool, graph the possible combinations of street tacos and Cuban sandwiches that he could produce in a week. Label the line 'PPFAlexi'. 2.) Using the point drawing tool, indicate how many of each good he actually produces in a week given the amount of time spent on each. Label the point 'A'. Carefully follow the instructions above and only draw the required objects. Suppose that Alexi spent all 20 hours of his time on street tacos and Tony spent 17 hours on Cuban sandwiches and 3 hours on street tacos. Combined they would produce a total of 1410 tacos and 1530 Cuban sandwiches. Suppose that Alexi and Tony can sell all their street tacos for $3.50 each and all their Cuban sandwiches for $3.50 each. Suppose each of them works 20 hours per week and they decide to completely specialize. That is, Alexi will spend all 20 hours on production of one good, and Tony will spend all 20 hours on production of the other good. How will they spend their time? Alexi will spend 20 hours on the production of street tacos. Tony will spend 20 hours on the production of Cuban sandwiches. Alexi will specialize in street taco production and earn $ 4200. Tony will specialize in Cuban sandwich production and earn $ 6300. Their maximum joint revenue is $ 10500 per week.
Monopolistically competitive firms prevent the efficient use of resources because in long-run equilibrium
price is greater than marginal cost.
According to the Bureau of Labor Statistics, the average weekly earnings of production and nonsupervisory employees in education and health services was $822 in March 2015, up from $671 in March 2006. All else equal, such an increase in wages would be expected to reduce the quantity of labor demanded and employment should fall. Instead, the quantity demanded for labor has increased dramatically with more than 3.7 million jobs being created between 2006 and 2015. How can you explain this seeming discrepancy?
An increase in labor productivity increased labor demand and wages in education and health services.
In Glaeser's analysis of the economics of a high-speed rail line between Dallas and Houston, which assumption has the largest effect on his calculated bottom line?
An interest rate (cost of capital) of 5 percent
Show how the market for corn would be affected (given the ethanol production subsidy) if oil prices were to fall. 1.) Using the line drawing tool, draw either a new market supply curve (Upper S 2) or new market demand curve (Upper D 2). Properly label your curve. 2.) Using the point drawing tool, indicate the new market equilibrium (Equilibrium). Properly label your point.
At the same time, if oil prices fall, then the demand for land will decrease, decreasing land prices. Further, if oil prices fall, then the wheat supply curve will shift to the right. This will decrease wheat prices.
Shown at right is a payoff matrix for a price-cutting decision by Audi and Mazda.
Audi does not have a dominant strategy.
There are 1,000 families in a neighborhood that is affected by noise pollution from a local factory. The noise level is within legal limits, but could be reduced further if the company spent $5,000 on technological improvements. The company agrees to make these improvements if the affected families contribute the $5,000. A committee starts to collect donations to pay for the improvements. Which of the following is most likely to occur?
Because each individual contribution is so small and individuals will benefit from the reduction in noise whether they contribute or not, most people will not contribute and the firm will not make the improvements.
Betty Lou has a car washing and detailing business. She charges $20 to wash a car, a process that takes her 20 minutes and requires no help or materials. For car detailing, a process requiring 1 hour, she charges $50 net of materials. Again, no help is required. What do you suggest Betty Lou do to make the most efficient use of her resources?
Betty Lou should raise the price of car detailing or concentrate on washing cars.
b. Find in favor of the plaintiff. The polluters will be held liable for damages and must fully compensate citizens for all past and future damages imposed.
Compensation charge must be equal to "marginal damage cost."
The market for pharmaceuticals purchased over the Internet.
Consumers cannot verify which companies selling pharmaceuticals are reliable due to imperfect information.
Inputs Required to Produce a Product Using Alternative Technologies Technology Units of Capital Number of Employees A 16 8 B 12 12 C 8 20 D 6 24 If the hourly wage rate is $10 and the hourly price of capital is $50, which production technology should be selected?
D
Briefly describe the trade-offs involved in the following decision. Specifically, what are the opportunity costs associated with the decision? Pay particular attention to the trade-offs between present and future consumption. After a stressful senior year in high school, Sherice decides to take the summer off instead of working before going to college. A. She sacrifices the value of goods and services that could have been purchased with the income from work in order to obtain more leisure today. B. To the extent that this income will need to be replaced to finance her education, she substitutes future work for present consumption (of leisure). C. She sacrifices leisure today in order to purchase more goods and services with the income she earned working. D. A and B only.
D. A and B only.
Can you think of any reasons why a production show would choose to not offer tickets in this manner? (Check all that apply.) A. Ticket sales at regular prices may decline. B. The shows are always sold out in advance. C. Perceptions of the show's quality may suffer. D. All of the above are plausible.
D. All of the above are plausible
Refer to the information provided in the figure at right to answer the question that follows. Equilibrium in this market occurs at the intersection of curves S and D. At equilibrium, producer surplus is area
E+F+G.
If price goes from equilibrium to P1, consumer surplus changes by the area
E-C.
You are an intern to the editor of a small-town newspaper in Mallsburg, Pennsylvania. Your boss, the editor, asks you to write the first draft of an editorial for this week's paper. Your assignment is to describe the costs and the benefits of building a new bridge across the railroad tracks in the center of town. Currently, most people who live in this town must drive 2 miles through thickly congested traffic to the existing bridge to get to the main shopping and employment center. The bridge will cost the citizens of Mallsburg $25 million, which will be paid for with a tax on their incomes over the next 20 years. What are the opportunity costs of building this bridge? A. Any economic inefficiencies associated with the new income tax. B. The value of goods and services that the city could have purchased with the tax revenue had it not built the bridge. C. Revenue lost by shopkeepers near the old bridge. D. Construction costs such as noise, additional (temporary) traffic, and other delays. E. All of the above. What are the benefits that citizens will likely receive if the bridge is built? A. Reduced travel time for commuters and shoppers. B. Issues of income distribution. C. Less pollution from idling traffic. D. The value of the goods and services that citizens could have purchased with the additional tax burden. E. A and C only.
E. All of the above E. A and C only
In Emily Oster's household, efficiency is optimized by:
Equalizing the effectiveness on the final task each person does and allocating tasks according to who has the lowest opportunity cost on a given task.
Using the line drawing tool, sketch the budget constraint when the price of X is $40, the price of Y is $50, and income equals $1 comma 000. Label this line 'BC'.
graph
John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is John's expected utility for each job offer?
Expected utility of 200 for the first offer and expected utility of 164 for the second offer
According to the figure, which point cannot be produced with the current state of technology? A, B, C, or F?
F
What would you expect to see happen in this business?
Firms would enter this market due to positive economic profit in the short run.
GM decides to build a new plant using retained earnings, then all of the following are true except:
GM is avoiding experiencing opportunity costs.
Remy is a New Orleans native who has lived for the past 7 years in Boston. For each of the last 7 years, he has made trips back to New Orleans for Mardi Gras, Jazz Fest, and Halloween. During 2015, the price of a round-trip ticket from Boston to New Orleans decreased from $575 to $350. As a result, Remy decided to buy new Mardi Gras and Halloween costumes that year and also decided to purchase tickets to see Harry Connick, Jr. perform at the TD Garden Arena in Boston. Explain how Remy's demand for Halloween costumes and concert tickets will be affected by a decrease in air travel prices. Explain why both income and substitution effects might be expected to increase Remy's number of trips to New Orleans.
His demand for these items will rise because less of his income will be used for plane tickets. Cheaper air travel increases real income and lowers the opportunity cost of trips to New Orleans.
Identify a specific action that would increase this firm's profits.
Holding the cost of production constant, this firm should use more capital and less labor.
Explain how imperfect information problems such as adverse selection and moral hazard might affect the following markets. The market for wireless Internet connectivity at large international airports.
It is difficult to know how well a company's Wi-Fi will work until after it is set up due to imperfect information.
The town council's finance committee has evaluated data and determined that the present discounted value of the benefits from a proposed dog park comes to $3.25 million. The total construction cost of the dog park is $2.5 million. This implies that the dog park should be built. Do you agree with this conclusion? Explain your answer. If the interest rate decreases, the likelihood that the dog park should be built will ____________.
It should be built at a cost of $2.5 million because its present value is greater than that amount. increase, because future benefits will be discounted by less.
Suppose that the government imposes a price ceiling on gas at $1.20 per gallon. How would the relationship between consumers and gas station owners change?
It would cause a shortage of gasoline.
John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. If John takes the offer that maximizes his expected utility and is risk-averse, which job offer will he choose?
John will take the first offer.
Consider two countries, Japan and Malaysia. Japan devotes a smaller portion of its production to capital. All other things equal which of the following statements is most likely true?
Malaysia's production possibility frontier will shift up and out farther and faster than Japan's.
As of June 2014, John Green's international bestselling novel, The Fault in Our Stars, had sold more than 10.7 million copies. In book publishing, fixed costs are high and marginal costs are low and fairly constant. Suppose that the marginal cost of the print version of The Fault in Our Stars is $2.00 per book and is the same for each book up to 20 million copies. Assume that this includes all variable costs. Explain why in this case marginal cost (MC) is a horizontal line, as is average variable cost (AVC).
Marginal cost and variable cost are horizontal lines because these costs are unchanging with output. Suppose that the fixed cost of producing The Fault in Our Stars is $30 million. The average total cost of the book if the publisher produces 5 million copies is $8.00. The average total cost of the book if the publisher produces 10 million copies is $5.00. The average total cost of the book if the publisher produces 20 million copies is $3.50.
Which of the following contains most of the characteristics of a public good?
National defense
For a given firm, MRPl = $400 and MRPk = $450 while Pl = $100 and Pk = $20. Is the firm maximizing profits? Why or why not?
No, because (MRPl/Pl) is less than (MRPk/Pk).
[Related to the Economics in Practice LOADING... in this section] In addition to gambling, Las Vegas is famous for its live production shows. Close to 100 shows are performed at various venues across the city on any given day, and many of the shows are multi-million dollar productions with months-long waiting lists for the best seats. Box office ticket prices range from less than $10 for a few of the smaller shows to over $200 for some of the major productions. In recent years, a number of these shows have begun offering tickets for sale at half price through discount ticket outlets. These half-price tickets are only available on the day of the show, on a first-come, first-served basis. Using the concept of marginal cost, explain why many of these productions have begun to offer these half-price tickets.
Once a show has been scheduled and sufficient seats sold to make it profitable to stage, the marginal cost of filling remaining seats is probably near zero. Even at half-price, the added revenue will exceed the negligible marginal cost of filling the remaining seats, enabling the show's promoter to enhance its profit.
In perfect competition, when firms are maximizing profits and households are maximizing utility,
Pareto optimality has been obtained.
According to the law of supply, there is a
positive relationship between price and the quantity of a good supplied.
Who among the following do you suppose are the most-likely customers to purchase show tickets through these discount ticket outlets?
People who are not 'picky' about seat quality (location). Individuals traveling with a limited entertainment budget. People having a flexible vacation itinerary and thus needing little certainty in their schedule.
The market for used automobile tires.
Sellers have more information than consumers, resulting in a disproportionate number of low-quality tires being sold due to adverse selection.
The results of bionicles experiment described in Ariely, Kamenica and Prelec (2008) showed that
Subjects in the Meaningful condition built an average of 10.6 bionicles and earned an average of $14.40.
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The diagram to the right is a basic supply and demand graph. Economists use it to analyze equilibrium price and quantity in a market. When price equals $7, a surplus occurs.
The amount of the surplus is 40 units. This surplus will cause price to fall to equilibrium level.
The number of seats available in a stadium is fixed at 80,000. The equilibrium price for a ticket to a football game at the stadium is $30. The equilibrium price for a ticket to a soccer match at the stadium is $10. Which of the following is true?
The demand for each football game must be more than the demand for each soccer match.
On the diagram to the right, sketch the corresponding marginal cost curve. Using the multipoint curved line drawing tool, draw the firm's marginal cost curve. Label this curve 'MC'. Note: Use the multipoint curved line drawing tool one time to draw the entire curve. If the price of output is $2.00 and there are no fixed costs, what is the profit-maximizing level of output?
The firm will maximize profits by producing 200 units of output.
You are given the following cost data: Total fixed costs are $15. q TVC 0 0 1 25 2 50 3 88 4 138 5 213 6 313 If the price of output is $75, how many units of output will this firm produce (assuming the firm produces in the short run, in a competitive market)?
The firm will produce 5 units of output because this is where price equals marginal cost. Total revenue is $375. Total cost is $228. The profit of the firm is $147. In the short run, the firm will operate. In the long run, the firm will operate.
Excise taxes on cigarettes vary widely by state, from 17 cents a pack in Missouri to $4.35 a pack in New York. (See http://www.taxadmin.org/fta/rate/cigarette.pdf for a list of excise taxes for all states.) Federal law allows Indian reservations to sell cigarettes to tribal members without paying state excise taxes, and because the U.S. Supreme Court ruled that states do not have the authority to enter reservations to collect taxes, many tribal smoke shops do not charge excise taxes to non-tribal members as well. In the state of New York, a pack of name-brand cigarettes sells for about $11, and a pack of generic cigarettes sells for about $8. These prices include the state excise tax of $4.35 per pack. Assume that the marginal utility for the last pack of name-brand cigarettes consumed is equal to 7 and the marginal utility for the last pack of generic cigarettes consumed is equal to 4.
The marginal utility per dollar for name-brand cigarettes at tribal smoke shops is 1.05, while the marginal utility per dollar for generic cigarettes at tribal smoke shops is 1.10. To make the utility-maximizing rule hold for cigarettes sold at the tribal smoke shops, more packs of generic cigarettes, should be purchased at tribal smoke shops.
An analysis of a large-scale survey of consumer food purchases by Mark Aguiar and Erik Hurst indicates that retired people spend less for the same market basket of food than working people do. Use the concept of opportunity cost to explain this fact.
The opportunity cost of time for retired people is lower than the opportunity cost of time for working people, so retirees choose to spend more time shopping for lower-priced items compared to people who are still working.
Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -0.20. Suppose that international hostilities lead to a sudden cut-off of crude oil supplies. As a result, U.S. supplies of refined gasoline drop 25 percent. If gasoline were selling for $1.80 per gallon before the cut-off, what new price would you expect to see in the coming months? (Hint: Use the absolute value of the gasoline elasticity coefficient and treat all values as positive.)
The price of gasoline will be $4.05 per gallon. (Round your response to two decimal places.)
Dana spends $10,000 on remodeling a storefront that she then opens as a shoe store. The business has not been very successful, and she needs an additional $3,000 to keep the shoe store open. Which of the following is true?
The $10,000 Dana spent on remodeling is a fixed cost of her business.
The diagram at right shows the structure of cost and demand facing a monopolistically competitive firm in the short run. In the long run, firms will exit, shifting the demand facing the remaining firms to the right until the firms earn a normal profit.
The profit-maximizing output level is 20 units of output. The profit-maximizing price is $13. Total revenue is $260. Total cost is $300. Total profit or loss is -$40.
The market for renter's insurance.
Those with insurance are less likely to take precautions to safeguard their property due to moral hazard.
On the graph to the right, show the elastic and inelastic portions of a linear demand curve. 1.) Using the double-arrow line drawing tool, show the elastic region of the demand curve by drawing a line segment on top of the portion of the curve that is elastic. Label this line 'Elastic'. 2.) Using the double-arrow line drawing tool, show the inelastic region of the demand curve by drawing a line segment on top of the portion of the curve that is inelastic. Label this line 'Inelastic'.
graph
The diagram on the right shows a firm (industry) that earns a normal return to capital if organized competitively. Price in the market place is Pc under competition. We assume at first that marginal cost is fixed at $40 per unit of output and that there are no economies or diseconomies of scale. Which of the following expresses the correct set of relationships? D. Upper P Subscript Upper M > Upper P Subscript Upper C; Upper Q Subscript Upper M < Upper Q Subscript Upper C; CS Subscript Upper M < CS Subscript Upper C What potential remedies to a monopoly are available? A. Breaking up the monopoly. B. Reducing barriers to entry, imposing price ceilings, and imposing sanctions on those who violate antitrust laws. C. Obtaining a consent decree to stop the anticompetitive behavior. ------->D. All of the above. E. None of the above.
Total revenue for the competitive firm, assuming free entry, is $288,000. Total cost to the competitive firm, assuming free entry, is $288,000. Consumer surplus under competition is $144,000. Now assume that you bought all the firms in this industry, combining them into a single-firm monopoly protected from entry by a patent. The profit-maximizing price, Pm, for a monopoly is $60. Total revenue from the monopoly is $216000. Total cost for a monopoly is $144000. Total profit for a monopoly is $72000. Consumer surplus for a monopoly is $36,000. The deadweight loss for a monopoly is $36,000.
An externality exists when the cost or benefit resulting from some activity or transaction is experienced by parties external to the activity or transaction.
True
Does this graph exhibit diminishing returns? Explain your answer.
Yes, it does exhibit diminishing returns, because the marginal product of labor decreases.
Assuming the price of the output, Upper P Subscript Upper X, is equal to $2, graph the firm's marginal revenue product schedule (MRP Subscript Upper L) as a function of the number of labor units hired. Using the multipoint curved line drawing tool, graph the firm's marginal revenue product curve. Label this curve 'MRP'. Note: Carefully follow the instructions above and only draw the required object. If the current equilibrium wage rate is $3 per hour, how many hours of labor will you hire? How much output will you produce?
You will hire 100 hours of labor. You will produce 250 units of output.
The economy moves from Point A to Point D. This could be explained by
a change in society's preferences for motorcycles versus hybrid cars.
An externality is
a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction.
Related to the Economics in Practice on page 356: Insurance companies are interested in being legally allowed to obtain the results of genetic testing before deciding on issuing insurance policies to potential buyers, which would lessen the problem of ________ in the health insurance market.
adverse selection
According to the theory of comparative advantage, specialization and free trade will benefit
all trading parties, even when some are absolutely more efficient producers than others.
In perfect competition, the marginal revenue curve
and the demand curve facing the firm are identical.
The "law of demand" implies that
as prices fall, quantity demanded increases.
The total of consumer plus producer surplus is greatest
at the the market equilibrium.
Engineers for the Off Road Skateboard Company have determined that a 10% increase in all inputs will cause output to increase by 5%. Assuming that input prices remain constant, you correctly deduce that such a change will cause ________ as output increases.
average costs to increase
For normal goods, the substitution and income effects of a price decrease will
both increase the quantity of the good demanded.
In monopolistic competition, firms can have some market power
by producing differentiated products.
If there is an increase in industry supply, while the industry demand curve remains the same, then an individual firm in a perfectly competitive industry currently earning positive profits will see its profits ________.
decrease
Assume the market is initially at Point B and that pizza is a normal good. A decrease in income would cause the market to move from Point B on demand curve D2 to
demand curve D1.
If pizza and beer are complementary goods, a decrease in the price of beer will cause a movement from Point B on demand curve D2 to
demand curve D3.
When supply is fixed or the product is unique, then price is
demand determined.
Related to the Economics in Practice on page 50: The Amazon Kindle and the electronic textbooks available for the Kindle are complementary goods. Electronic textbooks and traditional, hard-copy textbooks are substitute products. If the price of electronic textbooks for the Kindle decreases
demand for the Kindle increases, the quantity of electronic textbooks demanded increases, and demand for traditional, hard-copy textbooks decreases.
When there are more substitutes for a product, the ________ for the product is ________.
demand; more price elastic
In the short run average costs eventually increase because of ________, and in the long run average costs eventually increase because of ________.
diminishing returns; diseconomies of scale
Based on the New York Times article about competition in the by-the-slice pizza market, it appears that
entry caused price to fall from $1.50 per slice and the long-run equilibrium price is probably $1.00 per slice.
From society's point of view, a monopolist produces too little because price
exceeds marginal cost.
If the payment to labor per day is $100, this T-shirt manufacturer is maximizing profits if he will hire _____ employees.
four
Using the 3-point curved line drawing tool, draw the portion of a nonlinear labor supply curve where the income effect of a wage increase dominates the substitution effect of a wage increase. Label this curve 'S'.
graph
1.) Using the line drawing tool, sketch the following budget constraint. Label your line 'BC'. PX PY Income $40.00 $100.00 $800.00
graph
In the short run, a firm
has at least one fixed factor of production.
The gap between rich and poor countries
has increased over time because poor countries find it difficult to devote resources to capital production.ha
A perfectly price elastic demand curve will be a ________ line.
horizontal
For Matthew, the marginal utility of the 9th soda in a day is positive and the marginal utility of the 10th soda in a day is zero. This
implies that at a zero price Matthew's demand curve will intersect the quantity axis at 10.
A monopolist will not produce
in the inelastic portion of its demand curve, where marginal revenue is negative.
Heinrich reviews results from public-goods experiments that indicate people prefer institutional arrangements
in which free-riders are punished for not contributing to the public good.
According to Emily Oster, an effective policy response to the HIV/AIDS epidemic in sub-Saharan Africa would be to
increase the incentive to avoid the disease by reducing malaria incidence and improving indoor air quality.
Refer to Figure 6.6. Bill's budget constraint was originally AD. If his new budget constraint is EF, then his income
increased and the price of bell peppers decreased.
According to the figure, as the economy moves from Point A to Point E, the opportunity cost of motorcycles, measured in terms of hybrid cars,
increases.
The competition between Amazon and Walmart in men's clothing is an indication of how market forces are
increasingly creating a "positive returns-to-scale world".
According to the figure, the optimal point for the economy is A, B, or F?
indeterminate from the information given.
Consider point A shown along the total revenue curve in the graph below. Y Axis: Total Revenue X Axis: Quantity Demanded Curve starts at 0, goes up and comes back down looking like a hill. Point A is over halfway down the downslope At this point, demand is:
inelastic, because revenue decreases as the price decreases.
Along budget constraint AC, the opportunity cost of one hamburger
is 2 hot dogs.
At a price of $20, a store can sell 24 picture frames a day. At a price of $18 the store can sell 33 picture frames a day. Since total revenue ________ by the price decrease, demand must be ________ .
is increased; elastic.
Tacit collusion
is more likely to be successful in increasing industry profits when there are a few, similar firms in the industry.
The current price of a turkey sandwich is $6. If Kyle is currently buying five turkey sandwiches a week, he _____ maximizing utility because the marginal utility _____ than its price.
is not; gained from the fifth sandwich is greater
The following diagram illustrates the demand curve facing a monopoly in an industry with no economies or diseconomies of scale and no fixed costs. In the short and long run, MCequalsATC. 1.) Using the point drawing tool, indicate the monopoly output and monopoly price (Monopoly) in the figure to the right. Attach the appropriate provided label. 2.) Using the rectangle drawing tool, shade in monopoly profits (Profit). Attach the appropriate provided label. 3.) Using the triangle drawing tool, shade in the "excess burden" or "welfare costs" of the monopoly (Excess burden). Attach the appropriate provided label. The monopoly creates excess burden because
it produces where price is above marginal cost.
Compared to a perfectly competitive firm, the demand schedule of a monopolistically competitive firm faces is
less price elastic.
A firm must be able to ________ competition if it is to exercise control over the price of its product.
limit
Perfect competition is defined as:
many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices.
Warranties, education, extracurricular activities are all examples of
market signals.
The demand for Ben & Jerry's ice cream will likely be ________ the demand for dessert.
more price elastic than
Assume that the marginal cost of producing steel does not include the cost of the damage to the environment as a result of pollution. By producing where P = MC, the firm will be producing
more than the efficient amount of steel.
It has been argued that the following are examples of "mixed goods." They are essentially private but partly public. For each example, describe the private and public components. Public housing is a private good because ___________.
not all those who desire to live in public housing have the ability to do so. Public housing is a public good because it provides a substantial public benefit when it keeps people from living on the streets.
The Coase theorem implies that we never need to worry about regulating externalities because the private individuals involved will reach the efficient outcome through negotiations. Is that statement true or false? Justify your answer and use examples. This statement is
not correct because Coase bargaining is not necessarily feasible when a large number of people are involved.
Oligopoly is difficult to analyze because
of the complex interdependence that usually exists among oligopolistic firms.
The payoff matrix in the figure to the right shows the payoffs for a pricing game. If you were firm A, which strategy would you choose? Firm A should
price low because this is their dominant strategy. Firm B's dominant strategy is to price low.
The basic coordinating mechanism in a free-market system is
price.
According to a new study by Freakonomics author, Steve Levitt, and others, UberX
produces about $18 million of consumer surplus every day.
If at the current output of X the PX > MCX, then society gains by
producing more X.
The process by which resources are transformed into useful forms is
production.
Market power refers to a firm's ability to
raise price without losing all sales of its product.
This firm is currently hiring 16 workers and paying a wage of $10. This firm should
reduce employment to 15 workers to increase profits.
Capital, as economists use the term,
refers to things that have already been produced that are in turn used to produce other goods and services.
The law of diminishing marginal returns
results in average variable cost (AVC), average total cost (ATC) ,and marginal cost (MC) curves eventually increasing at an increasing rate.
An example of forgoing present benefits in order to receive future benefits is
saving.
The concept of trade-offs would become irrelevant if
scarcity was eliminated.
ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. If the interest rate is 10%, the firm
should forgo the investment.
If the product derived from the last dollar spent on labor is less than the product derived from the last dollar spent on capital, then the firm
should use less labor and more capital to minimize costs.
A decrease in the price of mushrooms (an input for gardenburgers) will cause a movement from Point B on supply curve S2 to
supply curve S3.
In 2005, an internal Wal-Mart memo was leaked that indicated the company was concerned about rising labor costs due to
the adverse selection of relatively unhealthy workers into the application pool.
In a laissez-faire economy ________ what gets produced, how it is produced, and who gets it.
the behavior of buyers and sellers determines
During the summer of 2014, Uber cut the price of its UberX service 20-25 percent. The success of such a pricing strategy depends on
the demand for rides being highly elastic.
The recent US employment patterns described as job polarization are best explained by
the increased use of information technology.
Kyle would increase his consumption of turkey sandwiches from 7 to 9 per week if their price fell from $6 to $4. This illustrates the idea of
the law of diminishing marginal utility.
Ellie is spending her entire income on goods X and Y. Her marginal utility from the last unit of X is 100 and the marginal utility from the last unit of Y that she consumes is 50. Ellie's utility is only maximized if
the price of good X is twice that of good Y.
In terms of the production possibility frontier, an increase in productivity attributable to new technology would best be shown by
the production possibility frontier shifting outward, away from the origin.
Coase explained the boundary of a firm's activities in terms of
the relative costs of internal versus external transactions
In a monopoly, the market demand curve is
the same as the demand curve facing the firm.
Trash collection is a private good because ____________.
the service is excludable for those who don't pay for it. Trash collection is a public good for the substantial public benefits of cleaner and healthier cities.
Public transportation is a private good because ____________.
there is rivalry as shown by the limited number of seats available and it is also excludable if passengers are charged for using the service. Public transportation is a public good as competing firms would not be able to provide this service effectively and there are also substantial benefits to the public with the reduction of traffic and pollution.
Fire protection is a private good because ___________.
there is rivalry due to the limited resources available for fire protection. Fire protection is a public good because there are substantial safety benefits to the public at large and in most municipalities the service is nonexcludable.
If this game were repeated a large number of times and you were firm A and you could change your strategy, what might you do? Firm A should
use a tit-for-tat strategy by responding in kind to firm B's play.
The government imposes a price ceiling on gasoline that is below the market price. You are asked to suggest a rationing scheme that will minimize the misallocation of resources. You suggest
using rationing coupons that can be resold.
San Francisco is dealing with its on-street public parking problem by
using sensors embedded in the streets to gauge demand
You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.
fewer; after
You will still be able to listen to NPR (National Public Radio) whether or not you contribute to their fund-raising campaign, so you decide not to contribute. This is an example of the
free-rider problem.
At the market price of $18, if this farmer produces the profit maximizing quantity, what profit will he make?
$0
If the interest rate is 9%, Nashbar Bicycle's total investment would be
$1,100,000.
What is the total damage imposed as a result of producing the efficient level of fertilizer?
$250
What is the total damage imposed as a result of producing the market (unregulated) level of fertilizer?
$300
Refer to the scenario below to answer the following question. Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen. Tom's profit is
$43,000.
If this firm is producing the profit-maximizing quantity and selling it at the profit-maximizing price, the firm's profit will be
$88.
Fill in the missing amounts in the following table: (Round your responses to one decimal place and include a minus sign if necessary. Do not include a plus sign for positive numbers.)
% Change in Price % Change in Quantity Elasticity Demand for the Apple iWatch 25% -25% -1.0 Demand for roses on Valentine's Day +50% -10% -0.2 Demand for electronic cigarettes -10% +38% -3.8
You use $50,000 of your own money to start a catering business. During the first year you earn a 5% return on that investment. If the current interest rate is 8%, you earn an economic profit of
-$1,500.
If Armstrong Cable were free to sell to any number of subscribers it desires and set any price, it would sell to _____ subscribers at a price of _____.
1,000; $16
If demand for wheat is Upper D 2, then a profit maximizing firm will produce _____ units and earn a profit of _____.
13; $0
If the government imposed a price ceiling of $12 on this firm, the firm would sell to
2,500 subscribers but would require a subsidy of $1,250 to stay in business.
Suppose demand for wheat is initially Upper D 2. If the price of rice (a substitute for wheat) falls, then demand for wheat will shift to _____. This will _____ the equilibrium price of wheat and individual profit maximizing firms will produce _____ bushels of wheat.
D1; decrease; 0
During 2010, Congress debated the advisability of retaining some or all of the tax cuts signed into law by former President George W. Bush in 2001 and 2003 and set to expire at the end of 2010. By reducing tax rates across the board, take-home pay for all taxpaying workers would increase. The purpose, in part, was to encourage work and increase the supply of labor. Households would respond the way the president hoped, but only if income effects were stronger than substitution effects. Do you agree or disagree?
Disagree: If the income effect were stronger than the substitution effect, households would work less.
In the Cournot model the final level of output falls between the output that would prevail if the market were ________ and the output that would be set by a ________.
competitive; monopoly
Most major American cities have long used a medallion system to limit the number of operating taxicabs, and medallion prices _______ as taxi demand _______, but the entry of Uber into these cities has caused medallion prices to _______ by offering a _______ alternative to taxis.
increased; increased; decrease; cheaper
For most people, as their income increases, their utility from that income ________ at a(n) ________ rate.
increases; decreasing
The Wall Street Journal article describes the P&G rivalry with Kimberly Clark as a
prisoner's dilemma in which the two firms vigorously compete on price and quality.
Suppose John's utility from income is given in the figure. From this we would say that John is
risk-averse.
