ECON 2113 Final Exam
If the price elasticity of demand for a good is 0.5, then a 5 percent increase in price results in a
2.5% decrease in the quantity demanded
Suppose that the Town of Mapledale is considering hiring an additional firefighter. The expected benefit is estimated to be worth $5 for each of Mapledale's 15,000 residents. What should the city do?
Hire the firefighter only if the cost does not exceed $75,000
"Falling oil prices have caused a sharp decrease in the supply of oil." Speaking precisely, this quotation is _______
Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply
Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $5. Its average total cost is $4. Its profit is
$800
Policy makers use taxes
. both to raise revenue for public purposes and to influence market outcomes.
Utility measures
. satisfaction a consumer receives from consuming a bundle of goods
Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product?
15 bouquets
If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price elasticity of demand is
2
Jennifer is a junior in college. Her current cumulative grade point average (GPA) is 3.5 out of a 4.0 scale. Jennifer is hoping that by the time she graduates, she can raise her cumulative GPA to a 3.7. Which of the following statements is correct?
Jennifer must earn above a 3.7 GPA in her senior year in order to raise her cumulative GPA to a 3.7
If the price elasticity of demand for a good is 2, then a 10 percent decrease in the quantity demanded must be the result of
a 5% increase in the price
Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles are an inferior good and textbooks are a normal good, then the income effect associated with an increase in the price of a textbook will result in
a decrease in the consumption of textbooks and an increase in the consumption of ramen noodles
An industry is a natural monopoly when
a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
If a surplus exists in a market, then we know that the actual price is
above equilibrium price and quantity supplied is greater than quantity demanded
On a graph we draw a consumer's budget constraint, measuring the number of apples on the horizontal axis and the number of light bulbs on the vertical axis. If the slope of the budget constraint is -2, then
an apple costs twice as much as a light bulb
A decrease in the price of a good would lead to
an increase in quantity demanded
A decrease in the price of oranges would lead to
an increase in the supply of oj
When a firm is operating in the short run,
at least one of its inputs is fixed
A firm produces 400 units of output at a total cost of $1,200. If fixed costs are $400,
average fixed cost is $1
If marginal cost is greater than average total cost, then
average total cost is increasing
A firm produces 200 units of output at a total cost of $1,200. If fixed costs are $200,
average variable cost is $5
What is the fundamental basis for trade among nations?
comparative advantage
Excessive fishing occurs because
each individual fisherman has little incentive to maintain the species for the next year.
Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then the demand for the good must be
elastic
By allowing an income-tax deduction for charitable contributions, the government
encourages a private solution to a particular positive externality problem
At the equilibrium price, the quantity of the good that buyers are willing and able to buy
exactly equals the quantity that sellers are willing and able to sell
Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.5. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to
fall by 50%
If we observe that a consumer's budget constraint has shifted inward, we can assume that the consumer will buy
fewer normal goods and more inferior goods
When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated?
fixed costs are sunk in the short run, if revenue exceeds variable cost the restaurant owner is making a smart decision to remain open for lunch
Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the
flatter the demand curve will be
An increase in a consumer's income
has no effect on the slope of the consumer's budget constraint.
Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to
pay your roommate at least $25 but no more than $50 to clean up after herself
A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?
people respond to incentives
The price elasticity of demand equals the
percentage change in quantity demanded divided by percentage change in price.
During the holiday season, high-end retailers frequently place a high price on merchandise on weekends and discount the price during the week. They do this because they believe that two groups of customers exist: shoppers with little free time and bargain hunters. Bargain hunters have time to shop around and frequently shop during the week. What do economists call this price strategy used by high-end retailers?
price discrimination
Buyers and sellers who have no influence on market price are referred to as
price takers
When buyers in a competitive market take the selling price as given, they are said to be
price takers
"Mexico, which typically produces almost half the world's avocados, may need to import them, as ordinary Mexicans can no longer afford their staple fruit. Economy secretary Ildefonso Guajardo said the global demand for avocados has ramped up prices in the domestic market, too." According to the news, why was the price of avocado higher?
positive demand shock
"Beef prices have hit a three-year low in the US. Thanks to a rise in production, that price could be significantly less. The cost of beef is on par with cheaper fare like pork and poultry." According to the news above, why was the price of beef lower?
positive supply
A competitive market is in long-run equilibrium. If demand increases, we can be certain that
price will rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.
The signals that guide the allocation of resources in a market economy are
prices
According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as
private parties can bargain with sufficiently low transaction cost
A monopolist maximizes profits by
producing an output level where marginal revenue equals marginal cost
Diminishing marginal product suggests that the marginal
product of an extra worker is less than the previous worker's marginal product
Which of the statements below does not apply to the production-possibility frontier, or PPF?
quantities of input are measured along the axes of the PPF
A tax imposed on the sellers of a good will
raise the price buyers pay and lower the effective price sellers receive.
Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the
supply of bicycles will shift left
A major difference between tariffs and import quotas is that
tariffs raise revenue for the government, while quotas do not raise revenue for the government
For a good that is a necessity, demand
tends to be inelastic
If the price of almond rises, many people would switch from consuming almonds to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of
the availability of close substitutes in determining the price elasticity of demand
An example of specialization in production can be seen when:
wheat is produced in the US and exchanged for autos produced in Japan, most of the potatoes produced in the United States are grown in Idaho and Maine, where the soil and climate are optimal for their production, faculty in a university teach courses in their area of expertise
A binding price floor will reduce a firm's total revenue
when demand is elastic
Wild animals are more often endangered, but pets are not because
wild animals are a common resource, while pets are private goods
Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for admission on a weekday. The cost of operating the museum on a weekday is $1,000. How much profit will the museum earn if it engages in price discrimination?
$1,800
Cindy's Car Wash has average variable costs of $2 and average total costs of $3 when it produces 100 units of output (car washes). The firm's total fix cost is
$100
Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba's annual total cost is
$12,000
Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $40 each. An economist would calculate the total cost for one photo frame to be
$15
Anya has decided to start her own hair-styling salon. To purchase the necessary equipment, Anya withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 3%. What is Anya's annual opportunity cost of the financial capital that has been invested in the business?
$450
A firm's marginal cost has a minimum value of $60, its average variable cost has a minimum value of $70, and its average total cost has a minimum value of $100. Then the firm will shut down in the short run once the price of its product falls below
$70
A monopolist faces a
downward sloping demand curve
An increase in the overall level of prices in an economy is referred to as
inflation
If the price elasticity of demand for a good is 2, then a 3 percent decrease in price results in a
6% increase in the quantity demanded
Average total cost (ATC) is calculated as follows:
ATC=(total cost)/(quantity of output)
Suppose consumers often purchase muffins to eat while they drink their lattés at local coffee shops. If the price of muffins rises, what would happen to the equilibrium price and quantity of lattés?
Both equilibrium price and quantity of lattes would decrease
If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would happen to the equilibrium price and quantity of lattés if the price of muffins rises?
Both the equilibrium and quantity would decrease
The distinction between efficiency and equality can be described as follows:
Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society
Which of the following observations would indicate that demand for a good is price-inelastic?
The good in question is more of a necessity than a luxury for most people, there are not good substitutes for the good, the time period allowed for responding to a change is very small
A city wants to raise revenues to build a new public library next year. The mayor suggests that the city raise the price of admission to the current public library this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?
The mayor would be correct if demand were price inelastic; the city manager would be correct if demand were price elastic
For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
There are many substitutes for the good
A fundamental source of monopoly market power arises from
barriers to entry
Suppose you make jewelry. If the price of gold falls, then we would expect you to
be willing and able to produce more jewelry than before at each possible price
In a competitive market, the quantity of a product produced and the price of the product are determined by
both buyers and sellers
New technology lowering the costs of production will cause the equilibrium price to ______________ and the equilibrium quantity to _____________.
decrease; increase
As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good
decreases
If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. Farmer Brown's production function exhibits
diminishing marginal product
If the total cost curve gets steeper as output increases, the firm is experiencing
diminishing marginal product
Marginal cost increases as the quantity of output increases. This reflects the property of
diminishing marginal product
In the long run, a company that produces and sells organic tofu pays total costs of $1,200 when output is 1,200, and $1,800 when output is 1,400 units. The company exhibits
diseconomies of scale because average cost is rising as output rises
Corrective taxes differ from most taxes in that corrective taxes
do not cause dead weight loss
A $1.50 tax levied on the buyers of pomegranate juice will shift the demand curve
downward by exactly $1.50
Hold the prices of goods, as well as Amy's preferences, constant. If Amy's income increases, then
her budget constraint changes, but her indifference curves do not change
A country has a comparative advantage in a product if the world price is
higher than that country's domestic price without trade
A good is an inferior good if the consumer buys less of it when
his income rises
In general, elasticity is a measure of
how much buyers and sellers respond to changes in market conditions
Foregone investment opportunities are an example of
implicit costs
A difference between explicit and implicit costs is that
implicit costs do not require a direct monetary outlay by the firm, where as explicit costs do
If the demand for donuts is elastic, then a decrease in the price of donuts will
increase total revenue of donut sellers
Someone who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
inelastic
There are very few, if any, good substitutes for automotive tires. Therefore, the demand for automotive tires would tend to be
inelastic
A tradeoff exists between a clean environment and a higher level of income in that
laws that reduce pollution raise costs of production and reduce incomes
A consumer consumes two normal goods, coffee and chocolate. The price of coffee rises. The income effect, by itself, suggests that the consumer will consume
less coffee and less chocolate
Assume the production of a good causes a negative externality. In the market equilibrium, the marginal consumer values the good at
less than the social cost of producing it
A monopolist produces ____________________ than in a competitive market.
less than the socially efficient quantity output but at a higher price
Economies of scale occur when a firm's
long-run average total costs are decreasing as output increases.
When a surplus exists in a market, sellers should
lower price, which increases quantity demanded and decreases quantity supplied until surplus is eliminated
Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 25 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $220. In order to maximize profits, Laura should
make fewer than 25 wedding cakes per month
Diminishing marginal product suggests that
marginal cost is upward sloping
A consumer chooses an optimal consumption point where the
marginal rate of substitution equals the relative price ratio
Because a monopolist must lower its price in order to sell another unit of output,
marginal revenue is less than price
Pepsi and pizza are normal goods. When the price of pizza rises, the substitution effect causes pizza to be relatively
more expensive, so the consumer buys more pepsi
The substitution effect of a price change is depicted by a
movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.
A competitive market is a market in which
no individual buyer or seller has any significant impact on the market price
A congested side street in your neighborhood is
not excludable and rival in consumption
Buyers of a good bear the larger share of the tax burden when the
supply is more elastic than the demand for the product
A minimum wage that is set below a market's equilibrium wage will
result in an excess supply of labor, that is unemployment
Suppose there is a decrease in the price of corn. If corn is an input into the production of ethanol, we would expect the supply curve for ethanol to
shift rightward
If income increases and prices are unchanged, the consumer's budget constraint
shifts outward
The smaller the price elasticity of demand, the
smaller the responsiveness of quantity demanded to a change in price
A consumer's preferences for $1 bills and $20 bills can be represented by indifference curves that are
straight lines
A paper plant produces water pollution during the production process. If the government forces the plant to internalize the negative externality with a corrective tax, as a result
supply curve for the paper would shift to the left
If a change in the price of a good results in no change in total revenue, then
the demand for the good must be unit elastic
The MC curve crosses the ATC curve at
the efficient scale, the bottom of the ATC curve, a point where the MC curve is rising
If the government removes a binding price ceiling from a market, then
the price paid by buyers will increase, and the quantity sold in the market will increase
If a binding price ceiling is imposed on the baby formula market, then
the quantity demanded of baby formula will increase, the quantity supplied of baby formula will decrease, shortage of baby formula will develop
If the minimum wage exceeds the equilibrium wage, then
the quantity supplied of labor will exceed the quantity demanded
Producers have little incentive to produce a public good because
there is a free rider problem
Which of the following statements could be used to explain an outward shift in the production-possibility frontier?
there is a general advance in technology, the population of country increases, new natural resources are discovered under the ocean
When the price of a good or service changes,
there is a movement along a given demand curve
When Samuelson and Nordhaus write that "goods are limited while wants seem limitless," they mean that
there is no simple solution to the basic economic problems of scarcity and unlimited human wants
A university's football stadium is always sold out, and students who wait in line for hours may be turned away. This indicates
ticket price is below equilibrium
Accounting profit is equal to
total revenue minus the explicit cost of producing goods and services
Economics is the study of how society manages its
unlimited wants and limited resources
the concept of opportunity cost
used to measure costs in terms of the next-best alternative.
Total surplus in a market is equal to
value to buyers-cost of sellers
If a firm produces nothing, which of the following costs will be zero?
variable cost
A sunk cost is one that
was paid in the past and will not change regardless of the present decision
In the long run, each firm in a competitive industry earns
zero economic profits
