Econ exam 2
What does diminishing marginal productivity mean?
as you increase the amount of a variable input, its marginal product eventually gets smaller
Assume that Jill always consumes at the utility-maximizing point. If the utility from the last soda she consumes is 40 and its price is $2, and the utility from the last bucket of popcorn is 20, then we know that the price of the bucket of popcorn is ________.
$1
At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. The variable cost of producing 1,000 units of output per week is equal to
$16,000
Juan wants to increase production at his confection shop. If he hires one more worker, he can increase output by 100 candies per week. A confection worker's weekly wage is $200. Juan's marginal cost of increasing output by 100 candies per week is __________.
$2.00
Alicia is currently spending $6,000 per week on total variable costs to produce 500 hats. To produce 505 hats per week she would have to spend $6,100 per week. The marginal cost per hat is _________.
$20
If at 500 units of output, total fixed cost is equal to $10,000 and total variable cost is equal to $15,000. Total cost is equal to _________.
$25,000
Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes falls from $70 to $50?
$30
Consider this example: The total cost of producing 1,000 units of output is equal to $55,000 per week. The total cost of producing 1,010 units is equal to $55,500 per week. The marginal cost of increasing output from 1,000 units per week to 1,010 units per week is:
$50
At 1,000 units of output the fixed cost of production is $12,500 per week Total cost of producing 1,000 units per week is $28,500 per week. If labor is the only variable input and the weekly wage is $1,600, how much labor is being used produce 1,000 units of output?
10
What is the consumer surplus at a price of $10, assuming the demand relationship is linear? $5-30 $10-20 $15-10
100
Assume that the individual continues to watch movies 11, 12, and 13, which provide marginal utilities of 1 unit, 0 units and -1 unit respectively. After watching which movie will total utility be maximized?
12
Assume that the individual continues to watch movies 11, 12, and 13, which provide marginal utilities of 1 unit, 0 units and -1 unit respectively. After watching which movie will disutility begin to set in?
13
Suppose that a factory is producing two automobiles per hour. The total fixed cost is $20,000. The total variable cost is $10,000. The average cost is _________.
15,000
Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. If the price of a class if $750, how many classes will he take?
2
The production of 12,000 candy bars per day requires 60 workers. The average product of each worker is ___________ candy bars per day.
200
What is the consumer surplus at a price of $5 $5-30 $10-20 $15-10
225
Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?
4%
Santa Claus's only variable input is labor. The wage he must pay is 200 candy canes per week. What is Santa's total weekly variable cost if he hires 200 elves?
40,000 candy canes
Marcus has four employees. The four employees produce 55 floral arrangements in a day. Marcus hires a fifth employee. The five employees produce 60 floral arrangements in a day. The fifth employee's marginal product is _______.
5 floral arrangements in a day
Describe in your own words what the relationship is between prices and marginal utilities when a consumer is considering how much to consume.
But, as he changes his spending patterns, the additional satisfaction gained from more cereal will begin to diminish and the additional satisfaction gained from the less fruit will rise. He will continue switching until the marginal utility gained from spending another dollar on cereal is just equal to the marginal utility gained from spending another dollar on fruit
A government may impose a price ceiling if which of the following is true?
Consumers can persuade legislators that lower prices are needed
in general, elasticity varies along the
D-curve
Compare the likely elasticity of demand for a college education with the likely elasticity of demand for a degree at one specific institution
Demand for a product will always tend to be less elastic than the demand for a specific brand of the same product. There are more substitutes for a specific brand, and thus the specific brand demand should be more elastic, so the demand for a degree at a specific institution will be more elastic than the demand for a degree
What are two of the reasons that average cost tends to have a "bowl" shape?
Fixed costs tend to dominate low levels of output and variable costs tend to dominate high levels of output
You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?
I do not know because I cannot tell how much costs would change in relationship to revenues
sunk costs
any costs that have already been paid in the past
If a good has an income elasticity of 0.8, what do you expect to happen to the quantity demanded of this good if the country enters a recession?
If income elasticity is 0.8, then the good is a normal good, meaning that as income increases, so does demand for the good, and if incomes decreases, demand also falls, If we enter a recession, consumer incomes will fall; therefore, the demand for this good will also fall
Assume you spend all of your income on two goods: peanuts and chips. Also assume that you are consuming the combination of peanuts and chips that maximize your utility. Which of the following statements is true?
If the price of peanuts is equal to the price of chips, the the marginal utilities must also be equal
Explain why the marginal utility of water may be quite high at low levels of consumption, but eventually diminish as you increase your consumption
If you are very thirsty, then the first glass of water will bring you a great deal of satisfaction and happiness. The second glass might continue to increase your satisfaction but probably will not taste as good as that first glass. By the time you get to the fourth glass, you may be struggling to get it down, and the fifth glass might actually cause you distress
If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases? The marginal utility will _________.
Increase, because the consumer will decrease her consumption of the good
Which product is more likely to have an elastic supply: ice cream or diamonds?
It is a lot easier for a producer to make more ice cream than it is to mine more diamonds, so the producer of ice cream will be more sensitive to price changes
Are marginal utilities of all goods equal to all other marginal utilities if consumers are maximizing their satisfaction? Explain why or why not.
No. It is the ratio of marginal utilities to prices that are equal. When a dollar "buys" the same amount of satisfaction from each good, then there will be no further incentive to change your buying choices
How many inputs are fixed in the short run?
at least one
What would happen to the store's total revenue with this 10% price increase if quantity falls by 5%?
Revenues rise by 10 percent due to the increase in price and fall by only 5% due to the lost sales, that is, the lower quantity. Thus, overall revenues must increase
If demand were elastic, an increase of 10% in the price might cause a 20% decrease in quantity demanded. What would happen to the total revenue in this case?
Revenues rise by 10% due to the increase in price and fall by 20% due to the lost sales. THus total revenues decline.
Why do surgeons play less golf than general practitioners?
Surgeons make more money per the hours so it would be very costly for the to give up a surgery to go golfing
Who is likely to be in favor of a price ceiling on a good?
The consumers of the good who can still purchase it after the ceiling is imposed
How does diminishing marginal utility affect the decision about how much of a good to purchase compared to another good with the same price?
The law of diminishing marginal utility, the marginal utility of the good purchased will eventually begin to diminish as more and more is purchased. If the marginal utility of the purchased good falls below the marginal utility of other possible purchases that cost the same amount, the buyer will not buy additional units of the first good, and will instead buy more of the ohter goods that now have a higher marginal utility.
List some things that influence how sensitive you are to changes in the prices of goods and services you purchase.
The number of substitutes for the good. Your interpretation of how necessary the good is. The percentage of your income spent on a good. The length of time you have to adjust your purchases
A production function can best be described as which of the following?
The relationship between the quantity of inputs and quantity of outputs produced in a given amount of time
Sometimes consumers purchase goods because of "conspicuous consumption", i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods?
These are luxury goods, so incomes elasticity would be greater than 1
Who suffers the greater loss of consumer surplus when the price increases: those with elastic demands or those with inelastic demands?
Those with elastic demand
What must always decline with the output?
average fixed costs
Assume that you are only consuming apples and plums and you are maximizing your utility. The price of apples is $1 each and the price of plums is $.25 each. Describe what will happen to the utility-maximizing choice if the price of plums increases to $.50.
With the new prices, if you give up one apple you will now get two plums. Since the marginal utility of an apple is four times the marginal utility of a plum at the old level of consumption, but the price of an apple is now only double that of a plum ,you can increase your satisfaction by increasing your consumption of apples.
Which of the following statements about the effects of a government setting maximum prices is true?
a maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price
Which of the following statements about the effects of rent control is true?
a maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price
Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?
a price ceiling with a maximum price below equilibrium price
a price ceiling has no effect on the economy if it is set ___________ the equilibrium price
above
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?
an increase in demand, but no change in quantity supplied
When the federal government subsidizes higher education in the form of Pell grants to students, it results in
an increase in the demand for higher education
When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:
an increase in the supply of higher education
a price floor has no effect on the economy if it is set ____________ the equilibrium price
below
Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ration of his marginal utility of pizza to marginal utility of video games is 1/4. If he wants to maximize his utility, what should he do?
buy fewer pizzas and more video games
price elasticity of demand equation (class version)
change in quantity demanded/ midpoint quantity / change in price/ midpoint price
marginal cost equation
change in total cost / change in output = marginal cost
If demand is inelastic, why wouldn't a firm keep raising price?
competition: other firms undercut price and as price increases and quantity decreases, the D-curve eventually becomes elastic
If absolute value is less than 0 for cross-price elasticity than the goods are ________
complements
A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues
decrease
Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 10 and the marginal utility of the last book is 5. The price of a movie is $12 and the price of a book is $4. In order to maximum her utility, what should Anna do?
decrease her consumption of movies and increase her consumption of books
Assuming a fixed budget, when the price of one good increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all goods will _______________.
decrease, but the marginal utility of the higher priced good will increase
Diminishing marginal returns means that marginal product will eventually ____________ and the total product function will ___________ as production increases.
decrease: not change
When the price of a good increases, consumer surplus _______.
decreases
an effective large-scale beef boycott:
decreases the price of beef
The law of diminishing marginal returns is the cause of _____________ marginal product and ____________ marginal cost.
decreasing; increasing
price floor and ceiling _____________ shift the supply or demand curve.
does not
Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?
elastic
unitary good is __________ 1
exactly
total cost equation
fixed costs + variable costs = total cost
absolute value ___________ 1 hence that is is a normal good
greater than
elastic good is ____________ 1
greater than
An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will _________ and the quantities actually sold will ___________
increase; decrease
A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods- hamburgers and football games?
her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ration of the marginal utility of movies to the price of a movie
elasticity
how responsive one is to a change
A business should ______________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.
increase
If the quantity of an input is variable in the short run its total cost will ___________ as output increases
increase
The total amount spent on a service with an inelastic demand will __________ if supply decreases.
increase
A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?
increase fares
A utility-maximizing consumer of coffee also enjoys consuming tea. Coffee prices rise, while tea prices do not change. This consumer consumes only these two goods and all else remains the same. For this consumer, consumption of tea will __________, and marginal utility of coffee will __________.
increase; increase
An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will ___________ and the quantities actually sold will _________
increase; increase
tax added will affect what curve
it will shift down the demand curve
absolute value _________ 1 is an inferior good
less than
inelastic good is ____________ 1
less than
The economic cost of growing corn on a farm is typically
less then the accounting cost due to the existence of large opportunity costs
A change in demand will cause the equilibrium price to change by _________ and the equilibrium quantity to change by _________ with an elastic supply than if supply were inelastic
less, more
If a good is provided for free, it is likely to have a marginal utility that is relatively _____________ and be __________ the marginal utility that could be gained from producing some other good.
low; less than
If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price?
lower price
Which of the following statements about utility is most accurate? As one consumes more of a good:
marginal and total utility are likely to decrease
If David buys more coffee and less ice cream, the ________________ of coffee will_____________ and the _______ of ice cream will ________
marginal utility; fall; marginal utility; rise
When will a minimum wage be an effective price control? When it is a ____________
minimum "price" that is above equilibrium price
In one market, supply is inelastic. In a second market, supply is elastic. An increase in demand will cause the equilibrium price to change by __________ and equilibrium quantity to change by ____________ in the first market than in the second market
more; less
Situation A: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a ___________ elastic supply OR has a _____________ elastic demand than exists in Situation B.
more; less
Assume that as your income increases, your consumption of burgers decreases. we can assume that your income elasticity of demand for burgers is what?
negative
Should sunk costs be considered when making current decisions?
no
Will a change in fixed costs change marginal cost?
no
Will a change in fixed costs change total variable cost?
no
Suppose at her current level of consumption, a person enjoys going to an additional baseball game three times as much as seeing an additional new movie. The price of a ticket for a baseball game is $30, and the price of a ticket for a movie is $15. Is the person spending her income (for these two goods) in a manner that maximizes her satisfaction?
no, she should increase the consumption of baseball games and decrease the consumption of movies
If the government mandates that a price cannot be set above some specified level, then
none of the above
If the government mandates that a price cannot fall below some specified level, then
none of the above
A firm's implicit costs are
opportunity costs of production that do not involve money outlays
The law of diminishing marginal returns means that when one uses more and more of an input:
output will eventually increase at a decreasing rate
price elasticity of demand equation (tophat version)
percent change in quantity demanded / percent change in price
Total revenue equation
price * quantity = total revenue
On a supply and demand diagram, would a minimum wage be considered a price ceiling or price floor?
price floor
Income equation
price of item 1*Quantity of item 1 + price of item 2 * quantity of item 2 = income
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold
Marginal cost is the slope of ________.
the total cost curve
Currently, the marginal product of labor is 45 units per week. The average product of labor at the current level of output is 32 unite per week. If the employer hires one more worker, the marginal product of labor will be 47 units per week. The average product of labor will __________.
rise
Variable cost __________ while fixed cost _________ as output ____________ in the short run.
rises, stays the same, increases
What is determining average variable costs useful for?
showing when the firm should shut down
If absolute value is greater than 0 for cross-price elasticity then the goods are _________.
substitutes
Consumer Surplus
the difference between the most you'd be willing to pay for a good and what you actually do pay
Suppose that a 10 cent tax per apple is imposed on apple growers. Then
the effective supply curve will shift upwards by 10 cents
If diminishing marginal utility exists and a person decreases consumption of a good, then (all else equal) it must be true that
the person's marginal utility will rise
The current equilibrium price of a specific type of automobiles in $23,000. An increase of a price ceiling on automobiles from $20,000 to $25,000 will do what to the amount sold in the market and to the price of automobiles?
the price of automobiles will increase to $25,000 and fewer will be sold
Which of the following would cause an increase in consumer surplus in the market for cars?
the price of steel decreases
Consider a good with a price floor that is above the equilibrium price. If demand decreases, what will happen to the price in the market and the amount produced?
the price will stay the same and the amount produced will decrease
When price decreases, quantity increases. Price elasticity of demand measures how much __________
the quantity increases when price decreases
If the government taxes car producers, that will happen in the market for cars?
the supply curve will shift to the left
law of diminishing marginal utility
the value that a consumer places on additional units of a particular good will diminish as total consumptions of that good increases
Average total cost equation
total costs / output = average total costs
Average fixed cost equation
total fixed costs / output = average fixed costs
max profits equation
total revenue - total costs = max profits
Average variable cost equation
total variable costs / output = average variable costs
Marginal product is the change in a firm's output divided by the change in the amount of input (like capital or labor) used
true
Goal of utilitarianism:
try to maximize total number of utils in society
What is determining marginal costs useful for?
useful for determining firm's optimal output to maximize its profits
What is determining average total costs useful for?
useful for graphically determining profits
total variable cost equation
weekly wage * amount of labor or workers
statutory incidence
who bears the legal burden of a tax
economic incidence:
who bears the true burden of a tax
Will a change in fixed costs change average cost?
yes
