Econ Exam 2 Study guide

Which of the following represents consumer surplus?

A

​What is the relationship between total surplus and economic efficiency?

An economically efficient market will have the maximum possible total surplus given the supply and demand curves.

In the following figure, which area represents producer surplus?

Area C

Which of the following represents producer surplus?

B

If you consume pasta every day of the week, its marginal utility is bound to ________ at the end of the week, ceteris paribus, and this demonstrates the law of ________.

Decline; Diminishing Marginal Utility

Suppose a computer manufacturer is producing in the short run when capital is fixed and the only variable factor of production is labor. The change in the quantity of production with the increase in labor is shown in the table below. What does the production function given represent?

Decreasing diminishing marginal returns to labor

The upward sloping portion of a short-run total cost curve illustrates:

Diminishing marginal returns

________ occur when the marginal gain in output diminishes as each additional unit of input is added.

Diminishing marginal returns

The upward sloping portion of a long-run cost curve illustrates:

Diseconomies to scale

Suppose you own a profitable tailoring company that hires two workers. The combined production of the two workers is ten shirts per day. You decide to double the amount of capital and labor and see that the total number of shirts produced each day has increased to 22. This implies that your company is exhibiting ________.

Economies of scale

Economies of scale may arise from which of the following activities?

Having a larger retail space can expand sales more than proportionately. Doubling promotional expenses to expand sale more than proportionately

Diseconomies of scale arise ________.

In the long run

Economists distinguish between the short run and the long run as follows:

In the long run, all resources are variable; in the short run, at least one resource is fixed

2 The marginal product of labor is known to be greater than the average product of labor at a given level of employment. The Average Product at this point would be ________.

Increasing

Which is (are) an example of a fixed cost?

Insurance for running a dance studio Rental costs for a dance studio

________ refers to the additional revenue gained from selling one more unit.

Marginal revenue

If hiring labor for the winter costs $100/unit and a unit of capital costs $400, what production method should be chosen? What method should be chosen if the cost of labor rises to $200/unit?

Method 1

Which of the following is most likely to be a fixed cost?

Mortgage payments

In long run equilibrium, firms ________.

Neither enter nor exit the industry

Who can influence the market price in perfect competition?

No individual buyer or seller.

Which of the following are examples of long-run fixed costs:

None of the above

Which of the following statement(s) are true for a perfectly competitive firm that is seeking to maximize profits?

Price is equal to marginal revenue. The best production choice is at a quantity where price is equal to marginal cost.

Which of the following statements accurately explains why profits for firms in a perfectly competitive industry tend to vanish in the long run?

Prices drop when other perfectly competitive firms see an opportunity to earn profits and enter the market.

When new firms enter a perfectly competitive market, what is the impact on prices?

Prices go down.

Compare a market operating at a quantity lower than equilibrium with the same market operating at the equilibrium quantity. Which of the following statements are true?

The economic surplus is greater at the equilibrium quantity. It is unclear if the consumer surplus is greater or less at the equilibrium quantity. The producer surplus is greater at the equilibrium quantity.

A firm's marginal cost curve above the average variable cost curve is equal to the firm's individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm's individual supply curve if marginal costs increase?

The firm will be willing to supply fewer units at every price level.

In a perfectly competitive market, which of the following is correct?

The firm's demand curve is perfectly elastic.

​Select all the reasons why a decrease in the price of a product would lead to an increase in purchases of the product.​

The income effect says that after the price decline, the consumer could purchase the same goods as before, and still have money left over to purchase more. The substitution effect says that because the product is cheaper relative to other things the consumer purchases, he or she will tend to buy more of the product.

If average total cost is declining, ________.

The marginal cost must be less than average total cost

Which of the following best defines consumer surplus?

The social surplus minus producer surplus

Suppose that a firm produces 10 units of output. Its Average Variable Cost (AVC) = $25, Average Fixed Cost (AFC) = $5, and Marginal Cost (MC) = $30. The firm's ________.

Total cost is $300

________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

Total costs

Who determines how much utility an individual will receive from consuming a good?

Utility is determined by one's own preferences.

Economists believe that:

Utility is personal and subjective.

________ include all of the costs of production that increase with the quantity produced.

Variable costs

Implicit costs are ________.

a foregone opportunity to do something else with your resources

A budget line for Shannon shows her consumption options for two of her favorite goods. An increase in a Shannon's income would lead to:

a parallel shift in her budget line to the right, allowing her to buy more of both goods.

If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have achieved:

allocative efficiency

​Long-run equilibrium in perfectly competitive markets meets what two important conditions?

allocative efficiency productive efficiency

In perfect competition if firms produce where P=MC they ensure ________ because the social benefits of production as measured by the price that people are willing to pay, are in balance with the ________ to society of that production.

allocative efficiency : costs

When a firm is producing the quantity where the price is equal to the marginal cost of producing additional goods, it is known as:

allocative efficiency.

When an owner uses resources they own in a business, that usage should be considered

an implicit cost

Marginal utility can:

be positive, negative, or zero

Temperatures have persisted below freezing levels in Florida throughout the months of December and January. As a result, demand for electricity sharply increased and the price of electricity rose sharply. The price of coal also rose. In these circumstances, any resulting shifts in the supply curves for coal miners and electricity producers ________.

can also be interpreted as shifts of their respective marginal cost curves.

A production function describes how firms

combine capital, labor and other inputs to create products.

Capital is a factor of production that has been produced for use in the production of other goods and services. Which of the following are examples of capital?

computer software airports

Which of the following are assumptions of perfect competition?

consumers have all the relevant information to make rational buying decisions. There are many buyers and sellers. The products are identical.

In a perfectly competitive market, if a firm raises the price of its product from the prevailing market price of $179 to $199, it:

could likely result in a notable loss of sales to competitors.

If you compute marginal utility from the following table, you will see

decreasing total utility and diminishing marginal utility

In microeconomics, the term ________ is synonymous with decreasing returns of scale.

diseconomies of scale

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

The market demand curve in a perfectly competitive industry is:

downward-sloping reflecting the law of demand

The term ________ describes a situation where the quantity of output rises, but the average cost of production falls.

economies of scale

The government wants to make Medicare benefits available to more people, but to achieve this goal, it needs to make cuts in the existing Medicare budget. The two areas where they are considering cuts are nonessential elective surgery and 6-12 month mental health care programs. Applying the concept of diminishing marginal utility, the budget cuts should be made for spending on:

elective surgery due to its lower marginal utility per dollar of expenditure.

What happens in a perfectly competitive industry when economic profit is greater than zero?

existing firms may expand their operations new firms have an incentive to enter the industry there may be pressure on the market price to fall

The term "constant returns to scale" describes a situation where

expanding all inputs does not change the average cost of production.

Interest payments are ________.

explicit costs

Salary payments are ________.

explicit costs

A firm's ________ consist of expenditures that must be made before production starts that typically, over the short run, ________ regardless of the level of production.

fixed costs; do not change,

Except for one point, the short run average cost must always be ________ the long run average cost.

greater than

A perfectly competitive firm should not shut down immediately as long as the price is:

higher than the average variable cost.

Even if it is making economic losses, a perfectly competitive firm should keep operating in the short run so long as the price is:

higher than the average variable cost.

In perfect competition, the demand curve for the firm is:

horizontal

If a perfectly competitive firm is a price taker, then:

it can increase or decrease its output without affecting overall quantity supplied in the market. pressure from competing firms will force acceptance of the prevailing market price.

What are three of factors of production?

labor, capital and natural resources

The short run average cost is never ________ the long run average cost.

less than

In the ________, the perfectly competitive firm will react to profits by ________.

long run : increasing its production

In the ________, the perfectly competitive firm will react to losses by ________ .

long run : reducing production or shutting down

In the ________, the perfectly competitive firm will react to losses by ________.

long run : reducing production or shutting down

Even if it is making economic losses, a perfectly competitive firm should keep operating in the short run so long as the price is not:

lower than the average variable cost.

The term ________ is used to describe the additional cost of producing one more unit.

marginal cost

In economics, the term "shutdown point" refers to the point where the

marginal cost curve crosses the average variable cost curve.

Refer to the table below. In this instance, you can tell this firm is operating in a perfectly competitive market by the fact that its:

marginal revenue is constant.

The step-by-step process of finding the choice with the highest total utility involves a comparison of the:

marginal utility gained and lost from different choices along the budget constraint.

A budget line for Ralph shows his consumption choices between hot dogs (on the vertical axis) and hamburgers (on the horizontal axis). If the price of hamburgers goes up, it:

no affect on Ralph's ability to buy hot dogs but decreases the number of hamburgers he can buy. His budget line therefore rotates inward as if on a hinge from the vertical axis.

Consumer surplus is best described as the extra benefit consumers receive when they ________.

pay less than they would have been willing to pay

Traditional economists, as opposed to behavioral economists, assume that ________.

people think rationally when making decisions

Which of the following economic terms best describes a situation in which the participants have all the knowledge needed to make the best decision?

perfect or complete information

Does this graph show the demand curve for a perfectly competitive firm, a perfectly competitive industry, or neither?

perfectly competitive firm (Elastic Line)

Does this graph show the demand curve for a perfectly competitive firm, a perfectly competitive industry, or neither?

perfectly competitive industry

Refer to the graph below. In the long run:

price will increase until economic profit is zero

Natural resources and labor are two factors of what?

production

What condition is being met when goods are being produced and sold at the lowest possible average cost​?

productive efficiency

The shape of the perceived demand curve for a perfectly competitive firm reflects that firm's ability to:

sell any quantity it wishes at the prevailing market price.

In the ________, if profits are not possible, the perfectly competitive firm will seek out the quantity of output where ________.

short run : losses are smallest

Sunk costs have ________.

should have no effect on output decisions

Economists are able to determine total utility by:

summing up the marginal utilities of each unit consumed.

For a perfectly competitive firm, the marginal cost curve is identical to the firm's ________.

supply curve

If average total cost is increasing, ________.

the marginal cost must be greater than average total cost

Which of the following is considered to be a tell-tale signal that the choice with the highest total utility has been found?

the marginal utility per dollar is the same for both goods

Which of the following are forms of labor?

the skills a worker has acquired the natural ability of a worker

Social surplus is ________.

the sum of consumer surplus and producer surplus

The difference between total utility and marginal utility is that

total utility is cumulate and marginal utility is not. total utility is usually larger than marginal utility.

The typical pattern revealed when consumers choose is that as the quantity consumed of some product rises,

total utility rises, but marginal utility falls.

In a market with an upward sloping supply curve and a downward sloping demand curve, a price floor ________.

transfers some consumer surplus to the producer creates deadweight loss

The marginal product curve is

upward sloping, and then downward sloping

The marginal cost curve is generally ________, because diminishing marginal returns implies that additional units are ________.

upward-sloping; more costly to produce

What concept is defined as the value, or satisfaction, that people derive from the goods and services they consume and the activities they pursue?

utility

The point where the marginal cost curve crosses the average cost curve is called the:

zero-profit point.

Which of these statements best fits how a behavioral economist might view a situation?

​If you find $100 on the street, you will be more likely to spend if freely than you would be to take $100 out of your bank account.

What two lines on a cost curve diagram intersect at the zero-profit point?​

​​The average cost curve and the marginal revenue curve.

Refer to the graph below. Total profit is:

$-44

The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table for total cost, average variable cost, average total cost, and marginal cost. Complete the chart by filling in the missing numbers: What is the average variable cost in A?

$12.50

Refer to the graph below. Total profit is:

$144

Refer to the figure below. Total variable costs are:

$176

The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table for total cost, average variable cost, average total cost, and marginal cost. Complete the chart by filling in the missing numbers: What is the marginal cost in C?

$20.00

Refer to the figure below. Total surplus is:

$210

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:

$220

Refer to the figure below. Consumer surplus is:

$30

If the total surplus in a market with no government intervention is $500 and consumer surplus is $200, producer surplus is

$300

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total variable costs are

$432

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total variable costs are:

$432

Given the data provided in the table below, what will be the marginal revenue for production at quantity (Q) level 4?

$5.00

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

$50

A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital and $200,000 on materials. What was the firm's accounting profit?

$50,000

Refer to the figure below. Total costs are:

$576

Given the data provided in the table below, what will the marginal cost equal for production at quantity (Q) level 6?

$6.00

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:

$720

Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4?

$9.00

Given the data provided in the table below, what will the amount of profit be for production at quantity (Q) level 7?

-$10.00

Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. What is Alex's utility maximizing point?

1 movie, 4 video game rentals

Kim has $23 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility from each of these activities is set out in the table below. What's Kim's total utility maximizing point? That is, what combination of movies and yoga classes will maximize Kim's total utility?

1 movie, 5 yoga classes

If the consumer surplus is $1000 and the producer surplus is $300, social surplus is

1300

Refer to the figure below. Producer surplus is:

180

According to Daniel Kahneman and Amon Tversky, a $1 loss pains us ________ times more than a $1 gain helps us.

2.25

Using the following table the marginal utility of the 4th movie is:

25

Given the data provided in the table below, what will the marginal cost equal for production at quantity (Q) level 4?

4.00

Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4?

9.00