ECON Final

t/f If the government imposes a binding price ceiling in a market, then that market's producer surplus will increase.

false

AVC

(# of variable inputs x cost of one variable input)/output

A binding price ceiling results in A. a shortage of the good or service. B. a surplus of the good or surplus. C. a new equilibrium at the new price.

A

A good with an income elasticity of demand of -0.7 means that A. the good is an inferior good. B. the good is a normal good but not a luxury good. C. the good is a normal good and is also a luxury good. D. demand for the good will increase by 1% if consumer income decreases by 0.4 percent.

A

Diamond consumes two goods, wheat and steak. When the price of steak rises, she consumes less steak. When the price of wheat rises, she consumes more wheat. For Diamond, A. steak is not a Giffen good but wheat is. B. wheat is not a Giffen good but steak is. C. both steak and wheat are normal goods. D. both steak and wheat are Giffen goods.

A

If a firm is operating in a perfectly competitive market, then which of the following is true? A. Both buyers and sellers are price takers. B. Both buyers and sellers are price makers. C. Buyers are price makers and sellers are price takers. D. Buyers are price takers and sellers are price makers.

A

In a perfectly compeititve market, A. buyers and sellers must accept the price as given. B. a large block of either buyers or sellers can affect the market price. C. any single buyer or seller can affect the market price. D. the government sets the price.

A

Refer to the above graphic. When comparing bundle D to bundle E, the consumer A. prefers bundle E because it contains more cake with the same amount of muffins. B. is indifferent between the two bundles. C. prefers bundle D because it contains more cake. D. In order to compare bundle E to bundle C, we must know the prices of cake and muffins.

A

The concept suggesting that society is getting the greatest benefits from its scarce resources is referred to as A. Efficiency B. Equality C. Opportunity cost

A

Tomato sauce and spaghe� noodles are complementary goods. A decrease in the price of tomatoes will A. Increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles B. Increase consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles C. Decrease consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles D. Decrease consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles

A

Which of the following is not an argument made by critics of advertising? A. Advertising promotes economies of scale. B. Advertising manipulates people's tastes. C. Advertising impedes competition on. D. Advertising increases the perception of product differentiation.

A

Define a normaitve economic statement and provide an example.

A normal economic statement presents a belief about how things ought to be. These statements are difficult, if not impossible, to objectively test. Example: Increasing the minimum wage rate is a more pressing problem than combatting inflation.

Define a posiitve economic statement and provide an example.

A positive economic statement describes how things are, not how they should be. A positive economic statement can be tested. Example: An increase in the minimum wage to $15 per hour by 2032 would result in an estimated 920,000 additional unemployed workers (Congressional Budget Office)

Explain the difference between accounting and economic profit.

Accounting profit = Revenue minus explicit costs Economic profit = Revenue minus explicit costs minus implicit costs Explicit Costs are costs which typically have a monetary outlay. Implicit Costs can be typically thought of as opportunity costs.

Define the concept of diminishing marginal uitility

As each additional unit of a good is consumed, the total utility (satisfaction) increases. However, the additional benefit from consuming each additional unit decreases.

Explain (either verbally or graphically) what happens to a perfectly competitive industry and a firm in that industry when firms in the industry earn positive economic profits.

At market price P1, the individual firm is making an economic profit. When potential business owners see that all individual firms (in true perfect competition, all firms are assumed to be alike) are making economic profits, new firms will enter the industry. This will shift the supply curve to the right (Supply 2) and the market price will fall to P2 (the breakeven point where no individual firm will make an economic profit or suffer an economic loss).

Explain the difference between average total cost and marginal cost. Provide the formulas and verbally explain what each term means.

Average Total Cost = Total Cost/Output Marginal Cost = ΔTotal Cost/ΔOutput Average total cost provides the cost per unit of production for all units of production. For example, if the average total cost is $3.00 and 1,000 units are produced, then, on average, each unit costs $3.00 to produce and the total cost of producing those 1,000 is $3,000. Marginal cost provides the cost of the last unit produced in the production range. For example, if marginal cost is $4.00 for increasing production from 999 units to 1,000 units, then the 1,000th unit costs $4.00 to produce.

"Left" gloves and "right" gloves provide a good example of A. perfect substitutes. B. perfect complements. C. negaitvely sloped indifference curves. D. posiitvely sloped indifference curves.

B

A change in which of the following will NOT shift the demand curve for hamburgers? A. the price of hotdogs B. the price of hamburgers C. the price of hamburger buns D. the income of hamburger customers

B

A firm that produces and sells furniture gets to choose A. The size of its factories in the short run but not in the long run. B. How many workers to hire in both the short run and the long run. C. Which short-run average total cost curve to sue in both the short run and the long run. D. The number of machines it uses in the short run but not in the long run.

B

Cigaretes have a relatively low price elasticity of demand (0.4). This suggests that A. increasing the price by placing a tax on the product would affect the quantity demanded of cigaretes by a great amount. B. increasing the price by placing a tax on the product would not affect the quantity demanded of cigarettes by a great amount. C. cigaretes have a large number of close substitutes. D. cigaretes would be viewed as a luxury by those who consume cigaretes.

B

Defenders of advertising argue that in some markets advertising may A. provide information to customers about products, including prices and seller locations. B. manipulate people's tastes. C. increase the perception of product differentiation. D. reduce the deadweight loss associated with monopolistic competition.

B

If the price elasticity of demand is -1.23, then an increase in the price of the product will A. result in an increase in total revenue. B. result in a decrease in total revenue. C. will result in no change in total revenue.

B

Kendra, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Kendra has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 8 gallons of ice cream and 5 paperback novels? A. Kendra, Tara, and Chelsea B. Kendra only C. Tara and Chelsea but not Kendra D. None of the women

B

Refer to the above graphic. When comparing bundle E to bundle C, the consumer A. prefers bundle E because it contains more cake. B. is indifferent between the two bundles. C. prefers bundle C because it contains more muffins. D. In order to compare bundle E to bundle C, we must know the prices of cake and muffins.

B

The concept of making a decision based on one additional unit is known as A. The concept of opportunity cost B. The concept of rational people thinking at the margin C. The concept of markets usually being a good way to organize economic activity D. The concept of facing a trade-of

B

The intercept of the budget constraint is calculated as A. The price of the good divided by the level of income. B. The level of income divided by the price of the good. C. The level of income divided by the Marginal Rate of Substituiton. D. The Marginal Rate of Subsittuiton divided by the price of the good.

B

When the price falls from P2 to P1, producer surplus A. Decreases by an amount equal to C B. Decreases by an amount equal to A+B C. Decreases by an amount equal to A+C D. Increases by an amount equal to A+B

B

Which of the following is not an example of a barrier to entry? A. Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world B. An entrepreneur opens a popular new hair studio C. A pharmaceutical company obtains a patent for a specific allergy medication D. A musician obtains a copyright for an original song

B

A drought in France destroys many plus causing the prices of both plums and plum jam to rise. As a result, the consumer surplus in the market for plums A. decreases, and the consumer surplus in the market for red wine increases. B. Increases, and the consumer surplus in the market for red wine decreases. C. Decreases, and the consumer surplus in the market for plum jam decreases. D. Increases, and the consumer surplus in the market for red wine increases

C

Corey prefers ketchup to mustard. He prefers mayonnaise to relish, but he is indifferent between mustard and relish. Which of the following statements can we say for sure? A. Corey prefers ketchup to mayonnaise. B. Corey prefers relish to ketchup. C. Corey prefers mayonnaise to mustard. D. Corey prefers mustard to mayonnaise.

C

If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of demand for its product, the firm will A. eventually have to reduce price to remain competitive. B. increase the welfare of society. C. be able to increase its markup over marginal cost. D. reduce its average total cost.

C

If a firm is operating in a monopoly market, then which of the following is true? A. Both buyers and the seller are price makers. B. Both buyers and the seller are price takers. C. Buyers are price takers and the seller is a price makers. D. Buyers are price makers and the seller is a price takers.

C

If a good is classified as a normal good but not a luxury good A. then the quantity demanded of the good will increase by more than one percent if income increases by one percent. B. then the quantity demanded of the good will decrease if income increases by one percent. C. then the quantity demanded of the good will increase by less than one percent if income increases by one percent.

C

In monopolistically competitive markets, free entry and exit (with no activity by the firm with regard to product innovation or advertising) suggests that A. the market structure will be eventually characterized by perfect competition in the long run. B. some firms will be able to earn economic profits in the long run. C. all firms earn zero economic profits in the long run. D. some firms will be forced to incur economic losses in the long run.

C

Kendra, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $4 per gallon, and paperback novels cost $6 each. Kendra has a budget of $80, Tara has a budget of $65, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 8 gallons of ice cream and 5 paperback novels? A. Kendra, Tara, and Chelsea B. Kendra only C. Tara and Kendra but not Chelsea D. None of the women

C

Marge buys a pizza for $10 and a soft drink for $2. She has an income of $200 that she has allocated to the purchase of pizza and soft drinks. Her budget constraint will experience a parallel outward shift if A. the price of pizza falls to $5 B. the price of the soft drink rises to $3 C. her income allocated to the two products increases to $225 D. her income allocated to the two products falls to $175.

C

On a graph we draw a consumer's budget constraint, measuring the number of pineapples on the vertical axis and the number of pencils on the horizontal axis. If the slope of the budget constraint is -1/7, then (choose all that apply)

C

Refer to the above graphic. When comparing bundle E to bundle B, the consumer A. prefers bundle E because it contains more cake. B. is indifferent between the two bundles. C. prefers bundle B because it contains more muffins and the same amount of cake. D. In order to compare bundle E to bundle B, we must know the prices of cake and muffins.

C

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which A. Total revenue is equal to variable cost. B. Total revenue is equal to fixed cost. C. Profit is maximized. D. Total revenue is equal to total cost.

C

The price elasticity of demand measures A. the percentage change in price that results from a one percent change in quantity demanded. B. the change in quantity demanded resulting from an increase in the supply of the product. C. the percentage change in the quantity demanded that results from a one percent change in price. D. the change in price resulting from an increase in the cost of inputs to produce the product.

C

The rate at which a consumer is willing to exchange one good for another while maintaining a constant level of saitsfaction is called the A. relative expenditure ratio. B. value of marginal product. C. marginal rate of substitution. D. relative price ratio.

C

When the price is P1, consumer surplus is A. A B. A+B C. A+B+C D. A+B+C+D

C

Which of the following determines a basis for trade? A. Absolute advantage B. Demand advantage C. Comparative advantage D. Supply advantage

C

Which of the following will cause an increase in producer surplus for a good? A. The imposition of a binding price ceiling in the market B. Buyers expect the price of the good to be lower next month C. Income increases and buyers consider the good to be inferior D. The price of a substitute increases

D

Define consumer tax incidence

Consumer tax incidence is the portion of the excise tax that falls upon the consumers to pay. It is defined as the difference between the new price that consumers must pay for the good minus the equilibrium price.

A decrease in the price of a good or service will cause A. a decrease in the quanitty demanded of the good or service. B. an increase in the demand for the good or service. C. a decrease in the demand for the good or service. D. result in an increase in the quantity demanded for the good or service.

D

A good with a more elastic price elasticity of demand suggests that A. quantity demanded is less sensitive to a change in price than a good with an inelastic demand. B. the good is a normal good. C. the good is an inferior good. D. quantity demanded is more sensitive to a change in price than a good with an inelastic demand

D

A nation will typically import those goods in which A. the nation has an absolute advantage. B. the nation has a comparative advantage. C. other nations have an absolute advantage. D. other nations have a comparative advantage.

D

At two points on the same indifference curve, A. the consumer has the same income. B. the consumer has the same marginal rate of substitution. C. the bundles of goods cost the consumer the same amount. D. the bundles of goods yield the consumer the same satisfaction.

D

For a firm operating in a competitive market, marginal revenue equals A. Average revenue, which is greater than the price for all levels of output. B. Average revenue, the price, and marginal cost for all levels of output. C. Marginal cost, which is greater than average revenue for all levels of output. D. Average revenue and the price for all levels of output.

D

Governments may intervene in a market economy in order to A. protect property rights B. correct a market failure due to externalities C. achieve a more equal distribution of income D. all of the above

D

If the distribution of water is a natural monopoly, then A. A single firm cannot serve the market at the lowest possible average total cost. B. Allowing for competition among different firms in the water distribution industry is efficient. C. Average cost increases as the quantity of water produced increases. D. Multiple firms would likely each have to pay large fixed costs to develop their own network of pipes.

D

Kendra, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $6 per gallon, and paperback novels cost $8 each. Kendra has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 8 gallons of ice cream and 5 paperback novels? A. Kendra, Tara, and Chelsea B. Kendra only C. Tara and Chelsea but not Kendra D. None of the women

D

Marginal cost is defined as A. The additional cost that is incurred as one more unit of a variable input is employed. B. The additional cost that is incurred as one more unit of a fixed input is employed. C. The additional cost that is incurred as one more unit of total cost is expended. D. The additional cost that is incurred as one more unit of output is produced.

D

On a graph we draw a consumer's budget constraint, measuring the number of pineapples on the horizontal axis and the number of pencils on the vertical axis. If the slope of the budget constraint is -6, then A. a pencil costs six times as much as a pineapple. B. the opportunity cost of a pineapple is one-sixth of a pencil. C. the opportunity cost of a pencil is six pineapples. D. a pineapple costs six times as much as a pencil.

D

Profit maximizing firms enter a competitive market when existing firms in that market have A. Total revenues that exceed fixed costs. B. Total revenues that exceed total variable costs. C. Average total costs that exceed average revenue. D. Average total costs that are less than market price.

D

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average A. Revenue B. Fixed cost. C. Variable cost. D. Total cost.

D

The government's imposition of price controls on gasoline in the 1970s is an example of A. a price floor. B. a tax on the producers of gasoline. C. a tax on the consumers of gasoline. D. a price ceiling.

D

The principle that "people face tradeoffs" applies to A. individuals B. families C. societies D. all of the above

D

Two goods with a cross-price elasticity of demand of 1.0 means that A. the two goods are complements. B. the goods have demands that can be classified as elastic. C. the goods have demands that can be classified as inelastic. D. the two goods are substitutes for one another.

D

Explain economies of scale and diseconomies of scale.

Economies of scale are defined as cost advantages (expressed as average cost) when a firm is increasing production. In other words, average total cost declines as production increases. Diseconomies of scale are defined as cost disadvantages when a firm is increasing production (average total cost or cost per unit of production increases as production is increased).

Verbally explain the decision that the owner or manager of the firm would make if the price of the product dropped below P1 and why that decision would be made.

If the firm's price falls below PSD, the firm will shut down operations in the short run because it cannot cover its variable costs of production.

Explain (either verbally or graphically) why a profit maximizing monopolist generates a deadweight loss as compared to a firm operating in a perfectly competitive environment.

If the monopolist were not maximizing profit (or if the monopolist were practicing perfect price discrimination), the monopolist would produce at the point where demand equals marginal cost (quantity Q2). However, if the monopolist is maximizing its profit and is not practicing perfect price discrimination, then the monopolist would produce where marginal revenue equals marginal cost or at point Q1. This reduction in quantity from Q2 to Q1 would result in a loss of welfare to society that we typically refer to as deadweight loss.

Economic theory tells us that, in the long run, a firm in a monopolistically competitive industry will earn zero economic profits. Explain the factors behind this assumption and describe strategies that a business owner could take to prevent this from happening (in other words, earn positive economic profits in the long run).

In the long run, the fact that there are no barriers to entry into or exit from the industry will allow new entrepreneurs to enter the industry. These new entries would decrease the demand curve for the business owner who is earning economic profits to the point where the average total cost curve is tangent to the demand curve (also the average revenue curve) at the point of profit maximizing production (where marginal cost equals marginal revenue). At this point, average revenue would equal average total cost and the level of economic profit would be zero. This situation could be avoided or at least forestalled by utilizing (at least) two strategies. The business owner could either increase the amount of advertising or make the current level of advertising more effective. Second, the business owner could innovate (positively change) the product so that demand would either increase or at the very least stay relatively constant even with new entrants into the market.

Describe the difference in long run and short run costs and provide an example that illustrates this difference. Be complete in your explanations.

In the short run, costs are divided between fixed and variable costs. Fixed costs do not change as production changes and variable costs do change as production changes. In the long run, given that the element of time has increased, all costs become variable. An example of this is a farmer that wants to increased the fixed input of land to increase production. It is very difficult, if not impossible, to make a purchase of 1,000 acres of land within a day or so of the decision being made. So, if the farmer has 500 acres of land to begin with and it is planting time (for example, March), then the farmer is going to have to stock with the 500 acres. But given enough time (a year or so), the farmer will be able to purchase the land and the land becomes a variable input.

Refer to the above graph. Suppose the consumer's income is $90 and Budget Constraint A applies. What is the price of a light bulb? (Show your work for credit)

Income ÷ Intercept = $90 income ÷ 10 light bulbs = $9 per light bulb

Define the concept of marginal utility

Marginal utility is the additional utility (satisfaction) that you receive by consuming one more unit of a good.

-Perfectly competitive firm -Monopoly -Monopolistically competitive firm

P Many firms in the industry • Free entry and exit of firms • Homogeneous product (same product) M One firm in the industry There are barriers to entry and perhaps exit Unique product MC Many firms in the industry • Free entry and exit of firms • Differentiated product that causes a downward sloping demand curve

ATC

TC/Output

TC=

TVC + TFC

Explain the meaning of the cross-price elasticity of demand.

The cross-price elasticity of demand provides the percentage increase in the quantity demanded of one good if the price of another good increases by one percent.

Define an indifference curve. Be sure to include the properites of indifference curves in your definiiton.

The indifference curve represents the different bundles of two good that provide the same level of satisfaction or utility. The properties of indifference curves include: 1. Slope downward 2. They do not cross 3. Higher indifference curves yield higher levels of utility 4. Convex to the origin

Refer to the above graph. Suppose point A was Kevin's optimum last week, and point B is Kevin's optimum this week. What happened between last week and this week?

The price of shirts fell and the price of sweaters remained the same.

Why is the typical produciton possibiliites froniter bowed?

The typical production possibilities frontier is bowed because of the specialization of resources (labor, land, capital, etc.)

Classify these goods according to the cross-price elasticity of demand classifications. How can you tell that the good should be classified in this way? Be sure to explain the answer using both the graph and your calculations.

These good should be classified as substitutes because the cross-price elasticity of demand is positive and the demand for ribeye steak decreases as the price for sirloin steak declines (the quantity demanded of sirloin steak increases). The consumer would substitute sirloin steak for ribeye steak when the price of sirloin steak decreases.

t/f For any given quantity, the price on a demand curve represents the marginal buyer's willingness to pay

true

Which input is the variable input?

workers

MC

ΔTC/ΔOutput