ECON Final Exam study guide

B) less of B and more of A.

1. Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa = 8 and MUb/Pb= 6. Ben should purchase A) less of A and more of B. B) less of B and more of A. C) more of both A and B. D) less of both A and B.

D) it is encountering constant returns to scale.

15. If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then A) the firm's long-run ATC curve will be rising. B) it is encountering diseconomies of scale. C) it is encountering economies of scale. D) it is encountering constant returns to scale.

B) Tony to feel good about his performance, and Stacey to feel good about hers.

16. Tony ran a marathon in 4 hours; his performance last year on the same course was 4.5 hours. Stacey ran the same marathon in 4 hours; her previous time was 4.4 hours. According to behavioral economists, and based solely on the information given, we would expect A) Tony to feel bad about his performance, and Stacey to feel good about hers. B) Tony to feel good about his performance, and Stacey to feel good about hers. C) Tony to feel bad about his performance, and Stacey to feel bad about hers. D) Tony to feel good about his performance, and Stacey to feel bad about hers.

C) fifth worker

17. Answer the question on the basis of the following output data for a firm. Assume that the amounts of all non-labor resources are fixed. Number of Workers 0 1 2 3 4 5 6 Units of Output 0 25 60 103 160 210 240 Diminishing marginal returns become evident with the addition of the A) third worker. B) second worker. C) fifth worker. D) fourth worker.

D) should buy more B and less A.

18. Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $6 and $3, respectively. The marginal utility of the last units of A and B are 30 and 18, respectively. These data suggest that Ms. Thomson A) has preferences that are at odds with the principle of diminishing marginal utility. B) considers A and B to be complementary goods. C) should buy more A and less B. D) should buy more B and less A.

C) 0.43

19. Suppose that as the price of Y falls from $15 to $12, the quantity of Y demanded increases from 200 to 220. Then the absolute value of the price elasticity (using the midpoint formula) is approximately A) 6.67 B) 0.5 C) 0.43 D) 2.33

D) rises from $4 to $5

2. Answer the question based on the following table, which shows a demand schedule. Price Quantity. Demanded $5 10 4 13 3 15 2 19 1 25 Total revenues will decrease if price A) rises from $1 to $2. B) rises from $2 to $3. C) rises from $3 to $4. D) rises from $4 to $5. Total revenue is found by multiplying price by the quantity demanded at that price.

D) 2 of Land 3 of M

21. Answer the question on the basis of the following total utility data for products L and M. Assume that the prices of L and M are $3 and $4, respectively, and that the consumer's income is $18 How many units of the two products will the rational consumer purchase? A) 3 of L and none of M B) 4 of L and 2 of M C) 3 of Land 5 of M D) 2 of Land 3 of M

A. If the price of raw coffee beans (an input to production) decreases, the supply curve for Rêve coffee would shift to the right (out). So other things equal, we would expect equilibrium price to decrease and equilibrium quantity to increase. B. Coffee consumers would be more inclined to purchase Rêve coffee, thereby increasing both their attention span and demand for Rêve coffee. This increase in demand (from D to D') will lead to an increase in both the equilibrium quantity and price. C. Starbucks and Rêve coffee are substitutes so we can expect that an increase in the price of one (Starbucks) will increase demand for the other (Rêve). Also, this change in production technology will be more costly and shift the supply curve in. Thus, equilibrium price will increase, but quantity may increase, decrease, or remain unchanged depending on the relative size of the change in demand and supply.

28. (15 points) Consider the market for Rêve coffee in Louisiana. For each of the following situations, state what happens to the equilibrium price and equilibrium quantity and why. Answer each question using a supply and demand diagram. a. The price of raw coffee beans decreases. b. A new study shows that switching from mass-produced coffee beans to Rêve coffee beans increases your attention span. c. The price of Starbucks increases. Also, Rêve has decided to lean into the artisan coffee shop movement and is replacing some of their roasting equipment with vintage machines that require more manual interaction and operation to produce the perfectly roasted bean.

C) five worker(s) is/are hired.

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all non-labor resources are fixed. Average product is at a maximum when A) four worker(s) is/are hired. B) three worker(s) is/are hired. C) five worker(s) is/are hired. D) six worker(s) is/are hired.

C)2 units of J and 3 units of K.

Answer the question on the basis of the following two schedules, which show the amounts of additional satisfaction (marginal utility) that a consumer would get from successive quantities of products J and K. If the consumer has money income of $28 and the prices of J and K are $8 and $4 respectively, the consumer will maximize her utility by purchasing A)1 units of J and 5 units of K. B)3 units of J and 1 units of K. C)2 units of J and 3 units of K. D)0 units of J and 6 units of K.

D) negative, and therefore X is an inferior good.

Assume that a 9 percent increase in income across the economy produces a 6 percent decrease in the quantity demanded of good X. The coefficient of income elasticity of demand is A) positive, and therefore X is a normal good. B) negative, and therefore X is a normal good. C) positive, and therefore X is an inferior good. D) negative, and therefore X is an inferior good.

A) $20,000

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total costs are. A) $20,000. B) $15,000. C) $50. D) $5,000.

A. Heuristics are the brain's mental shortcuts that have evolved over time. To conserve energy, the brain relies on low- energy mental shortcuts, or heuristics, that will usually produce the correct decision or answer. They work well in most situations, but sometimes result in systematic errors. B. Prospect theory helps to explain many consumer behaviors including how people cope with negative possibilities. Framing, anchoring, the endowment effect, mental accounting, and the status quo bias are all explained by prospect theory. [1] People judge good things and bad things in relative terms, as gains and losses relative to their current situation (that is, the status quo). [2] People experience both diminishing marginal utility for gains (meaning that each successive unit of gain feels good, but not as good as the previous unit) as well as diminishing marginal disutility for losses (meaning that each successive unit of loss hurts, but less painfully than the previous unit). [3] People experience loss aversion, meaning that for losses and gains near the status quo, losses are felt much more intensely than gains, in fact, about 2.5 times more intensely. Thus, for instance, the pain experienced by an investor who loses one dollar from his status quo level of wealth will be about 2.5 times more intense than the pleasure he would have felt if he had gained one dollar relative to his status quo level of wealth. C. Framing effects occur when a change in context (frame) causes people to react differently to a particular piece of information or to an otherwise identical situation. For instance, what if you were just told that you were getting a 7 percent increase in wages; you would be very happy and view that as a gain. But what if later, you learned that the others at work were getting 11 percent increases in their wages; now you view your 7 percent increase as a loss. Nothing has changed except the "frame" that you are using.

Behavioral economics discussion questions: a. What are heuristics? How is this related to our decision-making processes? b. Summarize prospect theory including the three facts about people that form its basis. c. How do framing effects influence perceptions of gains or losses? Give an example based on a wage increase of 7 percent for a worker and a wage increase of 11 percent for coworkers.

A. Yes, the graph exhibits increasing opportunity cost. For example, from choice 1 to choice 2, we have to give up 10 units of crawfish to obtain 20 units of rice. This means the opportunity cost is 1 rice = 0.5 crawfish. From choice 2 to choice 3, the opportunity cost is 1 rice = 1 crawfish. From choice 3 to choice 4, the opportunity cost is 1 rice = 1.5 crawfish. From choice 4 to choice 5, the opportunity cost is 1 rice = 2 crawfish. Thus we see that the opportunity cost of 1 unit of rice is increasing. Working through the same logic in reverse we would see that the opportunity cost of 1 unit of crawfish is increasing as well. B. Going from 20 to 60 bushels of rice, the number of units of crawfish (e.g. "sacks") that we can produce decreases from 90 to 40. Thus the opportunity cost is 50 units of crawfish. C. Part c shown in red (could be added to primary graph rather than draw a new graph). If the country is producing 70 sacks of crawfish and 25 bushels of rice, it is operating inside the PPF. This means either the resources are not fully employed or are not being used efficiently. D. With the discovery of this new technology, the end of the PPF on the rice axis will shift out. The end on the crawfish axis will not move. That is, for each combination with the same number of units of crawfish as before, the amount of rice production can increase.

Consider an economy that only produces crawfish and rice. The production possibilities are: Crawfish. Rice Choice 1. 100. 0 Choice 2. 90. 20 Choice 3. 70. 40 Choice 4. 40. 60 Choice 5. 0. 80 a. Graph the production possibilities frontier for this economy. Does it exhibit increasing opportunity cost? Explain. b. What is the opportunity cost of going from 20 to 60 bushels of rice? Explain. c. Show in your graph and explain the economic implications if this country is observed producing 70 sacks of crawfish and 25 bushels of rice. d. Using the production possibilities frontier, graph and discuss the impact of the discovery of a new technology that allows workers to harvest rice faster.

This problem describes a public good: street performing. Since street performers cannot exclude people in the area from enjoying the performance (unlike a gated venue that can sell tickets), the good is nonexcludable. Similarly, one person hearing or seeing the street performance does not prevent another person so it is a nonrival good. For public goods, we generally sum the value of all consumers, so the total value would be $500. But, because it is nonexcludable we can expect to get a free rider problem where some of the people passing by, or hearing the performance in the area will enjoy the performance without paying. Therefore, we can expect the street performer to earn less than $500.

Consider the demand for street performers in downtown Lafayette. On a Saturday night, there are 500 visitors who go to restaurants and bars in the downtown area and each values hearing street music to add to the atmosphere at $1 per night. If one street performer shows up to perform, how much do you expect they will earn?

C) $309,000

Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 9. The following is cost information for the Creamy Crisp Donut Company. Creamy Crisp's total economic costs are A) $229,000 B) $303,000 C) $309,000 D) $420,000

C) $237,000

Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's accounting profit is A) $111,000. B) $231,000. C) $237,000. D) $309,000.

A) $111,000

Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's economic profit is A) $111,000 B) $183,000 C) $237,000 D) $309,000

D) $126,000.

Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's implicit costs, including a normal profit, are A) $86,000. B) $120,000. C) $108,000. D) $126,000.

A) total cost is $1,900

Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Suppose that, when producing 50 units of output, a firm's AVC is $30, its AFC is $8, and its MC is $40. This firm's A) total cost is $1,900. B) total cost is $40. C) ATC is $48. D) ATC is $78.

C) the marginal utility of C is twice that of D.

Frank is purchasing products C and D in utility-maximizing amounts. If the price of C is $4 and the price of D is $2, then A) the marginal utility of D is twice that of C. B) the marginal utility of D is the same as that of C. C) the marginal utility of C is twice that of D. D) the relationship between the marginal utility of C and D cannot be determined.

D) increase the quantity of X demanded by less than 4 percent.

If the demand for product X is inelastic, a 4 percent decrease in the price of X will A) decrease the quantity of X demanded by more than 4 percent. B) decrease the quantity of X demanded by less than 4 percent. C) increase the quantity of X demanded by more than 4 percent. D) increase the quantity of X demanded by less than 4 percent.

C) increase the quantity demanded by about 50 percent.

If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.60 will A) increase the quantity demanded by about 5 percent. B) decrease the quantity demanded by about 50 percent. C) increase the quantity demanded by about 50 percent. D) increase the quantity demanded by about 65 percent.

A. To maximize utility, you should selecting a combination of goods and services where all of the budget is spent and the marginal utility divided by price is the same for all goods. Marginal utility can be calculated first to assist in calculating the ratio of marginal utility to price for each level of consumption (the last two columns in the table above). Working from low quantities to high quantities, select the product that offers the biggest MU/P (i.e. bang for the buck), adding additional items until all $36 is exhausted. The first item would be one bag of licorice ($33 of budget remains). Next, either a second bag of licorice or the first boat ride could be selected. Since the remaining budget can cover both, both would be purchased ($24 remains). The next item chosen would be the third bag of licorice ($21 remains) followed by two more boat rides ($9 remain). The next items to add would be the fourth bag of licorice and fourth boat ride, which exhausts the budget. This combination of 4 bags of licorice and 4 boat rides is also the only combination where the ratio of marginal utility to price is equal. B. Following a similar procedure to part a, you can see that the order of product selection would be as follows: bag 1 of licorice ($33 remain), bag 2 of licorice ($30 remain), bag 3 of licorice ($27 remain), boat ride 1 ($18 remain), bag 4 of licorice ($15 remain), boat ride 2 ($4 remain). While the next boat ride would offer the biggest bang for the buck, it is unattainable with the remaining budget. Since you are trying to enjoy your time in Amsterdam to the fullest and had set aside $36 for the day, you are left with only the choice to purchase a 5th bag of licorice. While the ratio of marginal utility to price is not equal across commodities, the combination of 5 bags of licorice and 2 boat rides offers the closet match to this rule that is attainable within the budget. Because of the higher price of boat rides, you have substituted toward the cheaper alternative of licorice relative to the expected prices in part a.

Imagine a future after COVID-19 and you are eager to travel and explore the world. You are planning a trip to Europe and will spend a day in Amsterdam. You've set up a budget and will spend $36 on licorice and/or boat rides. A bag of licorice costs $3 and a boat ride costs $6.a. Given the following table of total utility, how should you allocate your money between licorice and boat rides? State why it makes sense to spend your $36 that way. b. After your careful planning, you arrive in Amsterdam to find that boat rides now cost $9 due to social distancing rules, which lower the number of tickets that can be sold. How does that change your choice of the quantity of licorice and boat rides to purchase? c. Graph what we know of the demand curve for boat rides based on your work in parts a and b.

B) Mrs. Arnold should spend less on soda and more on pretzels.

Mrs. Arnold is spending all her money income by buying bottles of soda and bags of pretzels in such amounts that the marginal utility of the last bottle is 80 utils and the marginal utility of the last bag is 70 utils. The prices of soda and pretzels are $0.8 per bottle and $0.6 per bag, respectively. It can be concluded that A) the two commodities are substitute goods. B) Mrs. Arnold should spend less on soda and more on pretzels. C) Mrs. Arnold should spend less on pretzels and more on soda. D) Mrs. Arnold is buying soda and pretzels in the utility-maximizing amounts.

B) Parker would feel worse off.

Parker's shares of stock in ACME Corporation lost $10 in value, but his shares in XYZ, Inc. gained $18. According to behavioral economics research, how would Parker feel as a result of these changes? A) Parker would feel better off. B) Parker would feel worse off. C) Parker would feel about the same. D) Behavioral economics research suggest that the intensity of losses versus gains follows no measurable pattern.

C) 1.2

Refer to the diagram and assume a single good. If the price of the good decreased from $6.30 to $5.70 along D1, the price elasticity of demand along this portion of the demand curve would be A) 0.83 B) 1.25 C) 1.2 D) 0.8

B) only if she is offered more than $18.

Rosa received a corgi pillow as a raffle prize; she would have been willing to pay $18 to buy it herself. Based on the endowment effect, we would expect Rosa to be willing to sell the pillow A) for some amount less than $18. B) only if she is offered more than $18. C) for the $18 she would have been willing to pay for the pillow. D) under no circumstances whatsoever.

B) less than $12/unit.

Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $12/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be A) $12/unit. B) less than $12/unit. C) greater than $24/unit. D) greater than $12/unit but less than $24/unit.

B) Ryan to estimate a price lower than what Rita would estimate.

Suppose Ryan and Rita were randomly shown the numbers 25 and 67, respectively, and then asked to estimate the price of an item about which they have relatively limited knowledge. According to findings from behavioral economics, we would expect A) Ryan to estimate a price higher than what Rita would estimate. B) Ryan to estimate a price lower than what Rita would estimate. C) Ryan to estimate a price about the same as what Rita would estimate. D) the randomly shown numbers to have no influence on their estimates.

C) negative, and therefore these goods are complements.

Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent decrease in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is A) negative, and therefore these goods are substitutes. B) positive, and therefore these goods are substitutes. C) negative, and therefore these goods are complements. D) positive, and therefore these goods are complements.

A) a 5 percent increase in income will increase the purchase of toys by 6 percent.

Suppose the income elasticity of demand for toys is +1.2. This means that A) a 5 percent increase in income will increase the purchase of toys by 6 percent. B) a 5 percent increase in income will increase the purchase of toys by 4.17 percent. C) a 5 percent increase in income will decrease the purchase of toys by 4.17 percent. D) toys are an inferior good.

In the morning, the fixed price of $2 per hour is too low and fails to clear the market and there is excess demand. At this price, there are more people willing to pay for parking in the morning than there are spots (i.e. quantity demanded exceeds quantity supplied). Therefore, students must wait for spaces. During afternoon hours, parking is priced too high and fewer students are willing to pay for parking than there are parking spaces (i.e. quantity supplied exceeds quantity demanded). Therefore, there are numerous empty parking spots. As a solution to this problem, you should propose that the morning price be raised and (possibly) the afternoon price be lowered so that demand equals supply in each period.

Suppose there are 1,000 parking spaces at a college where most students drive to campus. All students pay $2 an hour to park. Between 9am and noon there are always students waiting in parking lots for spots to open up. However, between noon and 5pm there are always empty spaces to park. Using words and supply and demand diagrams, explain the parking situation for these two different times of day. (Draw separate diagrams for each.) The Director of the Office of Transportation Services has asked you to help him solve this problem. What would you suggest?

C) 2.27

Suppose you are given the following data on demand for a product. The price elasticity of demand (based on the midpoint formula) when price decreases from $10 to $8 is Price. Quantity Demanded $ 10 30 9 40 8 50 7 60 6. 70 A) 0.44 B) 0.25 C) 2.27 D) 1.2

A. 11/9 B. The price elasticity shows the firm how a change in price affects quantity, which together tell us about revenue. In this case, since price elasticity is greater than 1, raising price causes revenue to fall (because quantity decrease is larger than the price increase), that is, the revenue will decrease from $62,500 (=$250*250) to $60,000 (=$300*200). So they should not change the price C. The income elasticity of demand measures the percentage change in quantity purchased in response to a one- percent change in income. When the income elasticity of demand is greater than 1, the good is a luxury. Since the Rosebud motel is a luxury, if incomes double, that is, there is a 100% increase in income, demand will increase by more than 100%. Thus at the price of $100 and $200, the quantities demanded would be more than 620 and 580, respectively. D. If there are only two stamps of this type known in existence, Roland must expect the price of one stamp to increase to more than $20,000. We can think about this in terms of price elasticity using the formula in part a. First, consider what the elasticity would be if prices rose to $20,000: =1 So, a price elasticity of 1 would leave the guest with the same value of goods. However, to make this a smart move, the guest should end up with more value. Test a larger price than $20,000 (so that the value of one stamp is even greater than the sum of two) such as $30,000. In this case we see the elasticity ends up lower than one. It turns out that for any elasticity less than 1, the guest is better off if only one stamp exists than two. This is analogous to saying demand is inelastic.

The Rosebud Motel is planning their holiday pricing and has just learned that the nearby town of Elm Glen is hosting the East-Central Regional Christmas Show, the largest holiday showcase in the region. Co-owners Stevie, Johnny, and Roland are wondering if they should raise prices to increase revenue for the holiday season. Johnny's assessment of the monthly demand schedule during a busy season is: a. Johnny is recommending raising room prices from $250 to $300. What is the price elasticity of demand that the motel faces? 200 (show your calculations) b. Should they put the price change into effect? Show what happens to revenue. c. Because of its reputation for great hospitality, Rosebud Motel is a luxury good. Tell what might happen to demand at prices of $100 and $200 if incomes double. (Be specific!) d. One hotel guest is attending the Christmas Show because a rare stamp will be available for auction. The guest is telling Stevie that she had bought a rare stamp (the first USPS printing of a Santa stamp) for $10,000 a few years ago and the only other stamp from that printing will be at the auction and could be purchased for $10,000. Roland overhears the guest's story and suggests if she gets the second stamp she should burn it. What is Roland thinking?

B) $183,000

The following is cost information for the Creamy Crisp Donut Company that you will use for questions 7-12. Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 7. Creamy Crisp's explicit costs are A) $111,000 B) $183,000 C) $189,000 D) $309,000