ECON Midterm
Implicit costs are
"payments" for self employed resources
TP
total quantity produced
economic profit
total revenue less economic costs
If price is cut and demand is inelastic then
total revenue will fall
complementary good
used together with another good
Price elasticity is higher
when close substitutes are available
MC>ATC
ATC is rising
Law of Supply
As price rises the less the consumer will buy
Refer to the above graph showing the marginal product (MPL) and the average product of labor (APL). At what quantity of labor employed does diminishing marginal returns set in?
B at the peak of MPL
Refer to the above diagram. If price falls from P1 to P2, total revenue will become area
B+D
Black markets are associated with
ceiling prices and the resulting product shortages
Flow 3 represents
goods and services
price elasticity is higher
in the long run than in the short run
Arrows 3 and 4 represent
incomes and consumer expenditures respectively
If the current output of shoes is Q1 then
society would consider additional units of shoes to be more valuable than alternative uses of those resources
marginal cost curve
supply curve tells us the extra cost incurred by a producer in producing one more unit of a good/service
Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market
demand has increased and equilibrium price has decreased
If something is addictive, then
demand is perfectly inelastic
unit elasticity
demand or supply with a price elasticity coefficient that is equal to one
The relationship between quantity supplied and price is blank and the relationship between quantity demanded and price is blank .
direct, inverse
The total-revenue test for elasticity
does not apply to supply because price and quantity are directly related
If marginal cost is below average variable cost
Both average total cost and average variable cost are decreasing
As it relates to production possibilities analysis. the law of increasing opportunity cost is reflected in curve
C
At which quantity of labor employed is marginal product equal to average product?
C intersection of APL and MPL
Normal Goods
Products for which demand varies directly with money income
If economic profits in an industry are zero and implicit costs are greater than zero then
accounting profits are greater then zero
If the demand for farm products is price inelastic, a good harvest will cause farm revenues to
decrease
If the price of the good decreases from $6.30 to $5.70 consumer expenditure would
decrease if demand were D2 only
REfer to above information. Over the $11-$9 price range, demand is
elastic
Economic profits are
equal to the difference between accounting profits and implicit costs
Sup[pose that point y represents the optimal combination of civilian goods and defense goods. We can conclude that at y the marginal benefit of defense goods
equals the marginal cost of defense goods
The law of diminishing returns implies
eventually, the more hours you spend studying per day, the less you will learn with each added hour
Cash expenditures a firm makes to pay for resources are called
explicit costs
supply determinants
factor prices, technology, taxes and subsidies, prices of other goods, price expectations, the number of sellers in the market
price elasticity is higher
for luxuries than for necessities
inferior goods
goods for which demand varies inversely with money income
Income elasticity has a range of
greater than or less than zero
The larger the positive cross elasticity coefficient of demand between products X and Y, the
greater their substitutability
Refer to the above data. The price elasticity of demand is relatively elastic
in the $6-$4 price range
With a downsloping demand curve and an upsloping supply curve for a product, placing an excise tax on this product will
increase equilibrium price and decrease equilibrium quantitiy
economies of scale occur when
increasing production allows greater specialization: workers are more efficient when focusing on a narrow task common when Q is low
Tennis rackets and ballpoint pens are
independent goods
If the University Chamber Music Society decides to raise ticket prices to provide more funds to finance concerts, the society is assuming that the demand for tickets is
inelastic
Markets provide
information, incentives, prices
Price floors and ceiling prices
interfere with the rationing function of prices
Average variable cost
is U shaped curve
Change in demand
is a shift of the entire demand curve to the right or to the left
Price ceilings
is the maximum legal price a seller may charge for a product or service
If government set a maximum price of $45 in the above market
it would create neither a shortage nor a surplus
When a firm is experiencing diseconomies of scale
its average total costs will decline if it reduces its scale of operations
Average product
labour productivity, is output per unit of labour input
law of diminishing returns
law of diminishing marginal product assumes that technology is fixed so that techniques of production do not change. It states that as successive units of a variable factor are added to a fixed factor, beyond some point the extra or marginal product that can be attributed to each additional unit of the variable factor will decline
As long as marginal cost is rising
marginal cost will fall
The change in total costs when output changes is called
marginal costs
After the point of diminishing marginal returns
marginal product falls
Curve (2) in above diagram is a purely competitive firm's
marginal revenue curve
If consumer incomes increase, the demand for product X
may shift either to the right or left
Supply curves tend to be
more elastic in the long run because there is time for firms to enter or leave the industry
change in quantity supplied
movement from one point to another on a fixed supply curve
Change in quantity demanded
movement from one point to another point (from one price-quantity combination to another) increase or decrease of price
When variable inputs are added to a fixed input
output increases, output can increase at an increasing rate, output can increase at a decreasing rate
allocative efficiency
p=mc
productive efficiency
p=min atc
Short Run
period of time too short to change plant capacity but long enough to use the fixed plant capacity more or less intensively
change in buyer tastes
physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for traditional phones
The long run is often referred to as the
planning horizon
When demand is unit elastic
price and revenue are not related
When demand is inelastic
price and revenue move in the same direction
If demand is elastic
price elasticity of demand is greater than 1. revenue will fall
if demand is inelastic then
price elasticity of demand is<1. revenue will rise
In the above market, economists would call a government-set minimum of $50 a
price floor
Elastic demand
product or resource demand with a price elasticity coefficient that is greater than one
perfectly elastic demand
quantity demanded can be any amount at a particular price
perfectly inelastic demand
quantity demanded does not respond to change in price
If the supply and demand curves for a product both decreases, then equilibrium
quantity must decline, but equilibrium price may rise, fall, or remain unchanged.
The supply curve of antique reproductions is
relatively elastic
Refer to the above diagram. In the P1p2 price range demand is
relatively elastice
The fundamental economic problem faced by individuals is
scarcity
The period of time over which there is at least on fixed input is the
short run
A production function
shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
If the current output of shoes is Q3 then
society should produce fewer shoes to achieve the optimal allocation of resources
Compared to coffee, we would expect the cross elasticity of demand for
tea to be positive , but negative for cream
According to the law of diminishing marginal returns
the additional output generated by additional units of an input will diminish
When average variable cost is at a minimum
the average product of labor is at a maximum
If the average value is falling
the average value must be below the average value
the flatter the curve
the bigger the elasticity
increase in demand
the decision by consumers to buy larger quantities of a product at each possible price
If demand is perfectly elastic, then
the demand curve is horizontal line
Assume that product X has a negative cross elasticity with respect to shoes. If the price of shoes rises
the demand for product X will decrease
marginal benefit
the extra cost associated with producing one more unit of a good
marginal cost
the extra cost associated with producing one more unite of a good.
Marginal product
the extra output associated with adding a unit of variable input in this case labour to the production process
the greater thr proportion of income spent
the greater the price elasticity of demand for it
The more easily sellers can change the quantity they produce,
the greater the price elasticity of supply
Graphically the market demand curve is
the horizontal sum of individual demand curve
The shape of the cost curves may be traced back to
the law of diminishing marginal returns
If the average value is rising
the marginal value must be above the average value
explicit costs
the monotary payments it makes to those who supply labour services materials fuel transportation services and the like. Such montey payments are for the use of resources owned by others
implicit costs
the opportunity costs of using its self owned self employed resources. To the firm, implicit costs are the money payments that self-employed inputs could have earned in their best alternative use.
In general elasticities measure
the percentage change in the quantity demanded resulting from a fixed percentage change in some attribute
equilibrium price
the price where the intentions of buyers and sellers match
equilibrium quantity
the quantity demanded and quantity supplied at the equilibrium price in a competitive market
Which of the following will not produce an outward shift of the production possibilities curve?
the reduction of unemployment
MC<ATC
ATC is falling
The fixed cost of the firm is $500. The firm's total variable cost is indicated in the table. Refer to the above table and information.The marginal cost of the sixth unit of output is
$1600,3600-2000=1600
Refer to the above diagram and assume that price increases from $2 to $10. The coefficient of price elasticity of demand (midpoint formula) relating to this change in price is about:
.25 and demand is inelastic
If average variable cost is $74 and total fixed cost is $100 at 5 units output, then average total cost at this output level is:
100/5=20 74+20=94 94
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The implicit costs of Harvey's firm in the first year were:
100000*.10=10000 10000+5000+45000=60000
Jon Brooks quit his job in a bicycle shop, where he earned $15,000 per year, to become a graduate student in economics. At the university he attended, he spent $2,000 on books, $1,000 on cough medicine, and earned $12,000 as an economics teaching-assistant. What were Jon's economic costs while attending college?
15000+2000+1000= 18000
Which plant size would produce at least cost for the 3000-4000 level of output?
2
Assume that the only variable resource used to produce output is labor. Refer to the above table. With diminishing marginal returns, if the firm hires seven units of labor, which of the following numbers would most probably be the total product?
37 the production is reduced at a half rate 36-34=2, 2/2=1 36+1=37
In the long run the firm should use plant size ATC -3 for what level of output?
4000-4500
The supply of product X is elastic if the price of X rises by
5 percent and quantity supplied rises by 7 percent
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The explicit costs of Harvey's firm in the first year were:
55*11000= 605000
Assume that the only variable resource used to produce output is labor. Refer to the above table. When the firm hires four units of labor. The average product of labor is
7.5 units= 30/4
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The economic profits of Harvey's firm in the first year were:
825000-60000-605000= 160000
complements, cross price elasticity
<0
substitutes, cross pric elasticity
>0
Which is the most likely to be a long-run adjustment for a firm that manufactures cars on an assembly line basis?
A change in production to redesigned and retooled facility
change in the number of buyers
A decline in the birthrate reduces the demand for children's toys
A luxury good has
a very high income elasticity
Which of the following is true
Diminishing marginal returns means that in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs
If a firm's revenues just cover all its opportunity costs, then
Economic profit is zero
price elasticity formula
Ed= %change in quantity demanded of product X/ % change in price of product X
Suppose that TC=550 TVC=500 and MC=100. If the firm produces 10 units of output
MC>AVC
At the average point where diminishing marginal returns of an input sets in; the
Marginal product starts to decrease
In the short run
Output is raised or reduced by changing the levels of variable inputs
Which of the following goods will most likely suffer a decline in demand during a recession?
Plasma screen and LCD TVs (+4.2)
Refer to the above graph. Is hows the total product (TP) curve. At which point does diminishing marginal return set in
Point B Increase gradually begins to slow down
Refer to the above graph. Is hows the total product (TP) curve. At which point is the marginal product zero?
Point C the peak
Refer to the above graph. Is hows the total product (TP) curve. At which point is marginal product smallest?
Point D the last point
Change in consumer expectations
Political instability in South America creates an expectation of higher future prices of coffee beans, thereby increasing today's demand for coffee beans
inelastic demand
Product or resource demand with a price elasticity coefficient that is less than one
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The total revenues of Harvey's firm in the first year were:
Revenue = 11,000*75= 825000
Suppose that the price of peanuts falls from $3 to $2 per bushel and hat as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus
The demand for peanuts is inelastic
Assume that the only variable resource used to produce output is labor. Refer to the above table. With which unit of labor is the marginal product equal to the average product?
Third unit of labor 24/3=8 and 24-16=8
Assume that the only variable resource used to produce output is labor. Refer to the above table. Diminishing marginal returns set in with the addition of the
Third unit of labor where production still increases but a a lower rate
Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11 and .29 for products W,X, Y, Z respectively. A 1 percent decrease in price will increase total revenue in the case of:
W and
The above diagram suggests: (vertical line)
X and Y are independent goods
A purely competitive seller is
a " price taker"
price floors
a minimum price fixed by the government
Change in the prices of related goods
a reduction in airfares reduces the demand for bus transportation; a decline in th eprice of DVD players increases the demand for DVD movies
changer in income
a rise in income increases the demand for such normal goods as restaurant meals, sports tickets, and MP3 players while reducing the demand for such inferior goods as cabbage, turnips, and inexpensive wine
Economists use the term demand to refer to
a schedule of various combinations of market prices and amounts demanded
Supply
a schedule or curve that shows the amount of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period
A price of $60 in this market will result in
a surplus of 100 units
opportunity cost
a value equal tot he quantity of other products that cannot be produced when resources are instead used to make a particular product
REfer to the above diagram, in which S1 and D1 represents the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in demand may have been casued by
an increase in income if the product is a normal good
Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?
an increase in supply
MR=MC
at the profit maximizing Q
where marginal product is less than the average product
average product declines
Where marginal product exceeds average product
average product rises
Being the first mover means
being the first firm to offer a product in a particular market
VAriable costs can be controlled or altered in the short run
by changing production levels
A perfectly inelastic demand schedule
can be represented by a line parallel to the vertical axis
substitute good
can be used in place of another good
A perfectly elastic demand curve implies that the firm
can sell as much output as it chooses at the exisiting price
change in supply
change in the entire schedule and a shift of the entire curve
Trade between countries is based on
comparative advantage
The slope of a straight line can be determined by
comparing the absolute vertical change to the absolute horizontal change between two points on the line
diseconomies of scale are due to
coordination problems in large organizations : management becomes stretched and can't control costs common when Q is high
Inferior goods may also be referred ro as
countercyclical goods
Marginal costs
cuts average variable cost and average total cost at their lowest point
the steeper the curve
the smaller the elasticity
Total Revenue TR
the total amount a seller receives from the sale of a product in a particular time period P X Q
total product
the total quantity or total output of a particular good or service produced
Fixed costs
they are incurred in the short run and must be paid regardless of output level.
People trade because
they make themselves better off
Property rights need to be secure
to promote economic development
Which of the following goods will least likely suffer a decline in demand during a recession
toothpaste
Curve 4 in the above diagram is a purely competitive firm's
total cost curve
Curve 1 in the above diagram is a purely competitive firms
total economic profit curve