Econ Test 2

Which is a correct explanation for changes in revenue based upon unitary elastic demand?

% change in Qd = % change in P

Which of the examples are inelastic?

- Gasoline - Housing

The supplier of a computer game is willing to supply 2,500 units at $50 each, but is willing to supply 3,500 units at $60. Calculate the Price Elasticity of Supply rounded to two decimal places. Which statements are correct?

- If the price increases 10%, supply will increase 18.3%. - The supply is elastic.

Which statements about cross-price elasticity of demand are true?

- Substitute goods have positive cross-price elasticities of demand. - Complement goods have negative cross-price elasticities of demand.

The price of a new computer game has demand of 3,000 units at $50 and 2,500 units at $60. Calculate the Price Elasticity of Demand rounded to two decimal places. Which statements are correct?

- The demand is unitary elastic. - If the price increases 10%, demand will decrease 10%.

Match the following terms with their definitions. 1. Duopoly 2. Game theory 3. Collusion 4. Cartel

1. A. An oligopoly consisting of two firms 2. D. A branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do with all players knowing their payoffs are dependent upon the other players 3. C. When firms act together to reduce output and keep prices high 4. B. A group of firms that ac

1. Price elasticity 2. Price elasticity of demand 3. Price elasticity of supply 4. Elastic demand

1. A. The ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs), and the corresponding percent change in price 2. D. The percentage change in the quantity demanded of a good or service divided by the percentage change in the price 3. B. The percentage change in quantity supplied divided by the percentage change in price 4. C. The elasticity is greater than one, indicating a high responsiveness to changes in price.

1. Infinite elasticity 2. Zero elasticity 3. Constant unitary elasticity 4. Perfect elasticity

1. B. Either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. 2. D. The extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. 3. C. Occurs when a price change of 1% results in a quantity change of 1%. 4. A. This is the same as infinite

Match the terms with their definitions. 1. Diminishing marginal utility 2. Marginal utility 3. Budget constraint line 4. Consumer equilibrium

1. B. Explains that additional utility decreases with each unit added 2. D. The additional utility provided by one additional unit of consumption 3. A. Shows the various combinations of two goods that are affordable given consumer incom 4. C. The ratio of the prices of the two goods should be equal to the ratio of the marginal utilities

Match the following terms and definitions. 1. Patent 2. Trademark 3. Copyright 4. Intellectual property 5. Trade secret

1. B. Gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time 2. C. An identifying symbol or name for a particular good 3. D. A form of protection for original works of authorship 4. E. Implies ownership over an idea, concept, or image 5. A. Information that is kept

Match the following terms and definitions. 1. Explicit costs 2. Implicit costs 3. Accounting profit 4. Economic profit 5. Total revenue

1. B. Out-of-pocket costs, that is, payments that are actually made 2. D. Subtle, important costs representing the opportunity cost of using resources already owned by the firm 3. A. A cash concept meaning total revenue minus explicit costs—the difference between dollars brought in and dollars paid out; reported to the government's tax collectors 4. C. Total revenue minus total cost, including both explicit and implicit costs 5. E. The income brought into the firm from selling its products, which equals price multiplied by quantity

Match the following terms and definitions. 1. Average total cost 2. Average variable cost 3. Marginal cost 4. Fixed cost 5. Variable cost

1. D. Total cost divided by the quantity of output 2. C. Variable cost divided by quantity of output 3. E. The additional cost of producing one more unit of output 4. A. Expenditures that do not change regardless of the level of production 5. B. Costs that change with

Juan likes to download songs to his iPhone and movies to his laptop. Songs and movies each cost $2 to download. The marginal utility for songs is 1 song=10; 2 songs=9; 3 songs=8; 4 songs=7; 5 songs=6. The marginal utility for movies is 1 movie=10; 2 movies=8; 3 movies=6; 4 movies=4; 5 movies=2. 1. If Juan has $10 to spend, what combination of songs and movies would provide him with maximum utility? 2. If Juan has $10 to spend, and he downloaded the combination of songs and movies that provided him with maximum utility, what would the marginal utility per dollar be?

1. Three songs and two movies 2. $4.50

Suppose that Mimi plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Mimi's demand curve?

1.0

Which are correct statements about natural monopolies?

A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once fixed costs are in place.

Which statement is true about firms in a perfectly competitive market?

A perfectly competitive firm must be a very small player in the overall market, so that it can increase or decrease output without noticeably affecting the overall quantity supplied and price in the market.

Which describes how a profit-maximizing monopoly chooses the quantity to produce?

A profit-maximizing monopoly should follow the rule of producing up to the quantity where marginal revenue is equal to marginal cost—that is, MR = MC.

Which statement best describes the effect of higher interest rates?

A rise in interest rates makes it easier for people to enjoy higher present consumption or higher future consumption.

Which statement is true about shifts in costs of production and marginal costs?

A shift in costs of production that increases marginal costs at all levels of output will shift Marginal Cost to the left, causing a perfectly competitive firm to reduce its level of output at any given market price.

Which describes constant returns to scale?

A situation in which allowing all inputs to expand does not much change the average cost of production

Which statements are true about allocative efficiency?

Allocative efficiency means that among the points on the production possibility frontier, the point that is chosen is socially preferred—at least in a particular and specific sense. In a perfectly competitive market, price will be equal to the marginal cost of production.

Which is an example of the substitution effect?

An increase in price provides incentive for consumers to consume less of the good with a relatively higher price, and more of the good with a relatively lower price.

Which is an example of the income effect?

An increase in price results in a reduction of buying power, which leads to buying less of a normal good.

Which statement is true?

As the price of natural gas rises, the budget constraint shifts to the left, and the quantity consumed of natural gas falls, ceteris paribus (meaning, with all other things being the same).

Which types of elasticity will be represented by a curved line?

Constant unitary elasticity

Which are examples of implicit costs?

Depreciation of computer equipment Owner working without compensation

Although perfectly elastic supply curves are unrealistic, some goods have highly elastic supply curves. Which is an example of a good with a highly elastic supply curve?

Donuts

Which formula is correct?

Economic profit = total revenues - explicit costs - implicit costs

Which statements are correct about perfect competition?

Firms are said to be in perfect competition when many firms produce identical products. Firms are said to be in perfect competition when sellers and buyers have all relevant information to make rational decisions about the product being bought and sold.

Which are true for constant cost industries?

Firms can easily supply any quantity that consumers demand. The supply curve is very elastic.

Which is not a description of an industry within the context of the Long-Run Adjustment?

Fluctuating cost industry (as demand increases, the cost of production sometimes increases, while at other times decreases)

Which statement about the marginal revenue curve is not correct?

For a perfectly competitive firm, the marginal revenue (MR) curve is a vertical straight line because it is equal to the price of the good, which is determined by the market.

Which best demonstrates the backward-bending supply curve for labor?

High-wage people who can earn so much money that they respond to a still-higher wage by working fewer hours

Which is true about tax incidence?

If demand is more inelastic than supply, consumers bear much of the tax burden.

Which statements are true about the shutdown point?

If the firm is receiving a price below the price at the shutdown point, then the firm should shut down immediately. If the perfectly competitive firm can charge a price above the shutdown point, then the firm is at least covering its average variable costs.

Which statement about the elasticity of savings is true?

If the supply curve for financial capital is highly inelastic, then a percentage increase in the return to savings will cause only a small increase in the quantity of savings.

Which statement is not true about perfectly competitive firms?

In the long run, perfectly competitive firms will react to profits by decreasing production.

Which statement is correct?

In the short run, firms cannot change the usage of fixed inputs, while in the long run, the firm can adjust all factors of production.

The profit-maximizing quantity will occur where Marginal Revenue equals Marginal Cost (MR = MC) in which type of firms?

Monopolies and perfectly competitive firms

Which statement about monopolistic competition is correct?

Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way.

Which statements about oligopolies are correct?

Oligopolies are typically characterized by mutual interdependence where various decisions, such as output, price, advertising, and so on, depend on the decisions of the other firm(s). By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide the profit among themselves.

Which is a correct statement about the backward-bending supply curve for labor?

Over a long-term perspective, the backward-bending supply curve for labor is common.

Which factor does not create conditions for the existence of oligopolies?

Patent for an invention to one firm

Which is hypothetical when considering the concepts of productive and allocative efficiency over the long run?

Perfect competition

Which is not a distinguishing characteristic of a differentiated product?

Price of the product

A change in what will alter the slope of an intertemporal budget constraint?

Rate of return

Which is not one of the forces that discourage or prevent potential competitors from entering a market, also know as a barrier to entry?

Sociological

Which statements are true about savings in the United States?

The amount of retirement savings in IRAs has increased. The overall savings rate has declined.

Which statements are correct about the demand curve as faced by a monopolistic competitor?

The demand curve as faced by a monopolistic competitor is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. The demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes.

Which statement is true?

The marginal cost curve is generally upward-sloping, because diminishing marginal returns imply that additional units are more costly to produce.

Which statement is true?

The more you produce, the greater the variable cost.

Which statement is true?

The relationship between the quantity at the minimum of the long-run average cost curve and the quantity demanded in the market at that price will predict how much competition is likely to exist in the market.

Which is true about the wage elasticity of the labor market?

The wage elasticity of labor supply for teenage workers is generally thought to be fairly elastic.

Which statements are true about marginal profit?

Total profit is maximized where marginal revenue equals marginal cost. As long as marginal profit is positive, producing more output will increase total profits.

Which is not correct about the Labor-Leisure Budget Constraint?

When offered higher wages, workers will always choose to work more hours, if given the choice.

Which statement best describes productive and allocative efficiency?

When profit-maximizing firms in perfectly competitive markets combine with utility-maximizing consumers, the resulting quantities of outputs of goods and services demonstrate both productive and allocative efficiency.

When demand is inelastic:

consumers are not very responsive to changes in price.

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:

cross-price elasticity of demand for iced tea is +2.

A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that:

cross-price elasticity of demand for soda is -3.

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

elastic

When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as ____________.

elastic

If the supply curve for a product is vertical, then the elasticity of supply is:

equal to zero.

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:

fall and the equilibrium quantity to stay the same.

A perfectly elastic supply curve is:

horizontal.

The longer the time period considered, the more the elasticity of supply tends to:

increase

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:

increasing the price of game tickets because demand is inelastic.

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.

inelastic

The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be __________.

inelastic

Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.

inelastic; elastic

A 10 percent increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded but no change in the price of macaroni and cheese. From this information, we can assume:

macaroni is an inferior good and price elasticity of supply is infinite.

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

price

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

rise and the equilibrium quantity to stay the same.

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:

stay the same and the equilibrium quantity to fall.

Price elasticity of demand is defined as:

the percentage change in quantity demanded divided by the percentage change in price.

If cola and iced tea are good substitutes for consumers, then it is likely that:

their cross price elasticities are greater than zero.