Exam 3 Practice Problems & Quizzes
9. Refer to the chart above. At what output level or levels are the business owners doing at least as well as their next best alternative? (a) 10 units (b) 10 and 15 units (c) 10, 15, and 20 units (d) 10, 15, 20, and 25 units
(a) 10 units MR - MC (Marginal Explicit & Implicit Costs) 10 units: 50 - (36 + 5) = 9 15 units: 25 - (27 + 1) = -3 20 units: 25 - (30 + 1) = -6 25 units: 25 - (32 + 1) = -8 30 units: 25 - (36 + 1) = -12
3. Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Dusty can buy a maximum of _____ loaves of bread or a maximum of _____ jars of peanut butter. (a) 20; 10 (b) 15; 15 (c) 10; 20 (d) 10; 5
(a) 20; 10 Loaf of Bread: $30 / $1.50 each loaf = 20 loaves at maximum Jar of PB: $30 / $3.00 each jar = 10 jars of PB
CL Session - Firms and Production 1. Consider a firm producing computers in a perfectly competitive market that faces the following monthly production function: (in figure) Workers in this market are paid a monthly wage of $4,000, and for now the firm faces monthly total fixed costs (including opportunity costs) of $10,000. (a) Say the output price of computers is p = 1000. Calculate the optimal production decision for this firm and verify that it would not want to shut down in the short or long run. (b) Is there any level of the output price where this firm would want to temporarily shutdown? (c) Say every firm in the computer market was a copy of this firm. Over time, would you expect: i. more firms to enter, firms to exit, or neither? ii. the equilibrium market price of the good to increase, decrease, or stay the same? (Assume demand stays the same.) iii. the average quantity of computers produced per rm to increase, decrease, or stay the same?
(a) Based on the chart in the figure, 4 Employees making 28 computers is optimal. With this choice, you make 28,000 in revenue, pay 16,000 in wages, and 10,000 in fixed costs, leaving you with 2,000 in economic profit. Your revenue covers your both your variable costs (28000 > 16000) and your total costs (28000 > 16000 + 10000) so you would not want to shut down or exit. (b) At any price less than 400 you would want to produce 0, since your marginal benefit from 1 worker would not cover the wages. (c) i. The firm is making a positive profit, so we expect more firms to enter. ii. More firms are entering, so the supply curve will shift out and equilibrium price will fall iii. The equilibrium price is falling, so each rm would have to scale back so that MC fell down to the lower price, which requires scaling back production.
4. Refer to the figure above. The firm earns a ____ of ___ when it produces 120 units of output. (a) loss; $64 (b) profit; $64 (c) loss; $114 (d) profit; $114
(b) profit; $64 - $120 units sold at $2 output price - 9 employee hours at $14 an hour - $50 in rent $240 - $126 - $50 = $64 in profit
2. A firm wants to shut down in the long run (market exit) when (a) it cannot cover its fixed costs (b) it cannot cover its variable costs (c) it cannot cover its total costs (d) it can adjust its fixed inputs
(c) it cannot cover its total costs
CL Session - Firms and Production 2. Consider a firm that makes shoes in a perfectly competitive market. The firm has 10 shoe-making machines and cannot get any more, but can freely adjust the number of workers they have work those machines in a given day. Production works as follows: if 1 worker is assigned to a machine, that worker/machine pair can produce 10 shoes per hour. But if two workers are assigned to a machine, they only make 19 shoes (since they lose some time switching between them on the machine). If three workers are assigned to the machine, they can only make 27 shoes per hour, etc. (a) Say the firm currently has no employees and wants to hire 10 workers for a day. What is the best way to assign these workers these machine? (b) Now say the firm currently has 10 workers and wants to hire one more. What is the marginal product of hiring this one additional employee? (c) Make a plot with # of employees hired for a day on the x-axis and the marginal product of each worker on the y-axis. (d) Using your graph from part (3), determine the optimal number of workers to hire if the output price of shoes were $20 and the wage rate was $100 per day. (e) What is the marginal cost of making the 200th shoe if the wage rate is $100 per day?
(a) For each worker, assign them to an open machine, since there marginal product there will be 10 while it will only be 9 at a currently used machine. (b) There are no more open machines, so the marginal product will be 9 and it doesn't matter what machine the worker gets assigned to. (c) Table and Chart are shown side-by-side in the figure (d) Optimal level boxed in the figure. We want that the MRP of a worker is equal to their marginal cost. The marginal cost is the wage, so $100, and the MRP = MP * P so it is where the marginal product is 5 shoes, which is all the workers between 51 and 60. The rm makes the same profit regardless of whether it hires 51, 52, ..., 60, since each worker produces $100 worth of shoes and gets paid $100, so any number in there can be optimal. (One way to make a specific prediction is to make the wage actually $99.99, for example, you would hire 60 workers.) (e) The first 10 workers make 100 shoes, and the second 10 make 90 shoes, so you will be somewhere in the 3rd set of 10 workers when the 200th shoe gets made. Those workers have a marginal product of 8 shoes, and a marginal cost of $100, so the marginal cost per shoe is $100/8 = $12.5 per shoe.
CL Session - Monopolies 2. Consider the market described by the graph in question 1. Say the firm is able to develop a pricing method using the hurdle method, where the firm can charge a price of 40 to the buyers with the 20 highest reservation values and a price of 30 to the buyers with the next 20 highest reservation values. (a) Show how the hurdle method prices looks on the graph. (b) Shade and label the producer surplus, consumer surplus, and deadweight loss. (c) How did the PS, CS, and DWL change between problems 1 and this problem? (You can do this graphically and take your best guess, some of the areas might be a little tricky to compare.)
(a) In the graph. Basically, the two horizontal lines below show the prices and for which consumers those prices operate. (b) The new producer surplus is the red hatched area, the new consumer surplus is the sum of the two blue hatched areas, and the new deadweight loss is the orange triangle. (c) PS - Before: 925, After: 1000 So, increased by about 75 CS - Before: 296, After: 200 So, decreased by about 96 DWL - Before: 104, After: 50 So, Decreased by about 50
16. From your answer to the previous questions, what can you conclude about the nature of goods J and K? (a) J and K are both normal goods (b) Goods J and K are complements in consumption (c) J is a normal good; K is an inferior good (d) J and K are both inferior goods (e) J is an inferior good; K is a normal good
(a) J and K are both normal goods - As income fell, demand for both goods fell so both are "normal".
CL Session - Monopolies 1. Refer to the above graph showing a market with production operated by a monopoly. Answer the next four questions based on this information. (a) Label the solid and dotted lines (b) Draw the marginal revenue curve that the monopolist faces given the demand curve. (c) Show on the graph what amount the monopolist will produce and what price the monopolist would charge. (d) Rank the three following public policy proposals in order from most efficient to least efficient: i. Let the market operate with no interference ii. Impose a price ceiling of $25. iii. Impose a price ceiling of $10.
(a) Solid Line: Marginal Cost Curve Dotted Line: Demand Curve (b) Shown by the purple dotted line (asking a question for an explanation during office hours) (c) The point where the MC intersects the MR determines the quantity produced. Where this quantity produced intersects the demand curve straight upwards determines the price that will be charged for all of the quantity. (d) most efficient to least efficient: ii. , i. , iii. i.) This leads to the output of 37 and the associated deadweight loss ii.) This leads to the socially efficient outcome since the firm will charge $25 and we will hit the socially efficient point where MC=D. iii.) The firm will only produce those units it can produce at a marginal cost of $10 or less, which as we can see from the graph is 20 units. This means there will be even more deadweight loss than in the case of no interference.
CL Session - Rational Spending Rule Consider purchases of two goods, school books and meals. The marginal utilities for the two goods are shown by the graphs below: (in figure) - The price of a unit of school supplies is $5, while the price of a meal is $10. - For the problem, let your budget be as large as you need. - (No matter the amount of meals you buy, we'll assume the MU of a meal is constant at 100.) (a) Which of the two goods will your first dollar go to? (b) At what point will you switch to consuming the other good? (c) Say the price of school supplies doubles. How does this change your answers to (a) and (b)?
(a) The MU/P of school supplies is 40 for the first dollar while only 10 for meals, so you'll spend on school supplies. (b) The same logic from part (a) applies until the MU/P of school supplies falls to 10, which happens after you've bought enough school supplies so that your marginal utility falls to 50. Since the MU curve is a straight line, this will happen 3/4 of the way to the x-intercept at 300 units of school supplies. (c) Now you buy school supplies until your marginal utility of school supplies falls to 100, which will make the MU/P of school supplies fall to 10. This means that you now purchase 200 school supplies instead of the 300 you did before.
CL Session - Rational Spending Rule 2. Total utility from educational goods and entertainment goods is as shown by the following table: (in the figure) You have $8 to split between the two types of goods, and the price of Educational goods is $1 while the price of Entertainment goods is $2. (a) Find the best choice by finding the pair of goods purchases that give the highest total utility while spending your entire budget. (b) Verify that this choice also makes education and entertainment give equal marginal utility per dollar.
(a) The possible pairs that spend my whole budget of $8 are (Education, Entertainment) = (2,3) and (4,2), so those are the only two we have to check. Of those two, (2,3) gives 25 total utility (10 from education + 15 from entertainment), while (4,2) gives 29 total utility (15 from education and 14 from entertainment), so 4 units of education and 2 of entertainment is optimal. (b) Look at the table in the figure. Transform the total utilities to marginal utilities (and assuming total utility is 0 at 0), and you can see MU/P is equal to 2 for both goods at the optimal choice:
14. After regulation, existing street vendors earn (a) accounting profit of zero. (b) economic profit of $130,000. (c) economic profit of $65,000. (d) economic loss of $85,000.
(c) economic profit of $65,000.
CL Session - Rational Spending Rule The marginal utility you get from working on homework (MH) and the marginal utility you get from slacking off watching Netflix (MN ) can be described by the equation MH = 8 − 2h, and MN = 20 − h where h is the number of hours you do that activity in a given week. (a) Say you had access to as much free time as you wanted. How many hours would you spend on homework and how many would you spend on watching Netflix? (b) One week you only end up with 6 hours to spare to split between homework and Netflix. If I suggested for you to spend 3 hours on homework and 3 hours on Netflix, what "marginal" change (reallocating 1 hours) could you make to improve my suggestion?
(a) When you don't have a budget to deal with, you just want to consume until your marginal utility is 0. You can work on homework for 4 hours until your marginal utility falls to 0, and can watch 20 hours of Netix until it falls to 0. (b) At 3 hours of homework, my marginal utility for homework is MH = 8 − 2 ∗ 3 = 2, while my marginal utility for Netflix is MN = 20 − 3 = 17. So my marginal utility for an additional hour of Netflix is much higher, and the "price" is only 1 since I can trade one hour of Netflix for one of homework, so I should reduce my homework time and increase my Netflix time.
19. Assume: (1) that the price of cola is $2 and the price of tacos is $1; (2) that at your current consumption levels the MU of cola is 50 and the MU of tacos is 30; and (3) that you are spending all of your income. The equal marginal principle would imply that you should: (a) buy additional units of tacos and less cola. (b) buy additional units of cola and less tacos.
(a) buy additional units of tacos and less cola. - Your marginal utility per dollar of cola is 50/2 = 25, while your MU per dollar of tacos is 30/1 = 30. So you should move a dollar from cola into tacos.
21. Assume you are throwing a party and have $150 to spend. You are considering buying 10 cases of coke and 10 boxes of chips. The cost of coke is $5 per case and the cost of chips is $10 per box. The MU from the 10th case of coke is 132 and the MU from the 10th box of chips is 200. To maximize the utility from your purchases, you should: (a) buy more coke and less chips. (b) buy more chips and less coke. (c) buy more coke and more chips. (d) the answer is indeterminate without knowing the total utility received from coke and chips.
(a) buy more coke and less chips. - The MU per dollar for coke is 132/5 ≈ 26, while for chips it is 200/10 = 20.
Suppose the city of Austin, TX chooses to regulate the number of street vendors operating near the University of Texas by requiring each vendor to own a permit in order to operate. The city gives free permits to all existing vendors and announces that no new permits will ever be issued. Prior to regulation, the costs (including implicit costs) of operating were $85,000 and revenues were $150,000. The city ordinance allows the permits to be bought and sold without restriction. The permits have no expiration date. 12. If the regulation requiring permits had not been passed, one could predict (a) entry would have driven economic profits to zero. (b) street congestion would have fallen. (c) exit would have driven economic profits higher. (d) entry would have driven accounting profits to zero.
(a) entry would have driven economic profits to zero.
2. Based on the rule for maximizing utility, if the price of good A is twice that of good B. (a) the MU of the last unit of A must be twice the MU of the last unit of B. (b) the TU from A must be twice the TU from B. (c) the consumer must buy twice as many units of B in comparison to A. (d) None of the above are correct.
(a) the MU of the last unit of A must be twice the MU of the last unit of B. - Marginal utility per dollar (MU/p) is equal for good A and good B.
5. Refer to the figure above. What is the marginal cost of the 9th employee hour? (a) $126 (b) $14 (c) $50 (d) $48
(b) $14
6. Christina's economic profit is _______. (a) $100,000 (b) $9,000 (c) $64,000 (d) $49,000
(b) $9,000
6. What is Jamie's optimal combination of muffins and doughnuts? (a) 1 muffin, 6 doughnuts (b) 2 muffins, 4 doughnuts (c) 3 muffins, 2 doughnuts (d) 4 muffins, zero doughnuts
(b) 2 muffins, 4 doughnuts - In this case, MU(muffins) / P(muffins)= MU(doughnuts) / P(doughnuts), $30/$1 = $15/$0.5
Answer the next two questions based on this information. Kenny is a rational utility maximizing consumer. He earns $150 a week and consumes only fish and shrimp. The price of fish is $3 a pound and the price of shrimp is $5 a pound. Fish and shrimp are normal goods for Kenny. 17. Kenny can buy a maximum of _____ pounds of fish or a maximum of _____ pounds of shrimp. (a) 30, 50 (b) 50, 30 (c) 15, 30 (d) 30, 15
(b) 50, 30
6. A firm in a perfectly competitive industry faces an output price is $8 and the firm is producing 77 units with a marginal cost of $11. The firm should (a) lower its price (b) decrease production (c) increase production (d) raise its price
(b) decrease production • Lowering its price will just reduce profits further, while raising its price will stop everyone from buying its product (due to perfect competition). Since marginal costs are typically increasing, the firm should scale back producing until its marginal costs fall to $8.
1. A firm wants to shut down in the short run (that is, produce Q? = 0) when (a) it cannot cover its fixed costs (b) it cannot cover its variable costs (c) it cannot cover its total costs (d) it can adjust its fixed inputs
(b) it cannot cover its variable costs
2. In general, if the price of a fixed factor of production increases, (a) price falls. (b) marginal costs are unchanged. (c) marginal costs increase. (d) the firm will increase output.
(b) marginal costs are unchanged. • Changes in fixed factor prices are just changes in sunk costs and don't affect decision making on the margin
1. The law of diminishing returns implies (a) marginal product is always diminishing. (b) marginal product of a variable input must eventually decline. (c) marginal product of a fixed input must eventually decline. (d) total product must eventually decline.
(b) marginal product of a variable input must eventually decline.
13. Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can with each payment. The reason is that the: (a) opportunity cost of an additional can of soft drink increases very rapidly. (b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later. (c) marginal utility of an extra soft drink can declines quite rapidly. (d) opportunity cost of an additional can of soft drink increases very slowly
(b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later.
17. Refer again to the above table. Assume that all firms in the screwdriver market are exact copies of the above firm. With a current equilibrium price of 4 in a perfectly competitive market, we would expect that soon (a) more firms will enter the screwdriver market. (b) the average quantity produced by each firm in the market will increase. (c) the equilibrium price of screwdrivers will begin to fall. (d) demand will shift up.
(b) the average quantity produced by each firm in the market will increase. - This is somewhat counterintuitive: since all these firms are earning negative economic profits when p = 4, some will exit, driving the supply curve to the left and the equilibrium price up. When the price rises, the remaining firms will shift production outwards so that their marginal cost rises to meet the new higher price, so per-firm production actually increases.
10. To maximize utility, ensure that: (a) the marginal utility is the same for all goods. (b) the marginal utility per dollar spent is the same for all goods. (c) the marginal cost per dollar spent is the same for all goods. (d) all of the above
(b) the marginal utility per dollar spent is the same for all goods. - same as question 2: if we switch a dollar between goods, we don't want our total utility to rise.
8. What is John's per-window reservation price to justify the 4th and 5th hours of cleaning windows? (a) $7 and $7.5 respectively (b) $2 and $3.5 respectively (c) $3.5 and $7 respectively (d) $11 and $14 respectively
(c) $3.5 and $7 respectively - He can clean 2 windows in the 4th hour, so unless he's paid $3.50 per he will just work at the grocery store instead. 1 window in the 5th hour means its 7 for that one.
3. Refer to the figure above. Fixed cost for this firm is (a) $66 (b) $64 (c) $50 (d) $14
(c) $50
13. The equilibrium price of permits is (a) $650,000. (b) $150,000. (c) $65,000. (d) $6,500.
(c) $65,000. • If you get a permit, this gives you the opportunity to earn 150,000 in revenue at a (total) cost of $85,000. If the price were above this, no one would want to buy it.
8. Refer to the chart above. An economist would put the total cost of producing 15 units of output at (a) $6. (b) $63. (c) $69. (d) $75.
(c) $69.
Jamie's marginal utility for consuming muffins and doughnuts in utils are in the figure. Jamie spends $4 for breakfast every morning, the price per muffin is $1.00 and the price per doughnut is $0.5. Answer the next two questions based on this information. 5. If Jamie consumes 3 muffins, Jamie will consume ____ doughnuts, and have ____ marginal utility per dollar from doughnuts. (a) 2; 20 (b) 4; 15 (c) 2; 40 (d) 4; 10
(c) 2; 40 - Q(doughnuts)= disposable income / price of doughnut = ($4 - $1*3) / $0.5 =2
Answer the next three questions based on the following two schedules which show the amounts of additional satisfaction (marginal utility) which a consumer would get from successive quantities of products J and K. 14. Refer to the above data. If the consumer has an income of $52 and the prices of J and K are $8 and $4, respectively, the consumer will maximize her utility by purchasing: (a) 2 units of J and 3 units of K. (b) 5 units of J and 3 units of K. (c) 4 units of J and 5 units of K. (d) 6 units of J and 1 units of K.
(c) 4 units of J and 5 units of K. - The MU/price for J is 24/8 = 3, the MU/price for K is 12/4 = 3 and the consumer is spending 4*8 + 5*4 = 52, her whole income. So this is the optimal choice.
9. According to the denition used in class a competitive market is one where (a) Marginal cost is low (b) Firms spend a large fraction of revenue on advertising (c) All firms act as price takers (d) Many customers are highly price conscious
(c) All firms act as price takers
10. In highly competitive markets (a) Price markups over marginal costs are large (b) Entry is usually very difficult (c) The equilibrium price is always close to marginal cost (d) Profits are usually high because of large advertising expenditures
(c) The equilibrium price is always close to marginal cost - The marginal benefit from selling a unit is the price, so P=MC is the optimal pricing condition in a competitive market.
9. The utility maximizing principle of consumer behavior suggests that consumers will make purchase decisions based on comparing the (a) the marginal cost of each good. (b) total utility of all goods. (c) additional utility per dollar spent on each good. (d) rate of diminishing total utility from successive units of a given good.
(c) additional utility per dollar spent on each good. - The optimal spending rule is to ensure that you can't switch dollars between goods and become happier, so the marginal utility per dollar must be the same across goods.
1. The utility maximizing principle of consumer behavior suggests that consumers will make purchase decisions based on comparing the (a) the marginal cost of each good. (b) total utility of all goods. (c) additional utility per dollar spent on each good. (d) rate of diminishing total utility from successive units of a given good.
(c) additional utility per dollar spent on each good. - When you are spending money on multiple goods, optimal spending is when your marginal utility per dollar (MU/p) is equal for all goods.
10. Duke is a particularly highly skilled negotiator operating in a perfectly competitive market. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can from any other negotiator in town. The increased revenue will (a) be evenly split between Duke and the law firm to maximize surplus. (b) all go to the law firm because the firm bears the risk of running the business. (c) all go to Duke because if it didn't, another firm could hire Duke away. (d) be split, with 75% going to Duke and 25% going to the law firm.
(c) all go to Duke because if it didn't, another firm could hire Duke away. • price taking firms means Duke has to get paid his marginal product
12. Newspaper dispensing devices often allow the consumer to open the door and take all newspapers even if they have paid for only one. To the uninitiated it may seem that the newspaper vending company "trusts" people to take only a single paper upon payment for one newspaper. An economist would more likely say that the vending company is actually relying on the law of: (a) supply. (b) increasing opportunity costs. (c) diminishing marginal utility. (d) demand. (e) none of the above.
(c) diminishing marginal utility. - Consuming two newspapers doesn't give you any new news, and so there isn't much point, making the marginal benefit of the second very low. If there is even a small cost of getting caught or you feel slightly bad about stealing, the marginal cost of taking the second paper will exceed the marginal benefit.
7. Assume diminishing marginal utility. If Terry gets maximum utility from owning 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs. (a) greater than (b) equal to (c) less than (d) less than or equal to
(c) less than - Diminishing marginal utility: MU(7th pair of shoes)> MU(8th pair of shoes). But both MU(7th pair of shoes) and MU(8th pair of shoes) are larger than 0.
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: 7. Does the 3rd-hour cleaning satisfy the cost-benefit principle? (a) yes, since he makes $28 (b) yes, since the additional amount earned is $14 (c) no, since the additional amount earned is $6 (d) yes, since the additional amount earned is $6.
(c) no, since the additional amount earned is $6
11. Bobby consumes only chocolate and vanilla ice cream and he is spending all of his income. For the last scoop of chocolate and vanilla ice cream that he bought, his marginal utility of chocolate is 100 and his marginal utility of vanilla is 250, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. Bobby would maximize his utility by _______ice cream. (a) only purchasing vanilla ice cream, but no chocolate (b) purchasing more chocolate and less vanilla (c) purchasing more vanilla and less chocolate (d) not changing his purchases of chocolate and vanilla (e) only purchasing chocolate ice cream, but no vanilla
(c) purchasing more vanilla and less chocolate - His marginal utility per dollar of vanilla is 250/2 = 125, while his marginal utility per dollar of chocolate is 100/1 = 100. So if he spend one less dollar (approximately speaking) on chocolate, he loses 100 utils, but he can get 125 utils by spending that dollar on vanilla and so be happier.
11. Suppose several United States software design companies compete with each other in a perfectly competitive environment. If one company decides to move some of its offices to a low-wage country in order to reduce operating costs (a) the other companies will still be able to remain profitable while operating solely in the United States. (b) the company that moves to the lower-wage country will earn positive economic profits in the long run because it will keep a cost advantage. (c) the other companies will also move to the low wage country in order to remain in the industry. (d) only the first company to move will charge a lower price than the companies remaining in the United States.
(c) the other companies will also move to the low wage country in order to remain in the industry.
22. If the consumer is maximizing utility and the marginal utility per dollar spent on good X is 4 and the marginal utility per dollar spent on good Y is 2, we know that (a) the price of Y must be twice the price of X. (b) the MU of X must equal that of Y. (c) total utility can be increased by increasing the consumption of X and decreasing the consumption of Y. (d) all of the above must be true
(c) total utility can be increased by increasing the consumption of X and decreasing the consumption of Y. - Trick question: realize that the question is stating that the consumer IS maximizing utility
8. If marginal utility is positive, then (a) total utility must be decreasing. (b) total utility must be below zero. (c) total utility must be increasing. (d) none of the above would be necessarily true.
(c) total utility must be increasing. - If I always get positive utility from one more unit (which is the denition of positive marginal utility), it must be that any number of units gives me higher total utility.
4. What is Christina's annual implicit cost? (a) $15,000 (b) $18,000 (c) $36,000 (d) $40,000
(d) $40,000
5. Christina's accounting profit is _______. (a) $100,000 (b) $9,000 (c) $64,000 (d) $49,000
(d) $49,000
Christina was the business manager for a real estate firm earning an annual salary of $40,000. Then Christina decided to become a consultant. Christina hired an administrative assistant at $15,000 per year and rents office space (utilities included) for $3,000 per month. Christina earned $100,000 in total revenue the first year. 3. What is Christina's explicit annual cost? (a) $15,000 (b) $12,000 (c) $36,000 (d) $51,000
(d) $51,000 • 15000 + 3000 * 12 = 51000
15. Refer to the above data. If the consumer's money income were cut from $52 to $28, and the prices of J and K remain at $8 and $4, respectively, she would maximize her utility by purchasing: (a) 3 units of J and 1 units of K. (b) 1 unit of J and 5 units of K. (c) 4 units of J and 1 unit of K. (d) 2 units of J and 3 units of K.
(d) 2 units of J and 3 units of K. - Spending all her income, and the MU/price is now 6 for each.
15. From the perspective of a current street vendor, the regulation requiring permits has had (a) a negative effect; his economic profits are now zero. (b) no effect. (c) a negative effect; the opportunity cost of continuing in the business has increased. (d) a positive effect; he is now guaranteed $65,000 per year whether he operates or sells his permit.
(d) a positive effect; he is now guaranteed $65,000 per year whether he operates or sells his permit. • This regulation is effectively a transfer of $65,000 per license, with the source of the transfer being the customers of the food trucks, who have to pay more than they would in a zero-profit equilibrium.
7. Refer to the chart above. An output level of 25 units results in (a) economic profits of zero. (b) positive economic profits. (c) normal profits. (d) accounting profits of zero.
(d) accounting profits of zero.
4. Angel's marginal utility for playing pool is 10 after playing 5 games. Angel's marginal utility for bowling is 6 after 3 games. If both pool and bowling cost $1 a game, to maximize his utility without spending more Angel should (a) bowl more and play pool less (b) just go home (c) bowl only (d) bowl less and play pool more
(d) bowl less and play pool more - Angel's marginal utility is higher playing pool after 5 games than Angel's marginal utility for bowling after 3 games. Angel should bowl less and play pool more until Angel's marginal utility for bowling is equal to playing pool.
Answer the next two questions based on this information. Kenny is a rational utility maximizing consumer. He earns $150 a week and consumes only fish and shrimp. The price of fish is $3 a pound and the price of shrimp is $5 a pound. Fish and shrimp are normal goods for Kenny. 18. Suppose we know that when Kenny's income was $150, he maximized his total utility by buying 25 lbs of fish and 15 pounds of shrimp. If his income increases to $210, which of the following combinations is a reasonable choice for his new consumption bundle, assuming he still maximizes total utility? (a) 30 lbs of fish and 20 lbs of shrimp (b) 70 lbs of fish and zero pounds of shrimp (c) 20 lbs of fish and 30 lbs of shrimp (d) 30 lbs of fish and 30 lbs of shrimp (e) 30 lbs of fish and 24 lbs of shrimp
(e) 30 lbs of fish and 24 lbs of shrimp - This is the only option where he buys more of both goods (they are both normal goods) and he is spending his entire income.
11. The computer manufacturer Cray faces monthly production possibilities given by the following table in the figure (has answers): • Draw the supply curve Cray's production generates for prices between 0 and 50
All Shown in Figure Instructions: - First make a table with marginal computers produced, marginal costs, and then the MU/P = the output price. (Shown in the figure) - Then plot the out price on the y-axis and the corresponding Output price on the x-axis.
A firm producing screwdrivers in a perfectly competitive market has the following per-hour total costs table: 16. Refer to the table above. At an output price of p = 4, what is the firm's optimal short-run production decision, and would it want to exit the market if it got the chance?
First, we make the marginal version of the table: - Shown in Figure Answer: A) As usual, the final column here is marginal cost per screwdriver. At a price of 4, the firm wants to hire 30 employees and make 175 screwdrivers, with revenue 175 * 4 = 700, total variable costs of 500, and fixed costs of 400. So this firm is covering its variable costs (700-200 > 0) so it will operate and make 175 screwdrivers B) At 30 employees, the total cost is $900, but only revenue of 700. This means that the firm is not covering its total cost it is making negative economic profit and will want to exit.
Quiz Question A monopolist faces the following demand curve: (in figure) The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production? a) 2 units b) 1 unit c) 4 units d) 3 units
c) 4 units
12. Refer to the table above. Suppose the owner of the pond can now perfectly price discriminate. What will the highest price the owner charges any entrant and what is the overall efficiency loss now? a) $11.00; $0 b) $10.00; $11 c) $8.00; $4 d) $5.00; $25
a) $11.00; $0
Practice Exam 23. John operates a firm in a perfectly competitive restaurant market. John rents space for $1000 per month. John has signed a lease for a 6 month period of which one month still remains. John employs 2 workers and pays them $1000 each, per month. He sells 100 meals per month, at zero additional cost, which generates total revenues of $2500. John is trying to decide whether to shut down or remain open during the last month of the 6-month lease. John's profit for the month if he decides to keep the restaurant running is _____; John's profit for the month if John decides to shut down is _____; so John should ______. a) - $500; -$1000; remain open. b) - $1000; - $500; shut down (in the short run). c) - $500; - $500; be indifferent between shutting down and remaining open. d) - $1000; - $1000; be indifferent between shutting down and remaining open.
a) - $500; -$1000; remain open.
Quiz Question John operates a firm in a perfectly competitive restaurant market. John rents space for $1000 per month. John has signed a lease for a 6 month period, of which one month still remains. John employs 2 workers and pays them each $1000 per month. He sells 100 meals per month, at zero additional cost, which generate total revenues of $2500. John is trying to decide whether to shut down or remain open during the last month of the 6-month lease. John's profit for the month if he decides to keep the restaurant running is_____; John's profit for the month if John decides to shut down is _____; so John should______. a) - $500; -$1000; remain open. b) - $500; - $500; be indifferent between shutting down and remaining open. c) - $1000; - $500; shut down (in the short run). d) - $1000; - $1000; be indifferent between shutting down and remaining open.
a) - $500; -$1000; remain open.
Practice Exam 24. Suppose you start a business producing computers. In the first month, your total production was 10 computers. You paid $2,000 in monthly rent for office space and equipment, $3,000 to your workers in wages, and your opportunity costs of time were $1,000. Next month, you can adjust the number of workers you hire but none of your other inputs (nor your opportunity costs). You would want to temporarily shutdown if the output price fell to ____, and try to exit the market if the output price fell to ____. a) 300; 600 b) 600; 300 c) 400; 0 d) 600; 0
a) 300; 600 VC: $3,000 TC: $6,000
Practice Exam 17. Refer to Table 1 above. Now say the daily wages of workers rose from $60 to $100 with price (still) of 20. What is the new optimal number of lawns? a) 5 b) 9 c) 12 d) 20
a) 5
Salina studied 5 hours for her first Economics test and her test score was 85; 6 hours for her second Economics test and scored 90; and 7 hours for her third Economics test and scored 95. She also studied 5 hours for her first Math test and her test score was 68; 6 hours for her second Math test and scored 78; and 7 hours for her third Math test and scored 88. Assume Salina's utility equals her total score across her two exams: utility = math score + econ score, and all the exams were identical in terms of difficulty, benefits of studying, etc. She has no utility cost of studying. Salina's marginal utility from the seventh hour spent studying Economics is a) 5 b) 10 c) 15 d) 45
a) 5
7. In which situation is a price ceiling most likely to increase economic efficiency? a) A non-price discriminating monopolist operates in a market with a demand and marginal cost curve known by the government b) A perfectly competitive market has an equilibrium price given by P* c) A perfectly price-discriminating monopolist is charging dierent prices to each consumer d) A non-price discriminating monopolist operates in a market with a demand and marginal cost curve unknown by the government
a) A non-price discriminating monopolist operates in a market with a demand and marginal cost curve known by the government
Quiz Question Suppose a firm can produce 50 computers per day, and the market price for each computer is $200. The total cost each day is $12,000, of which $3,000 is fixed costs. What is the firm's short-run and long-run decision? a) It will produce in the short run and exit the industry in the long run. b) It will shut down in the short run and produce in the long run. c) It will shut down in the short run and exit the industry in the long run. d) It will produce in the short run and produce in the long run.
a) It will produce in the short run and exit the industry in the long run.
5. A price discriminating monopolist: a) Produces more output than that produced by a single-price monopolist b) Has a lower marginal cost than that incurred by a single-price monopolist c) Earns a smaller economic prot than that earned by a single-price monopolist d) Earns zero economic prot in the long-run
a) Produces more output than that produced by a single-price monopolist
Quiz Question Which of the following is the best "simple" description of the Rational Spending Rule? a) You shouldn't be able to make yourself happier by moving a dollar across different goods after you've spent everything. b) Make sure you buy units so your total "bang for the buck" is as high as possible. c) Minimize your expenditure by focusing consumption on the cheapest items. d) Spend until the additional benefit from consuming any goods equals zero.
a) You shouldn't be able to make yourself happier by moving a dollar across different goods after you've spent everything.
Quiz Question Refer to the market shown in the graph above. A single-price unregulated monopoly will set price at a) b b) a c) d d) c e) None of the other choices.
a) b
Practice Exam 6. Newspaper dispensing devices often allow the consumer to open the door and take all newspapers even if they have paid for only one. To the uninitiated it may seem that the newspaper vending company "trusts" people to take only a single paper upon payment for one newspaper. An economist would more likely say that the vending company is actually relying on the law of: a) diminishing marginal utility. b) demand elasticity. c) increasing opportunity costs. d) the rational spending rule.
a) diminishing marginal utility.
Sven's vacation convinced him that a) even for activities he really enjoys, diminishing marginal utility eventually sets in. b) blueberry picking yields higher total utility than does water skiing. c) even for activities he really enjoys, total utility declines each time he engages in it. d) economic theory applies only to things you buy, not recreation
a) even for activities he really enjoys, diminishing marginal utility eventually sets in.
Quiz Question Jonjoe's marginal utility for eating one more slice of pineapple and ham pizza (the "Hawaiian") is 20 after paying for and eating 5 slices. Jonjoe's marginal utility for the next can of Mr. Pibb (a soda) is 12 after drinking 2 cans. If both pizza slices and cans of soda cost $1, to maximize his utility, Jonjoe's next dollar should: a) go to pizza b) go to neither pizza nor soda c) be split between soda and pizza proportionally to their marginal utilities d) go to soda
a) go to pizza
Quiz Question Consider the market for baking supplies, which is perfectly competitive and has reached its long-run equilibrium. During the pandemic, demand for baking supplies increases because people are bored at home and need a new hobby. In the short run, this will lead to ______ for firms, and in the long run we would expect to see a(n) ______ in supply. a) higher profits; increase b) lower profits; increase c) higher profits; decrease d) lower profits; no change e) higher profits; no change
a) higher profits; increase
5. A single price monopoly is producing an output level of 100 units where MC=$5 and MR=$8. At this output, total costs are $800, variable costs are $600, and the marginal consumer's reservation value is $10. This firm should a) increase output and price somewhere below $10 b) increase output and price somewhere above $10 c) decrease output and price somewhere below $10 d) decrease output and price somewhere above $10
a) increase output and price somewhere below $10 - MC increases and MR decreases as quantity increases, as well as the price charged to the consumer. So since MC < MR, we check that the firm is covering variable costs (it is), then we increase production, which leads to a lower reservation value for the marginal consumer.
Sven likes to water ski, but can only water ski during the one week that he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Svenskied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. Sven's total utility _______with each hour that he skied. a) increased b) decreased c) remained constant d) first increased than decreased
a) increased
When Jeff goes from watching 3 to 4 movies a day, his total utility: a) increases b) decreases. c) does not change. d) gets close to zero.
a) increases - His marginal utility is still positive
Practice Exam 19. A firm wants to shut down in the short run (that is, produce Q* = 0) when a) it cannot cover its variable costs b) it cannot cover its fixed costs c) it cannot cover its total costs d) it can adjust its fixed inputs
a) it cannot cover its variable costs
Practice Exam 7. Based on the rule for maximizing utility, if the price of good A is twice that of good B, at optimal consumption a) the MU of the last unit of A must be twice the MU of the last unit of B. b) the rational spending rule does not apply if prices are different. c) the TU from A must be twice the TU from B. d) the consumer must buy twice as many units of B in comparison to A.
a) the MU of the last unit of A must be twice the MU of the last unit of B.
Practice Exam 4. If the marginal utility of the 3rd cup of coffee is 30 utils and the marginal utility of the 4th cup is 20 utils, then a) the above data are evidence of the law of diminishing marginal utility. b) it is optimal for the consumer to have 3 cups of coffee. c) the price of a cup of coffee must be 10 cents. d) total utility from 4 cups of coffee must be lower than the total utility from 3 cups of coffee.
a) the above data are evidence of the law of diminishing marginal utility.
Quiz Question Consider the total cost table of a firm shown above. What is the fixed cost associated with this firm? a) $50 b) $20 c) $10 d) $30
b) $20
6. A single price monopoly is producing an output level of 100 units where MC=$5 and MR=$5. At this output, total costs are $800, variable costs are $600, and at 100 units produced the marginal consumer's reservation value is $10. What is the firm's accounting profit? a) $500 b) $200 c) -$300 d) -$200, the rm should shut down
b) $200 - Remember the price is equal to the reservation value for the last unit bought, so price is 10.
11. Refer to the table above and problem 10. What is the efficiency loss associated with the single-price monopoly behavior? a) $0 b) $4 c) $5 d) $8
b) $4 - There could be 4 additional dollars of surplus generated because Robin will not fish and would be willing to pay up to 4 dollars to do so.
A catfish pond can only allow up to 6 people to fish per day. The following table shows the list of people who wanted to fish last Tuesday; their respective times of arrival and reservation prices that day (maximum amount they will pay to avoid postponing fishing). Answer the next three questions based on this information. 10. Refer to the table above. What is the profit-maximizing price that the owner of the pond would choose acting as a single-price monopolist? (Assume if someone is charged exactly their RV they will buy.) a) $4 b) $5 c) $6 d) $8
b) $5 - with a price of $5, only 5 people will want to fish, but the owner makes $25. By lowering the price to $4, the owner could sell to 6 people but the total revenue would only be $24.
Refer to the chart above. The total utility (ignoring monetary costs) from two dinners out is a) 75. b) 175. c) 185. d) 660.
b) 175.
Quiz Question You have 6 available hours to split between spending time with your friends and working on homework. The table in the figure summarizes the possible choices and the marginal utilities associated with each: What is the Rational Spending Rule choice for time spent with friends and on homework? a) 3 hours with friends; 3 on homework b) 2 hours with friends; 4 on homework c) 5 hours with friends; 1 on homework d) We can't say without more information. e) 4 hours with friends; 2 on homework
b) 2 hours with friends; 4 on homework
Quiz Question You have $200 to spend on car repairs or eating fast food. There are four problems with your car, and fixing each will cost $40, while you can get each fast food meal for $10. The marginal utilities of each are shown in the figure: What is the Rational Spending Rule choice for expenditure on these two goods? a) 1 car issues fixed; 1 fast food meals b) 4 car issues fixed; 4 fast food meals c) 4 car issues fixed; 5 fast food meals d) 3 car issues fixed; 6 fast food meals
b) 4 car issues fixed; 4 fast food meals
Quiz Question Suppose the price of the output is $1.00, what is the firm's profit-maximizing total output when calculated using our optimal production rule? a) 0 b) 90 c) 120 d) 150 e) 15
b) 90 MR = MC
1. In a market in which a firm exercises monopoly power, that firm is said to be a price _____ and sells goods or services for which there is no ______. a) Taker; close substitute b) Maker; close substitute c) Taker; close complement d) Maker; close complement
b) Maker; close substitute
Practice Exam 11. The theory of perfect competition implies that supply will increase if: a) the MC schedule of firms shifts upwards. b) economic profits are positive. c) input prices increase. d) opportunity costs increase.
b) economic profits are positive.
Quiz Question The theory of perfect competition implies that supply will increase in the long run if: a) input prices increase. b) economic profits are positive. c) opportunity costs increase. d) the MC curve of firms shifts upwards.
b) economic profits are positive.
Practice Exam 12. If a perfectly competitive firm with an increasing MC curve is producing a quantity where price is greater than marginal cost, then the firm should a) pay a higher rate to its variable factors of production. b) expand output to earn greater profits or smaller losses. c) reduce output to earn greater profits or smaller losses d) leave its output decision unchanged
b) expand output to earn greater profits or smaller losses.
Practice Exam 25. If an industry faced decreasing returns to scale, which of the following is most likely: a) firms would want to greatly increase production from their current level. b) firms are running out of room to fit additional material inputs. c) the demand curve is highly elastic. d) the long-run equilibrium would have positive profits for every firm.
b) firms are running out of room to fit additional material inputs.
13. Compare the socially efficient outcome with the monopoly equilibrium. Consumer surplus is a) greater under the pure monopoly equilibrium by the amount equal to area LEI b) greater under the socially efficient outcome by the amount equal to area CEIG c) smaller under the pure monopoly equilibrium by the amount equal to area CELG d) greater under the socially efficient outcome by the amount equal to area EIK
b) greater under the socially efficient outcome by the amount equal to area CEIG
Practice Exam 10. The price elasticity of demand for life insurance has been estimated to be 0.75. This implies, acting as a group insurance companies could increase their revenues by a) decreasing rates charged for insurance policies. b) increasing rates charged for insurance policies. c) increasing the supply of insurance policies. d) increasing the demand for insurance policies.
b) increasing rates charged for insurance policies.
Practice Exam 16. Refer to Table 1 above. If the price for working on a single lawn is p = 20 what is the optimal number of lawns cared for? a) 5 b) 9 c) 12 d) 20
c) 12
Assume you have $5,000 to invest. Assume stock in IBM costs $50 per share and pays a yearly dividend of $10 per unit of stock. Assume stock in TI costs $20 per share and pays a yearly dividend of $5 per unit of stock. Ignoring all other factors, to maximize your investment return you should: a) invest $5,000 in IBM. b) invest $5,000 in Tl. c) split your investment so that the ratio of your shares of TI relative to IBM is 2.5 to 1. d) split your investment so that the ratio of your shares of IBM relative to TI is 2.5 to 1.
b) invest $5,000 in TI. •TI has a 25% return per share (since if you spend $20 you get 5) vs 20% for IBM. Here there is no issue of decreasing marginal utility since (as long as the marginal utility of money is positive) you just want to get as much money out of this as possible - $5000 in TI returns $1250 - $5000 in IBM returns only $1000
10. Assume you have $5,000 to invest. Assume stock in IBM costs $50 per share and pays a yearly dividend of $10 per unit of stock. Assume stock in TI costs $20 per share and pays a yearly dividend of $5 per unit of stock. Ignoring all other factors, to maximize your investment return you should: a) invest $5,000 in IBM. b) invest $5,000 in Tl. c) split your investment so that the ratio of your shares of TI relative to IBM is 2.5 to 1. d) split your investment so that the ratio of your shares of IBM relative to TI is 2.5 to 1.
b) invest $5,000 in Tl. •TI has a 25% return per share (since if you spend $20 you get 5) vs 20% for IBM. Here there is no issue of decreasing marginal utility since (as long as the marginal utility of money is positive) you just want to get as much money out of this as possible - $5000 in TI returns $1250 - $5000 in IBM returns only $1000
Practice Exam 1. Assume diminishing marginal utility. If Steven gets maximum utility from owning 10 pairs of shoes, then Steven's total utility from owning 12 pairs of shoes is ______ Steven's total utility from owning 11 pairs. a) greater than b) less than c) less than or equal to d) equal to
b) less than
Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can with each payment. The reason is that the: a) opportunity cost of an additional can of soft drink increases very rapidly. b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later. c) marginal utility of an extra soft drink can decline quite rapidly. d) opportunity cost of an additional can of soft drink increases very slowly.
b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later.
2. To sell an extra unit of output, a perfect competitor __________ while an imperfect competitor __________. a) does not alter price; must lower price b) must hope the market price falls; must lower price c) does not alter price; does not alter price either d) must lower price; must lower price
b) must hope the market price falls; must lower price
Quiz Question Refer to the market shown in the graph. (in figure) The transfer of consumer surplus from consumers to the producers with a single-price monopoly instead of perfect competition is the area of a) trapezoid beic b) rectangle befc c) triangle abe d) rectangle begd
b) rectangle befc
Practice Exam 18. The difference between short-run and long-run production functions is a) the first refers to the current accounting year, while the second refers to years after that. b) the first refers to a timeframe when some factors of production cannot be adjusted, while the second refers to a timeframe such that all factors are freely adjustable. c) the first refers to a timeframe when the current management is in charge, the second refers to anytime after that. d) the first refers to the unit of time that production of one unit of the good takes, the second refers to anytime after that.
b) the first refers to a timeframe when some factors of production cannot be adjusted, while the second refers to a timeframe such that all factors are freely adjustable.
Quiz Question The difference between short-run and long-run production functions is a) the first refers to the current accounting year, while the second refers to years after that. b) the first refers to a timeframe when some factors of production cannot be adjusted, while the second refers to a timeframe such that all factors are freely adjustable. c) the first refers to a timeframe when the current management is in charge, the second refers to anytime after that. d) the first refers to the unit of time that production of one unit of the good takes, the second refers to anytime after that.
b) the first refers to a timeframe when some factors of production cannot be adjusted, while the second refers to a timeframe such that all factors are freely adjustable.
8. The best economic reason to protect the market power of a firm through patent protection is that a) high profits are important to the strength of a nation's economy. b) without patent protection the market may not exist. c) creating a monopolist will improve the allocation of resources in the economy. d) it is important to continue to employ lawyers.
b) without patent protection the market may not exist.
Practice Exam 22. Elsa was a travel agent with a large firm, earning $40,000 salary per year. Then Elsa decided to start her own firm. Elsa hired an administrative assistant at $25,000 per year and rents office space for $10,000 per year. Elsa earned $50,000 in total revenue the first year. Elsa's accounting profts are _____, while her economic profits are ______. a) $50,000; $15,000 b) $10,000; $25,000 c) $15,000; -$25,000 d) $-25,000; $10,000
c) $15,000; -$25,000 Accounting: $50,000 - $35,000 cost Economic: $50,000 - ($35,000 + $40,000 OC)
18. Refer to the figure above. Assume the market sells 4 units. The marginal revenue of selling the 4th unit, for the monopolist is ______ while for a perfectly competitive firm it is _____. a) $10; $2 b) $10; $4 c) $4; $10 d) $0; $12
c) $4; $10
Quiz Question Under the price discrimination scheme from question 4, the pool is able to increase their profits by ____ and social efficiency is _____. a) $1; increased b) $7; increased c) $4; increased d) $0; stays the same e) $7; decreased
c) $4; increased
Quiz Question Competitive firms differ from monopolies in which of the following ways? (i) Competitive firms do not have to worry about increases in their quantity lowering the price and thus reducing revenue. (ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge. (iii) Monopolies must lower their price in order to sell more of their product, while competitive firms do not. a) (i) and (ii) b) (i) and (iii) c) (i), (ii), and (iii) d) (ii) and (iii)
c) (i), (ii), and (iii)
Refer again to the figure above. What is Jeff's optimal number of movies to watch per day? a) 0, because it maximizes marginal utility b) 3, because then the number of movies exceeds his marginal utility of 2.5 c) 4.5, because marginal utility is 0 d) 6, since it's the most movies you can see
c) 4.5, because marginal utility is 0
Refer to the above data. If the opportunity cost (in utils) of buying each unit of K were always 9, the optimal consumption of K would be a) 2 b) 5 c) 6 d) 7
c) 6
Practice Exam 5. Chris had been charging a dollar a pound for potatoes. When Chris lowered the price to 90 cents, total revenue increased. When Chris raised the price to $1.10, total revenue fell. Why? a) $0.90 is the equilibrium price for potatoes. b) At $1.00, there is excess demand for potatoes. c) At $1.00, demand for potatoes is elastic. d) $1.10 is more than Chris's customers' reservation prices.
c) At $1.00, demand for potatoes is elastic.
12. The deadweight loss resulting from monopoly provision is represented by the area: a) LEI. b) KLI. c) KEI. d) GCEL.
c) KEI.
9. Suppose a monopolist in a market given by the above figure can perfectly price discriminate. Producer surplus is then given by area: a) EIK b) OGI c) OJI d) OJK
c) OJI
Quiz Question Assume there is one swimming pool in town that faces the following reservation values for college students and faculty: (in the figure) Say the marginal cost to the pool of pool entrance is $3 per person (for both students and faculty). If the pool operates as a single-price monopoly and can't statistically discriminate, what would the profit maximizing price (P) be for the swimming pool to charge? What is the associated quantity demanded (Q)? a) P, Q = 13, 2 b) P, Q = 1, 6 c) P, Q = 10, 3 d) P, Q = 7, 4
c) P, Q = 10, 3
16. The beneficiaries of this deal are _______. a) the students b) State U c) State U and CheapFizz d) CheapFizz
c) State U and CheapFizz
If Salina has already spent 5 hours studying Economics and 5 hours studying Math, she should spend the next hour a) Studying Math for half an hour and Economics for half an hour b) Studying only Economics c) Studying only Math d) Studying Economics for 45 minutes and Math for 15 minutes
c) Studying only Math - The marginal benefit for an additional hour of Math is 10, while it's only 5 for economics. So she should choose the highest of the marginal utilities for that hour.
Quiz Question The Rational Spending Rule principle of consumer behavior suggests that consumers will make purchase decisions based on comparing the (choose the best answer) a) the marginal cost of each good. b) rate of diminishing total utility from successive units of a given good. c) additional utility per dollar spent on each good d) total utility of all goods.
c) additional utility per dollar spent on each good
9. A monopolist is producing 10 units of output such that total costs are $40, P = $5, MC = $2, and MR = $3. This firm is realizing: a) a loss that could be reduced by producing more output. b) a loss that could be reduced by producing less output. c) an accounting profit that could be increased by producing more output. d) an accounting profit that could be increased by producing less output.
c) an accounting profit that could be increased by producing more output. - MR > MC means output should increase
Newspaper dispensing devices often allow the consumer to open the door and take all newspapers even if they have paid for only one. To the uninitiated, it may seem that the newspaper vending company "trusts" people to take only a single paper upon payment for one newspaper. An economist would more likely say that the vending company is actually relying on the law of: a) supply. b) increasing opportunity costs. c) diminishing marginal utility. d) demand. e) none of the above.
c) diminishing marginal utility.
Practice Exam 9. Electric scooters are a close substitute for taxi services such as Uber. When scooters were introduced, the price elasticity of demand for Ubers ______ and Ubers' ability to raise revenues through price increases _________. a) increased; increased b) decreased; was reduced c) increased; was reduced d) had no effect; was reduced
c) increased; was reduced
Sven likes to water ski, but can only water ski during the one week that he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Svenskied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. On the fifth day of Sven's vacation, he had decided that another hour of skiing would yield a) more utility than the day before b) the same level of utility as the day before c) less utility than blueberry picking d) no utility at all
c) less utility than blueberry picking
Practice Exam 14. In general, if the price of a variable factor of production increases, a) output price falls. b) marginal costs are unchanged. c) marginal costs increase. d) output increases.
c) marginal costs increase.
Practice Exam 8. Bobby consumes only chocolate and vanilla ice cream and he is spending all of his income. For the last scoop of chocolate and vanilla ice cream that he bought, his marginal utility of chocolate is 100 and his marginal utility of vanilla is 250, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. Bobby would maximize his utility by _______ice cream. a) only purchasing vanilla ice cream, but no chocolate b) purchasing more chocolate and less vanilla c) purchasing more vanilla and less chocolate d) not changing his purchases of chocolate and vanilla
c) purchasing more vanilla and less chocolate
1. An imperfectly competitive firm is one a) that attempts but fails to compete perfectly. b) with the ability to set price at any level it wishes. c) that possesses some degree of control over its price. d) that faces perfectly inelastic demand.
c) that possesses some degree of control over its price.
Say you started with 7 units of good K and 0 units of good J and could trade between J and K at a 1-for-1 rate. Optimally, you would end up with a) 0 J, 7 K b) 6 J, 1 K c) 2 J, 5 K d) 4 J, 3K
d) 4 J, 3K •At 4 units of J and 3 of K, getting one more unit of K (getting 20 utility) would require giving up one unit of J and losing 24 utility, so you wouldn't do that. •And getting one more unit of J (and getting 20 more utility) would require giving up one unit of K and giving up 24 utility, so again you wouldn't do that.
Consider the problem of how much coffee to drink. If the marginal utility of a 3rd cup of coffee is 23 utils (value in utility)and the marginal utility of the 4th cup is 15 utils (value in utility), then: a) it is optimal for the consumer to have 3 cups of coffee. b) the price of a cup of coffee must be 15 cents. c) the described situation is evidence of the law of diminishing marginal utility. d) total utility from 4 cups of coffee must be lower than the total utility from 3 cups
c) the described situation is evidence of the law of diminishing marginal utility.
In exchange for a share in the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus or at university events. 14. CheapFizz now has market power due to a) the economies of scale gained by having more sales on campus. b) the grant of a patent. c) the grant of an exclusive license to sell. d) network economies caused by all students consuming their product.
c) the grant of an exclusive license to sell.
If marginal utility is positive, then a) total utility must be decreasing. b) total utility must be below zero. c) total utility must be increasing. d) none of the above would be necessarily true.
c) total utility must be increasing.
Quiz Question The business you run splits resources between different divisions: sales, marketing, accounting, etc. An increase in the complexity of the tax code increases the marginal utility of devoting resources to your accounting division; at the same time, the market price of hiring accountants increases, making the price per year of running that division higher. In response to these changes, your optimal resource re-allocation is: a) devote more resources to accounting and fewer to other divisions. b) devote less resources to accounting and more to the other divisions. c) we can't tell without knowing the magnitudes of the two changes. d) increase your spending on both accounting and your other divisions.
c) we can't tell without knowing the magnitudes of the two changes.
Quiz Question Suppose the firm maximizes its profit when producing 60 units of output, what is a possible market price for the output? a) $0.30 b) $2.00 c) $1.20 d) $0.70
d) $0.70 - Has to be over $20 MC at 60 units. So, 20(MC)/30(Marginal Output) = at least $0.66666 needed per unit to exceed the 20 MC
7. A monopolistic firm faces a demand curve such that it can sell 10 prefabricated garages per week at $10,000 each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week is: a) -$1,000. b) $9,000. c) $10,000. d) $1,000.
d) $1,000.
17. Refer to the figure above. At a price of $8 per unit of output the total revenue for the monopolist is ____, and the marginal revenue earned from this last unit sold is ____. a) $8; 8 b) $24; 8 c) $32; 4 d) $40; 0
d) $40; 0 - The marginal revenue curve looks more or less like. Which I made simply by comparing revenue at 0 productions (0) to revenue at 1 production (16), then revenue at 1 production (16) to revenue at 2 productions (28), etc, and looking at the marginal revenues. Then a price of 8 happens at 5 productions, leading to 40 total revenue.
11. The monopolist's producer surplus is given by area (0 = origin): a) 0JI b) 0JK c) 0JEK. d) 0CEK. e) 0CEA.
d) 0CEK.
The table below shows some utility values associated with eating dinners out a certain number of times per week for some consumer. Assume total utility from food consumption is zero for zero dinners out per week. Each dinner out has an additional (not yet included in the table) monetary opportunity cost of 50 utils. Refer to the chart above. The marginal utility gained from eating the 4th dinner out is. a) 75. b) 250. c) cannot be determined from given information. d) 15.
d) 15. - Here we are focused on the utility gained from eating, and the utility cost from the money will be included later.
How many times will this individual have dinner out in a week? a) 0. b) 1 c) 2 d) 3
d) 3 •Here we include everything including monetary marginal opportunity costs of 50 per dinner.
Answer the next three questions based on the following two schedules which show the amounts of additional satisfaction (marginal utility) which a consumer would get from successive quantities of products J and K. Refer to the above data. If the opportunity cost (in utils) of buying each unit of J were always 22, the optimal consumption of J would be. a) 1 b) 2 c) 3 d) 4
d) 4 - we consume J all the way until the opportunity cost (22) is greater than the utils we are receiving from J. This happens to be at 4, based on the table.
Quiz Question If the monopoly illustrated in the figure above could engage in perfect price discrimination, then it would sell a) 50 tickets b) 30 tickets c) 100 tickets d) 60 tickets
d) 60 tickets
Quiz Question Say now the swimming pool from question 3 can change different prices for students and faculty. The profit maximizing student price is ___ and the profit-maximizing faculty price is ____ a) 7; 16 b) 4; 10 c) 4; 13 d) 7; 10 e) 1; 13
d) 7; 10 a) 7; 16 = 17 b) 4; 10 = 23 c) 4; 13 = 22 d) 7; 10 = 25 e) 1; 13 = 14
4. Price discrimination by a monopolist a) Requires that products cannot be transferred easily between customers b) Requires knowledge of demand of individual consumers or consumer subgroups c) Typically increases profit relative to a uniform price d) All of the above
d) All of the above
2. A profit maximizing single price monopolist produces an output where a) MR=MC b) MR < P c) demand is elastic. d) All of the above are true.
d) All of the above are true.
10. The monopolist's equilibrium price and quantity are, respectively: a) G; H. b) C; H. c) B; A. d) C; A.
d) C; A.
6. The more perfectly a monopoly can price discriminate: a) Its output gets closer to the competitive output and the outcome is less efficient b) Its output gets farther from the competitive output and the outcome is more efficient c) Its output gets farther from the competitive output and the outcome is less less efficient d) Its output gets closer to the competitive output and the outcome is more efficient
d) Its output gets closer to the competitive output and the outcome is more efficient
Quiz Question Which of the following economic choices is least likely to follow the law of diminishing marginal utility? a) Working a job lifting heavy objects. b) Buying pencils for the next semester's schoolwork c) Hiking on a beautiful mountain trail. d) Learning how to play a new instrument.
d) Learning how to play a new instrument.
8. Choose the incorrect statement: a) Price discrimination is charging different prices for a single good or service because of differences in buyers' willingness to pay b) The hurdle method is a price discriminating technique c) Price discrimination can increase economic efficiency d) Price discrimination includes charging different prices for a single good or service because of differences in production costs
d) Price discrimination includes charging dierent prices for a single good or service because of dierences in production costs
3. A profit maximizing monopolist's supply curve a) is less than with P.C. b) is greater than with P.C c) is the same as with P.C. d) The monopolist does not have a supply curve.
d) The monopolist does not have a supply curve. - Recall a supply curve has a horizontal interpretation as an amount produced for any given output price. Since a monopolist chooses the output price, it's not clear how to even dene its supply curve. It does, however, have a marginal cost curve.
Practice Exam 3. The utility maximizing principle of consumer behavior suggests that consumers will make purchase decisions based on comparing the a) the marginal cost of each good. b) total utility of all goods. c) rate of diminishing total utility from successive units of a given good. d) additional utility per dollar spent on each good.
d) additional utility per dollar spent on each good.
Practice Exam 13. Kimi is a particularly highly skilled computer programmer, working in a perfectly competitive market. The firm that hires her is able to collect twice as much revenue per hour from Kimi's time than it can from any other programmer in the market. The increased revenue will a) be evenly split between Kimi and the firm to maximize surplus. b) all go to the law firm because the firm bears the risk of running the business. c) be split, with 75% going to Kimi and 25% going to the law firm. d) all go to Kimi because if it didn't, another firm could hire Kimi away.
d) all go to Kimi because if it didn't, another firm could hire Kimi away.
Quiz Question Kimi is a particularly highly skilled computer programmer, working in a perfectly competitive market. The firm that hires her is able to collect twice as much revenue per hour from Kimi's time than it can from any other programmer in the market. The increased revenue will a) all go to the law firm because the firm bears the risk of running the business. b) be evenly split between Kimi and the firm, in order to make sure surplus is maximized. c) be split, with 75% going to Kimi and 25% going to the law firm. d) all go to Kimi because if it didn't, another firm could hire Kimi away.
d) all go to Kimi because if it didn't, another firm could hire Kimi away.
Practice Exam 2. Assume you are throwing a party and have $75 to spend. You are considering buying 5 cases of coke and 5 boxes of chips. The cost of coke is $5 per case and the cost of chips is $10 per box. The MU from the 5th case of coke is 120 and the MU from the 5th box of chips is 200. To maximize the utility from your purchases (assuming you can buy partial cases), you should: a) buy more chips and less coke. b) buy more coke and more chips. c) the answer is indeterminate without knowing the total utility received from coke and chips. d) buy more coke and less chips.
d) buy more coke and less chips. Coke: 120/$5 = 24 MU/P Chips: 200/$10 = 20 MU/P
Practice Exam 21. The government is thinking of eliminating drug patents, which would allow any firm to copy freely copy existing medical drugs without having to pay any of the fixed costs associated with drug development. Basic economic theory about firm dynamics would suggest that ______ are likely to lobby policitians to try to prevent removing this barrier to entry. a) future firms who will produce after the regulation b) consumers of the drugs c) producers of goods that are complements of medical drugs d) existing drug producers
d) existing drug producers
Practice Exam 15. If a worker in a perfectectly competitive industry moves to an industry where our assumptions of perfect competition no longer hold, we would expect that their wages will _____ since ______. a) fall; since the worker's opportunity costs are now higher in the new industry b) rise; as they can now negotiate with their firm for higher wages. c) rise; as decreased marginal costs raise their marginal revenue product. d) fall; there is decreased competition for that worker's services.
d) fall; there is decreased competition for that worker's services.
3. The hurdle method of price discrimination usually _____ consumer surplus and _____ producer surplus. a) decreases; increases b) increases; decreases c) decreases; decreases d) increases; increases
d) increases; increases
Practice Exam 20. A firm wants to shut down in the long run (market exit) when a) it can adjust its fixed inputs b) it cannot cover its fixed costs c) it cannot cover its variable costs d) it cannot cover its total costs
d) it cannot cover its total costs
15. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for a) 75 cents because that is the market price. b) less than 75 cents because CheapFizz will have greater volume and so can sell for a lower price, c) more than 75 cents because demand for CheapFizz will shift to the left. d) more than 75 cents because other firms must exit the market.
d) more than 75 cents because other firms must exit the market.
4. The reason economists often consider monopolies socially undesirable is that the monopolist: a) earns excessive prots. b) can charge any price it wants. c) exploits the inelastic nature of demand. d) produces less than the socially efficient amount.
d) produces less than the socially efficient amount.
Quiz Question Eliza consumes only chocolate and vanilla ice cream and she is spending all of her income. For the last scoop of chocolate and vanilla ice cream that she bought, her marginal utility of chocolate is 100 and her marginal utility of vanilla is 220, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. Eliza would maximize her utility by _______ice cream. a) only purchasing vanilla ice cream, but no chocolate b) only purchasing chocolate ice cream, but no vanilla c) purchasing more chocolate and less vanilla d) purchasing more vanilla and less chocolate e) not changing her purchases of chocolate and vanilla
d) purchasing more vanilla and less chocolate
Quiz Question If the monopoly illustrated in the figure above could engage in perfect price discrimination, then the lowest ticket price would be a) $0 b) $3 c) $4 d) $5 e) $2
e) $2