Final

An equilibrium is a set of prices and quantities such that

1. firms are maximizing profit 2. consumers are maximizing utility 3. markets clear

Variable input

A production input that can be varied in both the short run and the long run

fixed input

A production input that can only be varied in the long run

Can an isoquant ever slope​ upward? Explain. A. No. It would imply that adding more of both inputs keeps output constant. B. Yes. If both inputs are​ inferior, then the isoquant is upward sloping. C. No. It would imply that adding more of both inputs decreases output. D. Yes. Where diminishing returns​ occur, the isoquant is upward sloping.

A. No. It would imply that adding more of both inputs keeps output constant.

Using calculus, we measure marginal utility as the utility change that results from A. a very small increase in consumption. B. a very large increase in consumption. C. an average increase in consumption. D.anything other than changes in consumption.

A. a very small increase in consumption

An isocost line shows A. all the input combinations that can be purchased at a given total cost. B. the total cost of producing each possible level of output. C.all the possible output levels that can be produced at a given total cost. D. all the input combinations that produce the same total output.

A. all the input combinations that can be purchased at a given total cost.

An Engel curve shows combinations of A.income and the quantity consumed of one good. B.two goods for different levels of prices. C.two goods for different levels of income. D.income and prices.

A. income and the quantity consumed of one good

indiffernce curve

All combinations of goods that provide a consumer with the same level of satisfaction

A function that indicates the maximum output per unit of time that a firm can​ produce, for every combination of inputs with a given​ technology, is called A. an isoquant. B.a production function. C.a production possibility curve. D. an isocost function.

B. a production function.

At the point where average variable cost reaches its minimum value A.marginal cost also reaches its minimum value. B. average variable cost equals marginal cost. C.average variable cost equals average total cost. D. marginal cost equals zero.

B. average variable cost equals marginal cost.

If firms produce a homogeneous​ product, then A. consumers will be willing to pay different prices for output from different firms. B. products will be perfectly substitutable with one another. C. individual firms can raise price without losing all sales. D.the market may have multiple prices. E. market output will not be a commodity.

B. products will be perfectly substitutable with one another.

A perfectly competitive firm is producing the output that maximizes its profit. If its fixed cost​ increases, and industry price remains​ constant, how should it respond in the short​ run? A. It should produce more output. B. It should shut down. C. It should produce less output. D. It should keep output the same. E. It should raise its price.

D. It should keep output the same.

Which of the following is not an example of​ third-degree price​ discrimination? A. Higher fares for business travellers. B. Lower prices for students. C. Discounted movie tickets for senior citizens. D. Reservation pricing for each consumer. E. ​Manufacturer's coupons.

D. Reservation pricing for each consumer.

At the optimal point on an indifference curve and budget line diagram​ (assuming an interior​ solution) A.the consumer spends his or her entire budget on the two goods. B.the marginal rate of substitution between the two goods equals the ratio of their prices. C.the optimal indifference curve is tangent to the budget line. D.All of the above.

D. all of the above

The short run is A. three years. B. a time period in which at least one set of outputs has been decided upon. C.however long it takes to produce the planned output. D. less than a year. E. a time period in which at least one input is fixed.

E. a time period i which at least one input is fixed

Linear isoquant

The​ slope, or the​ MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input and output can be maintained. The inputs are perfect substitutes.

marginal product of labor

additional output from a small increase in labor

economic cost

the total cost of utilitzing resources

What is the difference between economies of scale and returns to​ scale? A. Economies of scale define whether joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single​ product, and returns to scale define how output changes with input usage for a single firm. B. Economies of scale define how cost changes with output in the short ​run, and returns to scale define how cost changes with output in the long run. C. Economies of scale are present when the​ long-run average cost curve is increasing​, and returns to scale are present when the​ long-run average cost curve is decreasing. D. Economies of scale are present when the expansion path is a straight​ line, and returns to scale are present when the expansion path is not a straight line. E. Economies of scale define how cost changes with​ output, and returns to scale define how output changes with input usage.

E. Economies of scale define how cost changes with​ output, and returns to scale define how output changes with input usage.

If firms can easily enter and exit a​ market, then A. firms will produce at minimum average fixed cost in the long run. B. firms will produce where price is less than marginal cost. C. firms will produce at minimum average cost in the short run. D. firms will produce where price is greater than marginal revenue. E. firms will earn zero economic profit in the long run.

E. firms will earn zero economic profit in the long run.

If firms are price​ takers, then A. they will earn zero economic profit. B. they will produce where price equals average variable cost. C. they will have market power. D. they will produce where marginal revenue is greater than marginal cost. E. they will produce where price equals marginal cost.

E. they will produce where price equals marginal cost.

What is the difference between a production function and an​ isoquant? A. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output. B. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. C. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. D. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.

A. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.

If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal​ cost, it should A. decrease its output. B. shut down. C. decrease its price. D.increase its output. E.increase its price.

A. decrease its output.

There is a social cost to monopoly power because A. monopoly production occurs where price is greater than marginal cost. Your answer is correct.B. monopolies earn less profit than competitive firms. C. monopolies charge prices that are below marginal revenue. D. monopolies create less producer surplus than competitive firms. E. the amount produced by monopolies is greater than competitive outcomes.

A. monopoly production occurs where price is greater than marginal cost. Your answer is correct.B. monopolies earn less profit than competitive firms.

In a perfectly competitive​ industry, if a firm is incurring​ losses, then it might choose to produce in the short run because A. price is greater than average variable cost​, resulting in smaller losses than would result from shutting down. B. price is greater than average fixed cost​, resulting in smaller losses than would result from shutting down. C. revenue is greater than variable costs​, resulting in profit in the long run. D. fixed costs become zero in the long​ run, resulting in profit in the long run. E. variable costs are greater than fixed​ costs, resulting in smaller losses than would result from shutting down.

A. price is greater than average variable cost​, resulting in smaller losses than would result from shutting down.

When the cost minimizing combination of inputs is being used and there is no corner​ solution, A. the isoquant line is tangent to the isocost line. B. the marginal product of each input is equal to its cost. C. the costs of the inputs are equal to each other. D. the marginal products of the inputs are equal to each other. E. All of the above.

A. the isoquant line is tangent to the isocost line.

When the optimal point on an indifference curve and budget line diagram is a corner​ solution, A.the marginal rate of substitution usually does not equal the ratio of prices for the two goods. B.the consumer does not spend her entire budget on the two goods. C.the budget line must have a kink in it. D.All of the above.

A. the marginal rate of substitution usually does not equal the ration of prices for the two goods

Faced with constantly changing​ conditions, why would a firm ever keep any factors​ fixed? What criteria determine whether a factor is fixed or​ variable? A. Some factors are simply fixed inputs by definition. For​ example, plant and equipment are fixed inputs regardless of the time horizon. B. Some factors are fixed in the short​ run, whether the firm likes it or​ not, simply because it takes time to adjust the level of the variables. C. Some factors are fixed in the short​ run, whether the firm likes it or​ not, simply because the firm may not have the resources to adjust the level of the variables. D. The production of most goods requires the use of both fixed and variable inputs. Fixed inputs are inputs that are not consumed during the production​ process, while variable inputs are consumed during the production process.

B. Some factors are fixed in the short​ run, whether the firm likes it or​ not, simply because it takes time to adjust the level of the variables.

If a law requires a​ price-discriminating monopolist to charge every consumer the same​ price, A. consumers who used to pay the high price will be worse off and those who used to pay the low price will be better off. In​ addition, the monopolist will be better off. B. consumers who used to pay the high price will be better off and those who used to pay the low price will be worse off. In​ addition, the monopolist will be worse off. C. all consumers will be worse​ off, but the monopolist will be better off. D. all consumers will be better​ off, but the monopolist will be worse off.

B. consumers who used to pay the high price will be better off and those who used to pay the low price will be worse off. In​ addition, the monopolist will be worse off.

For a market to be perfectly​ competitive, A. firms must have market​ power, firms must produce a differentiated​ product, and firms must be able to easily enter and exit the market. B. firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market. C. only one firm can produce​ output, no close substitutes may​ exist, and firms must not be able to enter the market. D. only a few firms may produce​ output, firms must have market​ power, and firms must produce a homogenous product. E. only one firm can have access to a key​ input, the government must regulate entry of new​ firms, and the​ long-run average cost of production must be decreasing.

B. firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market.

If a production function has straight line​ isoquants, then A. the industry is a constant cost industry. B. the inputs are perfect substitutes. C. there are constant returns to scale. D. All of the above are true.

B. the inputs are perfect substitutes.

Elasticity measures A. the slope of a demand curve. B. the percentage change in one variable in response to a one percent increase in another variable. C. the inverse of the slope of a demand curve. D. sensitivity of price to a change in quantity.

B. the percentage change in one variable in response to a one percent increase in another variable.

In the short run when some inputs are​ fixed, marginal cost must eventually rise as a​ firm's output increases because A.there will eventually be decreasing returns to scale. B. there will eventually be diminishing marginal products for the​ firm's variable inputs. C. the prices the firm pays for​ labor, material and other variable inputs will increase. D.All of the above.

B. there will eventually be diminishing marginal products for the firm's variable inputs.

If the marginal cost of production is less than the average variable cost of​ production, then A. average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. B.average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average. C.average variable cost is falling because the cost of the last unit produced is adding to total variable cost. D. average variable cost could be rising or falling because marginal cost and average variable cost are unrelated. E. average variable cost is falling because marginal cost and average variable cost are equal.

B.average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average.

Explain the term​ "marginal rate of technical​ substitution." ​(Assume a​ two-input production function.​) A. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to increase output by one unit. B. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to keep output constant. C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is​ used, so that output remains constant. D. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is​ used, so that output increases.

C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is​ used, so that output remains constant.

Assume the vitamin industry is perfectly competitive. When a new medical study shows that taking vitamins improves both the quality and length of​ life, demand for vitamins increases dramatically. As a​ result, vitamin​ producers' profits will A. remain unchanged in both the​ short-run and the​ long-run. B. decrease in the​ short-run but become positive in the​ long-run. C. increase in the​ short-run but fall to zero in the​ long-run. D. increase in the​ short-run and in the​ long-run.

C. increase in the​ short-run but fall to zero in the​ long-run.

A perfectly competitive firm should shut down in the short run if A. price is below minimum average total cost. B. it cannot earn a profit. C. price is below minimum average variable cost. D. the firm does not earn enough to pay for all its fixed costs.

C. price is below minimum average variable cost.

Firms would enter an industry if profit will eventually be zero because zero economic profit A. indicates other industries are earning negative economic profit. B. corresponds to positive producer surplus in the long run. C. signifies that a firm is earning as much as it could in its next best activity D. includes the opportunity cost of resources used in production and corresponds to negative accounting profit. E. becomes positive once the value of the next best use of resources used in production is included.

C. signifies that a firm is earning as much as it could in its next best activity

Suppose you have drawn a​ consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the price of food​ increases, A.the budget line shifts outward in a parallel fashion. B.the budget line shifts inward in a parallel fashion. C.the budget line becomes steeper. D.the budget line becomes flatter.

C. the budget line becomes steeper

The marginal utility associated with the additional consumption of X is given by A.the Lagrangian multiplier. B.its equality to total utility. C.the partial derivative of the utility function with respect to good X. D.the second derivative of the utility function with respect to good X.

C. the partial derivative of the utility function with respect to good X.

If consumers have different levels of demand but the same price​ elasticities, then the​ firm's profits A. will increase because the firm will charge the consumers with a higher level of demand a higher price. B. will increase because the firm will charge the consumers with a higher level of demand a lower price. C. will not increase because prices will be the same in both markets. D. will increase because prices will be the same in both markets. E. will increase because output will be different between the markets.

C. will not increase because prices will be the same in both markets.

An isoquant is a curve that shows A. all the combinations of inputs that cost the same total amount. B. the optimal combination of inputs to use to produce any given level of output. C. all the combinations of inputs that yield the same total output. D. all the output levels that can be produced from a given set of inputs

C> all the combinations of inputs that yield the same total output

A monopolist that practices perfect price discrimination A. charges each consumer the maximum price the consumer is willing to pay. B. drives consumer surplus to zero. C. produces the perfectly competitive level of output. D. All of the above are correct. E. Only A and B are correct.

D. All of the above are correct.

All firms in perfectly competitive industries earn zero economic profit in the long run because A. firms are price​ takers, maximizing profit by producing where price equals average cost. B. firms are price​ takers, maximizing profit by producing where price equals marginal cost. C. a positive profit would induce firms to produce more​, increasing price and​ profit, and a negative profit would induce firms to produce less​, decreasing price and profit. D. a positive profit would induce firms to​ enter, decreasing price and​ profit, and a negative profit would induce firms to​ exit, increasing price and profit. E. barriers to entry and exit prevent firms from earning positive or negative economic profit.

D. a positive profit would induce firms to​ enter, decreasing price and​ profit, and a negative profit would induce firms to​ exit, increasing price and profit.

An Engel curve A. slopes downward for both normal and inferior goods. B. slopes upward for both normal and inferior goods. C. slopes upward for inferior goods and downward for normal goods. D. slopes upward for normal goods and downward for inferior goods.

D. slopes upward for normal good and downward for inferior goods

Suppose you have drawn a​ consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the prices of food and clothing remain the same and the​ consumer's income​ increases, A.the budget line shifts inward in a parallel fashion. B.the budget line becomes steeper. C.the budget line becomes flatter. D.the budget line shifts outward in a parallel fashion

D. the budget line shifts outward in a parallel fashion

The income elasticity of demand refers to A. the change in income required for quantity demanded to change by​ 1%. B. the substitution of one good for another as income changes. C. a change in income following a change in quantity demanded. D. the percentage change in quantity demanded resulting from a 1 percent increase in income.

D. the percentage change in quantity demanded resulting from a 1 percent increase in income.

Which of the following does not create a barrier to​ entry? A. A patent for a new drug. B. A copyright on a new computer program. C. Economies of scale in production. D. A government license required to practice law. E. All of the above create barriers to entry.

E. All of the above create barriers to entry.

law of diminishing marginal returns

Holding other inputs​ fixed, increasing the use of an input will eventually result in decreasing amounts of additional output

income effect

The change in consumption due to a change in​ income, holding prices​ constant

Substitution effect

The change in consumption due to a change in​ price, holding utility​ constant

L-shaped isoquant

The inputs are perfect​ complements, or that the firm is producing under a fixed proportions type of technology. In this​ case, the firm cannot give up one input in exchange for the other and still maintain the same level of output.

What does a MRTS​ = 4 ​mean

It means that if the input on the horizontal axis is increased by one​ unit, then the input on the vertical axis decreases by 4 units and output will not change

the condition where consumers only consumer x.

MRS(x,y) > (px)/(py)

What happens to the marginal rate of substitution as you move down along a convex indifference​ curve

The marginal rate of substitution decreases

What happens to the marginal rate of substitution as you move along a linear indifference​ curve

The marginal rate of substitution is constant

marginal rate of substitution

The rate at which a consumer is willing to exchange one good for another and remain indifferent is called the Marginal Rate of Substitution

accounting cost

Which consists of actual expenditures (plus depreciation of capital)

Opportunity cost

Which is the cost of forgoing the next best alternative

Convex isoquant

Within some​ range, a declining number of units of one input can be substituted for a unit of the other​ input, and output can be maintained at the same level. In this​ case, the MRTS is diminishing as we move down along the isoquant.

partial equilibrium

an equilibrium in one​ market, ignoring the rest of the economy

Two goof are complements if

an increase in the price of one good leads to a decrease in quantity demanded of the other.

the indifference curve for two goods that are perfect substitutes are

downward-sloping straight lines

perfect price discrimation

each consumer is charged his/her exact willingness to pay

budget line

indicates all bundles​ (combinations of​ goods) for which the total amount of money spent is equal to income.

market power

is the ability to charge a price above marginal cost.

budget set

is the set of all feasible bundles​ (all possible combinations of goods the consumer can​ afford).

Individual demand curve

relates the quantity of a good that a single consumer will buy to the price of that​ good, all else equal.

the indifference curve for two goods that are perfect complements are

shaped as right angles

Strict monotonicity on a indifference map

the indifference curves further to the northeast provide greater utility

when is the marginal rate of substitution diminshing

where indifference curve are convex, which implies that consumer prefer a balanced bundle of goods

when preferences are complete

which means that consumers are able to rank all possible baskets

Preferences are transitive

which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle​ C, then bundle A is preferred to bundle C

rent seeking

a firm spends money in socially unproductive efforts to​ acquire, maintain, or exercise monopoly​ power, it is said that the firm

monopolist

a single seller that is the sole supplier for the market