Micro

A producer knows that the price elasticity for his product is -0.5. He wants to increase quantity demanded by 30%. By what percentage does he need to change the price?

-60%

What are the four determinations fo the price elasticity of demand

1. The existence of subsists 2. the share of the budget spent on the good 3. necessities versus luxury goods 4. time and the adjustments process

A 15% increase in the price of cookies results in a 9% decrease in the quantity of cookies sold. Te revenue receive by cookie suppliers will ___ because the price elasticity of demand for cookies is ___

1. increase 2. inelastic

Howard buys 5 suites a year when he earns 70,000. When his income increases to 200,000 he buys 15 suites a year. What is his income elasticity of demand for suites

1.04

If the elasticity of demand for Good A is -3, a 33% decrease in quantity demanded of Good A results from an

11% increase in the price of Good A

Bob is willing to pay $65 for a new pair of shoes. Bill is willing to pay $50 for the same shoes. The shoes have a price of $45. What is the total consumer surplus for Bob and Bill?

25

The revenue received by the profit maximizing monopolist it is

300

When the price changes from 50 to 30 the price effect leads to a loss of ... in revenue

600

When a negative externality exists, as in the case of pollution, the government may be able to restore the social optimum using three different solutions. Name them.

A negative externality exists when the firms producing the good are creating external costs that are not being accounted for. To force the firms to internalize these external costs, the government can require the firm to install pollution-abatement equipment or to change production techniques to reduce emissions, a tax can be levied as a disincentive to produce, or the government can require the firm to pay for any damage (pollution) it creates.

At the profit-maximizing price and quantity, what is the approximate deadweight loss incurred by society?

Deadweight loss is calculated by seeing the change in economic welfare from a competitive market. This is represented by the triangle enclosed by the demand curve, marginal cost curve, and the quantity produced by a monopoly. In this example, deadweight loss is [($25 − $10) × (70 − 40)] ÷ 2. This gives us $225 in deadweight loss.

The Five Foundations of Economics

Incentives Trade-Offs Opportunity Cost Marginal Thinking Trade creates Value

At the profit-maximizing price and quantity, what are the total profits or losses made by this firm?

Profits are calculated as total revenue minus total cost (TR − TC). Total revenue is price multiplied by quantity (P × Q), and total cost is average total cost time quantity (ATC × Q). Thus, the profits are ($25 × 40) − ($20 × 40), giving a profit of $200.

Explain how a market with no barriers to entry or exit results in long-run economic profits equaling zero.

The assumption of no barriers to entry or exit means that new competitors can enter the market easily, and competitors that feel the market it no longer profitable can leave it. Because of this, if there are any positive economic profits being earned by the firms in a market, competitors will enter, lowering the price, which in turn will cause profits to decrease. The opposite is true as well. If firms are incurring economic losses, some firms will leave the market; prices then increase, which in turn will cause profits to increase. If economic profits are equal to zero, firms will stay put and the market is in long-run equilibrium.

How do we know if the market for a product or service is vulnerable to price discrimination?

The firm must hold some amount of market power (price-making ability) and the buyers must be easily distinguishable with different price elasticities of demand (ability to distinguish among groups of buyers). These are the two conditions necessary for price discrimination; however, just because they are present does not necessarily mean that the firm will choose to price-discriminate.

When market participants are allowed through their interactions to find the price, there will be equilibrium where the quantity supplied by buyers equals the quantity supplied by sellers. If this is the case, why does the government intervene in certain markets by imposing a price floor? Why does the government intervene in certain markets by imposing a price ceiling? Which market participant (the buyer or the seller) will lobby the government to secure passage of a binding price floor? Which one will lobby for a binding price ceiling?

The government will generally intervene to impose a binding price ceiling when consumers feel that a good should cost less than the market price would suggest. This binding price ceiling is designed to make the market outcome more equitable: Those who are fortunate enough to obtain the good at the price ceiling amount are able to buy it cheaper than they otherwise would. The government will generally intervene to impose a binding price floor when producers feel that the good should be more expensive than the market price would suggest. The binding price floor is also designed to make the market outcome more equitable. Whereas consumers lobby for the passage of the binding price ceiling, producers generally lobby for the passage of the binding price floor.

How will a firm know when it has reached its minimum efficient scale of production?

The minimum efficient scale is the level of output where long-run average total cost is lowest. A firm will know when it has reached its minimum efficient scale of production when subsequent increases in the scale of production, such as by increasing the size of a factory, do not result in additional decreases in the average total cost of production. The minimum efficient scale is found where there are no more gains from economies of scale. It is also found at the level of output after economies of scale have ended and before diseconomies of scale occur.

Explain the price effect and the output effect as it pertains to the marginal revenue of a monopolist.

The price effect refers to how lower prices affect revenues. When prices drop, those consumers who are already purchasing the product are now experiencing savings. Thus, when the price drops on a product, the price effect causes the firm to lose revenue. The output effect refers to how lower prices affect output. When prices drop, new consumers enter the market and purchase the good because of the law of demand. Thus, when the price drops on a product, the output effect causes the firm to gain revenues.

What will happen in a market where a binding price ceiling is removed

The products sold will improve in quality and become more plentiful

What is the profit-maximizing price and quantity?

The profit-maximizing price and quantity are determined by setting marginal revenue equal to marginal cost and going up to the demand curve. Thus, the profit-maximizing price and quantity are $25 and 40, respectively.

A binding price ceiling will have the following consequences

The quantity demanded will always exceed the quantity supplied

Why are binding price floor laws passed?

They help producers receive higher prices for products sold in the legal market

profit maximization occurs when

a firm expands output until marginal revenue is equal to marginal cost.

if a price floor is imposed at $15 per unit when the equilibrium market price is %12 there will be

a surplus

the marginal revenue lies..the demand curve because there is a ...effect whenever the price is lowered

below, price

when talks about economic profits in a perfectly competitive market the difference between the long run and the short run is that in the short run firms

can earn positive or negative profits but in the long run firms have zero economic profits

When one produce has a comparative advantage in production , she

can produce a good at a lower opportunity cost than someone else

Goods that are produced now so that they can be used to produce other goods in the future are called

capital good

When you change your quantity demanded of one good because of a change in price of another good, you are acting according to the principle of

cross price elasticity of demand

If a society is producing at a point on its production possibilities frontier (PPF), it can only increase the production of one good by

decreasing the production of the second good

Comparative advantage emerges because of the presence of

differing opportunity costs

A big difference between a competitive firm and a monopolist is that a monopolist

does not change a price equal to marginal revenue

At high price levels, demand tends to be ________ and the price effect is ________, relative to the output effect.

elastic , small

When quantity demanded and price increase by 10% you know that price and quantity are ____ to the consumer

equally important

When both supply and demand shift to the right:

equilibrium quantity always rises

one reason that firms may be unable to utilize price discrimination as a viable strategy is because

firms are unable to prevent resale of the product they offer for sale

opportunity cost is the ______ alternative forfeited when a choice is made

highest valued

Economists is the study of

how to allocate resources to satisfy wants and needs

When a competitive market becomes controlled by a monopoly, the price... and the output...

increases , decreases

When the opportunity cost of producing a good rises as you produce more of it, you experiences

increasing relative cost

If firms in a competitive market are making positive economic profits, the long rum a market supply curve

is below the point where the short run market supply curve and the demand curve intersect

A society that is producing its maximum combination of goods and using all available resources for production

is operating on its production PPF

How will a reduction in the national unemployment rate affect a nation's production possibilities frontier (PPF)?

it will move society outward to a point closer to or on the PPF

The ___states that the opportunity cost of producing good always rises as you produce more of it

law of increasing relative cost

when marginal revenue is positive

lost revenues associated with the price effect are outweighs by the revenue gains created by output effect

when marginal revenue is negative the

lost revenues associated with the price effect outweighs he revenue gains created by the output effect

A person has a comparative advantage in the production of a good when she or he can produce the product at a(n)________ opportunity cost compared to another person

lower

if income elasticity of demand for laptop is 3.5 you know that laptops are

luxury good

economists believe that optimal decisions are made up to the point where

marginal benefits are equal to marginal costs

A firm's short run supply curve is equal to the firms

marginal cost curve above minimum average variable cost

In the short run, average total coast at first decrease and then increase as more output is produced because

marginal cost is at first less than average total costs the rise above it .

The cost of a trade-off is known as the ________ of that decision.

opportunity cost

A firm's willingness to supply its product in the short run is represented on a graph by the

part of the marginal cost curve above minimum average variable cost

At higher prices, the price elasticity of demand is likely to be __ whereas it is likely to be __ at lower price

perfectly elastic , perfectly inelastic

If the short run market supply curve and the demand curve intersect above the long run market supply curve, firms will experience ....economic profits , meaning the price is ...the minimum pint on the average total cost

postive, above

When firms enter a market, the ...causing individual firms' profits to..

short run market supply curve shifts right, decrease

Deadweight loss results in a monopoly because

some consumers who would benefit from a competitive market lose out

What creates comparative advantage

specialization

When the demand curve shifts to the right and the supply curve is held constant

the equilibrium price and quantity increase

For a market to work efficiently

the external costs must be paid

Holding all else constant a decrease in the market demand for a product in a competitive market would cause

the marginal revenue curve of the firms to shift downward

According to the law of demand, all other things being equal

the quantity demanded falls when the price rises, and the quantity demanded rise when the prices falls

A binding price floor creates a surplus which means

the quantity demanded will always be smaller than the quantity supplied

When a tax is imposed on some good, what usually happens to consumer and producer surplus

they both decrease

one of the benefits of perfect price discrimination over a monopoly is that it can increase

total welfare

Indirect incentives create

unintended consequences

When price increases by 30% and quantity demanded drops by 30% the price elasticity of demand is

unitary elastic

You have an absolute advantage in producing something whenever

you can produce more of it than someone else can using the same quantity of resources

if the short run supply curve the demand curve and the long run supply curve all interest at the same point firms will experience ..economic profits, which means the price is.. the minimum point on the average total cost curve

zero, at