micro ch 5-7

If Wendy considers pizza and salad to both be normal goods, when her income increases, she will maximize her utility by consuming at point __.

B If Wendy's income increases, then her budget constraint will also shift out. If she considers both pizza and salad to be in normal goods, then she will want to purchase more of both while on her new budget constraint. This is only seen at point B. At point C, she is still consuming at her old income level and is not maximizing her utility.

A budget constraint curve for electronic devices is shown above in the figure, with the original budget constraint on Point M. Suppose your income decreases. Which point(s) would potentially be located on your new budget constraint?

B If your income decreases, this means you would buy less of both goods and the possible points lie inside of your current budget constraint. Thus only B is a possible point when your income decreases. Points A & C represent maximum utility if income had increased. And Point M represents the original budget utility.

The figure below shows a budget constraint curve for a consumer who is deciding how many electronic devices to purchase. Currently, the utility-maximizing choice for this consumer is M. Assume electronic devices are a normal good. If the price of electronic devices decreases, assuming income and prices remain the same, then which of the following could be the new utility-maximizing choice?

C If the price of electronic devices decreases, then the budget constraint will rotate outwards in a way such that the budget constraint has a greater maximum quantity of electronic devices. The utility-maximizing choice must be on the budget constraint. If electronic devices are normal goods, then a decrease in the price of electronic devices will result in more electronic devices being consumed. The only point representing this is Point C.

Ebon opened up a small coffee shop which earned him $175,000 in total revenue the first year. To do this, Ebon had to quit his previous job as a barista where he earned $25,000 per year. Ebon calculated his economic profit to be $10,000, but he wants to know what his explicit costs were. What are Ebon's explicit costs?

Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Total Revenue = $175,000 Explicit Costs = X This the variable or unknown we want to solve for. Implicit Costs = $25,000. This is the opportunity cost of Ebon starting his own coffee shop. It represents the money Ebon gave up by not continuing to work as a barista. Economic Profit = $10,000 Recall that Accounting Profit = Total Revenue - Explicit Costs and therefore Economic Profit = Account Profit - Implicit Costs $10,000 = Accounting Profit - Implicit Costs = Accounting Profit - $25,000 Accounting Profit = $35,000 Accounting Profit = Total Revenue - Explicit Costs $35,000=$175,000 - Explicit Costs therefore Explicit Costs = $140,000

Which of the following best describes the condition that leads to a natural monopoly?

Economies of scale are large relative to quantity demanded in a market. A natural monopoly occurs in an industry where the cost structure is such that economies of scale are large relative to quantity demanded. This creates a barrier to entry as entering firms must produce a high quantity to face low cost. Other types of barriers to entry that lead to monopolies are government induced barriers and exclusive control of a natural resource.

Diseconomies of scale can be represented by the portion of the long-run average cost curve with a downward slope.

False Diseconomies of scale can be represented by the portion of the long-run average cost curve with an upward slope.

The slope of either the supply or demand curve defines its elasticity.

False The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). Elasticity is the percentage change, which is a different calculation from the slope and has a different meaning. The formula for elasticity is the percentage change of quantity demanded over the percentage change of price.

Kathryn needs to decide how many shirts and vests to buy for her daughter. She has estimated her daughter's total utility of different quantities of shirts and vests in the table below. Kathryn is willing to spend no more than $18 on her daughter. If the price of a shirt is $6 and the price of a vest is $3, then Kathryn should buy 2 shirts and 2 vests for her daughter.

False Use the chart to determine the total utility for each possible combination. It is important to remember that utility is measured in a unit called utils. Recall that not consuming something (i.e. 0 units consumed) gives no utility. Remember that each consumption bundle is on the budget constraint. Therefore, as you consume more of one good, you must decrease the consumption of another good. As a result, as you consume more of one good, your total utility will increase, but as you consume less of the other good your total utility will decrease. Because of these opposite changes to total utility, your total utility might increase, decrease, or remain the same. If your total utility increases, you will prefer this consumption bundle to the previous one. However, if your total utility decreases, you will prefer the previous consumption bundle to this new one. The chart below explains how to decide the most preferred consumption bundle for this specific problem.

A firm competing in a market where the LRAC curve has a clear minimum point has flexibility in its output.

False When the LRAC curve has a clear minimum point, any firm that produces a different quantity from that minimum will have higher costs.

Your buddy Joseph wants your advice. He presents you with his utility schedule above and want to know how many units of Product B he should purchase to maximize his utility. He tells you the price of Product A is $4 and the price of Product B is $5. Joseph informs you he only wants to spend a total $27 on both products.How many units of Product B do you tell Joseph to purchase?

If Joseph wants to maximize the utility he receives from his limited budget, he will always purchase the item with the greatest marginal utility per dollar of expenditure (assuming he can afford it with his remaining budget). Each of the values for 'Marginal Utility per Dollar' has been solved for for both Product A and Product B in the table below: If he chooses the item with the greatest marginal utility per dollar spent, when his budget is exhausted, the utility-maximizing choice should occur where the marginal utility per dollar spent is the same for both goods. If there are multiple quantities where marginal utilities per dollar are equal, a determination must be made for which possible solutions are on the budget constraint. MU1P1= MU2P2 12$4= 15$5 3=3 Along the budget constraint, the total price of the two goods remains the same. A quantity of 3 units of Product A would cost $12, and 3 units of Product B would cost $15, meeting Joseph's budgeted goal of $27. This means that these quantities at these prices would remain on the budget constraint.

occurs when an existing firm (or firms) reacts to a new firm by dropping prices very low and, as a result, drives the new firm out of the market. The existing firm then raises prices again.

Predatory pricing By definition, predatory pricing occurs when an existing firm (or firms) reacts to a new firm by dropping prices very low until the new firm is driven out of the market, at which point the existing firm raises prices again.

Sarah is buying and taking over a coffee shop. In order to do so, Sarah will purchase technology which costs $12,000. Sarah will spend $75,000 on the coffee shop building. Sarah expects to earn $120,000 a year at the coffee shop. Sarah is using her own coffee mugs and dishware at her shop, which are valued at $3,000. Calculate Sarah's accounting profit.

Step 1: Calculate costs. Total explicit costs=Cost of business+technology=$75,000+$12,000=$87,000 Step 2: Subtract the explicit costs from the revenue to find accounting profit. Accounting profit=Revenues−Explicit costs=$120,000−87,000=$33,000

Once a water company lays the main water pipes through a neighborhood, the marginal cost of providing water service to another home is fairly low. Where will the demand curve for water intersect the long-run average cost (LRAC) curve for this company?

The demand curve intersects the LRAC curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. So, in this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part.

A person can purchase only two goods: cups of coffee and lottery tickets. Assume this individual has $60, the price of a single cup of coffee is $3.00, and the price of a lottery ticket is $3.75. If the price of a lottery ticket falls to $3.00, then how will the budget constraint change?

The lottery ticket endpoint will shift outward When the price of lottery tickets falls, we can now buy more lottery tickets with the same budget. As a result, the lottery ticket endpoint shifts right. This is because if the consumer spends all their income on lottery tickets, they can purchase more lottery tickets when the price decreases. As a general rule, when the price of a good decreases, the budget constraint rotates outwards and when the price of a good increases, the budget constraint rotates inwards.

___________ occurs when the price of a good changes and consumers have an incentive to consume less of the good with a higher price and more of the good with a lower price.

The substitution effect The substitution effect occurs when the price of one goods increases and consumers substitute away towards other cheaper alternatives. That is, when the price of a good increase, it becomes relatively more expensive and so consumers will decrease their quantity demanded for that good and increase their demand for other substitute goods. If the price of a good decreases, it becomes relatively more cheaper and so consumers will increase their quantity demanded for that good and decrease their demand for other substitute goods.

Find the average fixed cost for producing 42 sneakers. Round your answer to the nearest hundredth.

To find the average fixed cost, divide the fixed cost by the quantity produced. $11842=$2.81.

Andrew left his role as an economist at the U.S Postal Service where he made $170,000 per year to start his own private economic consulting company. During his first year of private consulting, he made $35,000 in economic profit. If Andrew's clients paid him a total of $400,000 for his consulting services, then what must Andrew's accounting profit be? (Hint: Remember that Economic Profit = Total Revenue - Explicit Costs - Implicit Costs whereas Accounting Profit = Total Revenue - Explicit Costs)

Total Revenue = $400,000 because this is the money that Andrew earned from his business operations. Explicit Costs = X Implicit Costs = $170,000. This is the salary that Andrew could have earned if he did not quit his previous job. It represents the opportunity cost of Andrew starting his own private consulting business. Economic Profit = $35,000 Consider the formula for Economic Profit: Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Substituting the above values into the formula for Economic Profit, we get: $35,000=$400,000−X−$170,000 X=$195,000 Recall that Accounting Profit = Total Revenue - Explicit Costs, therefore Accounting Profit = $400,000−$195,000=$205,000

True or false? If at the end of the year, after taxes, a manufacturing firm has $150,000 in revenues, $60,000 in production costs, and $30,000 in opportunity costs, then the firm's economic profits total $60,000

True Economic profits differ from accounting profits in that they include any opportunity costs a firm may have incurred. In this case, the production costs and the opportunity costs should be subtracted from revenues, giving the firm an economic profit of $60,000.

True or false?To find average profit, simply divide profit by the quantity.

True Profit is found by subtracting total costs from total revenue. Average profit can be found by subtracting average total cost from average total revenue or dividing profit by output.

The shape of the long-run average cost curve determines the number and size of firms competing in the industry.

True The shape of the long-run average cost curve determines the amount of firms competing in an industry as well as the size of the firms. A LRAC curve with a clear minimum point does not allow for many firms to compete, but a flat-bottomed LRAC curve does.

At the end of the year, after taxes, a manufacturing firm has $230,000 in revenues, $90,000 in production costs, and $140,000 in opportunity costs. How much economic profit did the firm make?

When a manufacturing firm ends its year with an accounting profit equal to its production costs and opportunity costs combined, this is referred to as earning zero economic profits. Economic Profit=Total Revenues−Explicit Cost−Implict Cost If Total Revenues=Explicit Cost+Implict Cost then Economic Profit>0

Which of the following is evidence of predatory pricing?

a firm is selling a service for less than its average variable cost A commonly proposed rule for detecting predatory pricing is that if a firm is selling for less than its average variable cost—that is, at a price where it should be shutting down—then there is evidence for predatory pricing.

A legal monopoly is _____________________.

a situation in which there are legal prohibitions against competition For some products, the government erects barriers to entry by prohibiting or limiting competition. Most legal monopolies are considered utilities—products necessary for everyday life—that are socially beneficial to have. As a consequence, the government allows producers to become regulated monopolies, to ensure that an appropriate amount of these products is provided to consumers.

Which of the following does production entail?

all of the above This activity of production goes beyond manufacturing (i.e., making things). It includes any process or service that creates value, including transportation, distribution, wholesale and retail sales. Production involves a number of important decisions that define a firm's behavior. These decisions include, but are not limited to: What product or products should the firm produce? How should the firm produce the products (i.e., what production process should the firm use)? How much output should the firm produce? What price should the firm charge for its products? How much labor should the firm employ?

______, also known as profit margin, is the profit divided by quantity produced, or average revenue minus average cost.

average profit Average profit and profit margin are synonymous. They are equal to price - average cost.

The graph below represents production costs at the button factory. The x-axis represents output, and the y-axis represents cost. Curves represented are marginal cost, average total cost, and average variable cost. The curve labeled 'B' represents what kind of curve?

average total cost Information on total costs, fixed cost, and variable cost can be presented on a per-unit basis. The average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. The average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is also typically U-shaped. The marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.

What is the name for the legal, technological, or market forces that discourage or prevent potential competitors from entering a monopoly market?

barriers to entry Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

If the long-run average cost curve has a ___________, competing firms that produce at minimum costs will have to produce the same exact quantity of output.

clear minimum point When the LRAC curve has a clear minimum point, any firm that produces a different quantity from that minimum will have higher costs. All firms who choose to produce at the minimum cost will produce the same output.

Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low once the fixed costs of the overall system are in place. This results in what?

economies of scale Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low once the fixed costs of the overall system are in place. This results in situations where there are substantial economies of scale since one established firm can expand output at lower cost than new firms just entering the market.

A cost paid out of pocket is an ______ cost.

explicit An explicit cost is an out of pocket cost, or an actual payment such as wages and rent.

When a long-run average cost curve has a ______, ________ are able to compete in the market.

flat bottom; more firms of different sizes definite minimum; fewer firms of different sizes When a LRAC curve has a unique bottom point, more firms of different sizes are less likely to be able to compete because average costs will be too high. If the long-run average cost curve has a wide, flat bottom, firms of a variety of different sizes are able to compete because average cost stays low for a range of outputs.

All of the following are examples of fixed costs, except:

labor Fixed costs are the costs of the fixed inputs. Because fixed inputs do not change in the short run, fixed costs are expenditures that do not change regardless of the level of production. Whether you produce a great deal or a little, the fixed costs are the same. Labor is not a fixed cost. It is an example of a variable cost because it increases or decreases with output. The more output that is produced, the more labor is needed.

Barriers to entry occur in a monopoly market because ________.

legal, technological, or market forces discourage or prevent potential competitors from entering the market Barriers to entry in a monopoly market occur because of the legal, technological, or market forces that discourage or prevent potential competitors from entering the market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

When a $1 loss of money pains an individual 2.25 times more than a $1 gain in money, we refer to this as _______________________.

loss aversion

The graph below represents production costs at the button factory. The x-axis represents output, and the y-axis represents cost. Curves represented are marginal cost, average total cost, and average variable cost. The curve labeled 'C' represents what kind of curve?

marginal cost Information on total costs, fixed cost, and variable cost can be presented on a per-unit basis. The average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. The average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is also typically U-shaped. The marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.

In situations in which there are substantial economies of scale, the ___________ of adding an additional customer is very _________ once the fixed costs of the overall system are in place.

marginal cost; low Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. This results in situations where there are substantial economies of scale.

Your grandma likes to play Bingo every Friday night. One night she wins $50 and spends it on coloring her hair pink even though she has been saving for a new rocking chair. She said because she won the $50 instead of receiving it in her social security check it was "fun money." This is an example of _______________________.

mental accounting Mental accounting is the idea of putting dollars in different mental categories where they take different values, whereas economists typically consider dollars to be fungible, or having equal value to the individual, regardless of the situation.

Firms make production decisions primarily based on _________.

production conditions cost conditions Production decisions depends on the production and cost conditions facing each firm. The answers also depend on the market structure for the product(s) in question. Market structure is a multidimensional concept that involves how competitive the industry is.

______ is the total revenue minus total costs.

profit Profit is found by subtracting total costs from total revenue, which is the income made from selling products.

A natural monopoly occurs when ______________ is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.

quantity demanded A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. In this situation, economies of scale are large relative to the quantity demanded in the market, and that's what creates the natural monopoly.

The long-run average cost (LRAC) curve is actually based on a group of ______________, each of which represents one specific level of fixed costs

short-run average cost curves The long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will show the least expensive average total cost for any level of output.

The long-run average cost curve is typically _______________________.

slope downward at first then upward towards the end

The sum of the fixed plus variable costs is known as _________.

total cost Total cost includes all costs used for production, both fixed and variable costs.

Which of the following types of cost changes with output?

total cost variable cost Variable costs are the costs of the variable inputs (e.g. labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output. Because total cost is the sum of fixed costs plus variable costs, and variable costs increase or decrease with variable inputs, then total cost will increase and decrease along with these variable inputs.

A ______ cost is the cost of inputs that increase or decrease with production.

variable Variable costs are the costs of the variable inputs (e.g. labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output.

When will a firm experience diseconomies of scale?

when LRAC increases as output increases By definition, diseconomies of scale occur when LRAC increases as the firm expands its output.

Suppose you are taking a luxury tour of a city in a limousine. With just a few passengers, the tour is pleasant and everyone has plenty of space to stretch and move around to see the sights. As more people get in the limo, it starts to become crowded. Given the following chart, at what number of people in the limo (x) does your marginal utility first begin to decrease due to the crowded limo?

x=8 Marginal utility for each number of people in the limo is calculated in the table below. When the number of people in the limo goes from 6 to 8, marginal utility decreases from 130 to 45. Therefore, a passenger's marginal utility begins to decline with 8 people in the limo.