Micro-Economics

Which of the following statements is TRUE?

Utility maximization requires seeking the most utility from a given budget

With fewer substitutes, demand tends to be

less elastic

Xavier notices that the marginal utility of working with a tutor seems to fall with each hour the tutor helps him study. If Xavier keeps the tutor until his grade actually begins to fall, his marginal utility for the last hour of tutoring will be:

negative.

Tom is trying to decide how to allocate his $50 budget for music downloads and online movie streaming when the price of a music download is $1 and the price of a movie is $5.Reference: Ref 10-6(Scenario: Tom's Budget Constraint) Read the scenario Tom's Budget Constraint. The combination _____ music downloads and _____ movies lies INSIDE Tom's budget line. (Tom can afford this combination, but he will not be spending the entire $50.)

no; 5

If the government imposes a $5 excise tax on leather shoes and the price of leather shoes increases by $2:

producers are paying more of the tax than are the consumers.

If a good is a necessity with few substitutes, then demand will tend to:

be more price-inelastic.

A linear demand curve has:

both elastic and inelastic price elasticities of demand.

a. After spending hours researching his choices, Mark decides on a laptop that will cost him $799. As he walks into his local retailer, a salesman presents him a laptop with marginally better features at the same price. However, Mark would have to do further research to verify that the new alternative is in fact better. As a result, he decides that the laptop he previously decided on is good enough and buys it.

bounded rationality.

The percentage change in quantity demanded of one good or service divided by the percentage change in the price of a related good or service is the _____ of demand.

cross-price elasticity

For each scenario, calculate the cross-price elasticity between the two goods and identify how the goods are related. Please use the midpoint method when applicable, and specify answers to one decimal place. A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B.

cross-price elasticity between A and B: 0 relationship between A and B: No relationship

Product C increases in price from $5 a pound to $11 a pound. This causes the quantity demanded for Product D to increase from 10 units to 18 units.

cross-price elasticity between C and D: 0.8 relationship between C and D: Substitutes

When the price of Product E decreases 2%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 17%.

cross-price elasticity between E and F: -8.5 relationship between E and F: complements

What is the price elasticity of demand?

elastic

(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. Total utility is maximized at the _____ roll.

The fourth

(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. Marginal utility becomes negative at the _____ roll.

The sixth

If the estimated price elasticity of demand for foreign travel is 4:

a 20% decrease in the price of foreign travel will increase quantity demanded by 80%.

When the price elasticity of demand is low and the price elasticity of supply is high, the burden of a tax falls mainly on producers.

false

Steve is trying to diet. Each day he says the diet will begin today, but each time he sees potato chips, he indulges in them. The next day, he promises his diet will really start, but the vicious cycle continues

overconfidence

If demand is elastic, the _____ effect dominates the _____ effect, and a(n) _____ in price will cause total revenue to rise.

quantity; price; decrease

Utility is most closely related to:

satisfaction.

Suppose the Canadian government has decided to place an excise tax of $20$20 per tire on producers of automobile tires. Excise taxes are also called sales or commodity taxes. Previously, there was no excise tax on automobile tires. As a result of the excise tax, producers of tires, such as Bridgestone and Michelin, are going to alter their tire prices. The graph illustrates the demand and supply curves for automobile tires before the excise tax. Please shift the appropriate curve or curves on the graph to demonstrate the new equilibrium. What is the price consumers pay for a tire post tax? Round to the nearest 10. What is the price producers receive for a tire net of taxes? Round to the nearest 10.

shift the supply curve up to 3 , 100 price paid by consumers: $100 price received by producers: $80

(Figure: The Market for Productivity Apps) Look at the figure The Market for Productivity Apps. If the government imposes a tax of $1 in this market, consumers will pay _____ more per app and purchase _____ fewer apps.

$0.50; 5

(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government wants to limit shrimp sales to 250 pounds, it can impose a _____ excise tax on sellers, and the total tax revenue generated will be _____.

$10; $2,500

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the second sweatshirt is:

$11.

Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the third sweatshirt is:

$13

(Figure: The Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. The total benefit of mowing six lawns is approximately:

$154.

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the fifth sweatshirt is:

$17

(Figure: The Market for Hamburgers) Look at the figure The Market for Hamburgers. If the market is originally in equilibrium and the government imposes an excise tax of $0.80 per unit of the good sold, consumer surplus will be reduced by:

$175

When the price of chocolate-covered peanuts decreases from $1.10 to $0.95, the quantity demanded increases from 190 bags to 215 bags. If the price is $1.10, total revenue is _____, and if the price is $0.95, total revenue is _____.

$209; $204.25

Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job, which paid $60,000 per year, and started Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000. (Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The accounting profit of Wang's Wicker Furniture Store is:

$30,000.

(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The total cost of mowing three lawns is approximately:

$33.

Nancy is consuming her optimal consumption bundle of burritos and margaritas. The marginal utility of her last burrito was 75 utils, and each burrito costs $3. Her marginal utility of her last margarita was 100 utils. What is the price of a margarita?

$4

Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job, which paid $60,000 per year, and started Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000. Reference: Ref 9-1 (Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The implicit cost of capital for Wang's Wicker Furniture Store is:

$5,000.

(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The total cost of mowing four lawns is approximately:

$50.

Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The total cost of mowing four lawns is approximately:

$50.

After earning your BA, you have to decide whether to take a job that will pay you $45,000 per year or spend an additional two years earning an MBA. If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000. You have been offered a scholarship for $10,000 per year, but to pay the remaining $22,000 per year, you would have to cash in savings bonds from your grandparents that have been earning $500 in interest per year. The annual opportunity cost of earning your MBA is:

$67,500

(Figure and Table: The Market for Taxi Rides) Look at the figure and table The Market for Taxi Rides. If the government imposes an excise tax of $1 per ride (causing the supply curve to shift upward by that amount), then the government will collect tax revenues of _____. However, the tax will cause a _____ deadweight loss to society.

$9 million; $0.5 million

Last week, Michelle spent $30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar? (Use the midpoint formula for your calculation.)

-1

The accompanying diagram depicts a demand curve for DVDs for a monopoly currently producing at point 𝐵B. Specify answers to the nearest dollar, and use a negative sign to indicate decreases in revenue. If the firm lowers DVD prices from $16 to $14, what is the change in revenue, assuming quantity remains the same? In other words, focus only on the price effect.

-400

If the price of Product E decreasing by 2% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 17% what is the cross-price elasticity of demand? Round your answer to one decimal place. what is the relationship between the two goods ?

-8.5 complements

Consider two markets: the market for cat food and the market for dog food. The initial equilibrium for both markets is the same, the equilibrium price is $0.50, and the equilibrium quantity is 33.0 When the price is $6.75, the quantity supplied of cat food is 75.0 and the quantity supplied of dog food is 105.0. For simplicity of analysis, the demand for both goods is the same. Using the midpoint formula, calculate the elasticity of supply for dog food. Please round to two decimal places. Supply in the market for cat food is

.61 less elastic than supply in the market for dog food.

If a 35% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? Round your answer to one decimal place. What is the relationship between the two goods?

0 and no relationships

The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to _____, and demand is described as _____.

0.2; inelastic

(Table: Market for Pizza) Look at the table Market for Pizza and use the midpoint method. The price elasticity of demand for pizza between $14 and $12 per pizza when income is $1,000 per month is:

1

Arista always spends 3030% of her income on purses. Assume that her income increases by some percentage while the price of purses remains constant (and that all purses cost the same). What is her income elasticity of demand for purses?

1

Suppose at $10 the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand between $10 and $8, by the midpoint method, is approximately:

1.17

If Good C increases in price by 30% a pound, and this causes the quantity demanded for Good D to increase by 40%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the two goods?

1.3 Substitutes

Faruq spends all of his income on tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. Put tacos on the horizontal axis and milkshakes on the vertical axis. The horizontal intercept for Faruq's budget line is _____ tacos.

10

Becky only eats out at Macaroni Grill, and she eats out three times per month. She receives a raise from $31,900 per year to $33,500 per year and decides to eat out five times per month. Use the midpoint method to calculate the monthly income elasticity of demand for eating out. Round your answer to two decimal places.

10.2 a normal good and income-elastic

What is the overall net effect of this price decrease on the firm's total revenue?

1000

What is the change in revenue that results just from the increased quantity at $14? In other words, focus only on the quantity effect.

1400

(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. The marginal utility for the second roll is:

15

(Table: Price Elasticity) Look at the table Price Elasticity. What is the price elasticity of demand (using the midpoint formula) between $2.50 and $2.25?

19

Table: Utility from Oranges and Star Fruit) Look at the table Utility from Oranges and Star Fruit. Oranges cost $2 per pound and star fruit costs $5 per pound. Calvin has $26 to spend. If Calvin buys 4 pounds of star fruit and 3 pounds of oranges, how much is his total utility?

280

(Table: Marginal Utility per Dollar of M&Ms) Look at the table Marginal Utility per Dollar of M&Ms. The price of M&Ms is $2 per bag. The marginal utility per dollar of the first bag of M&Ms is:

3

Assume that Billy gets no utility from saving. His total income is $240 and that the two goods he must choose across are cream ($50 per gallon) and butter ($30 per gallon):

3 creams, 3 butters

Sylvia's annual salary increases from $100,000 to $109,500. Sylvia decides to increase the number of vacations she takes per year from three to four. Use the midpoint method to calculate her income elasticity of demand for vacations. Round your answer to two decimal places.

3.15 a normal good and income-elastic.

When will we have our second midterm exam? There is only one correct answer.

3/24

(Table: Marginal and Total Benefit) Look at the table Marginal and Total Benefit. Sed is deciding how many football games he wants to attend this year. His marginal benefit from increasing the number of games that he attends from two to three is:

30.

(Table: Utility from Oranges and Star Fruit) Look at the table Utility from Oranges and Star Fruit. Oranges cost $2 per pound and star fruit costs $5 per pound. The table shows Calvin's total utility from eating various amounts of oranges and star fruits. If Calvin has $26, he should eat _____ oranges and _____ pounds of star fruit, and he will have _____ left over.

3; 4; no money

In anticipation of a major hurricane hitting the Gulf Coast, the quantity of gasoline sales rise from 360 million gallons to 375 million gallons. Based on this information, what is the percent change in gasoline sales? Please specify your answer to one decimal place and use the midpoint formula.

4.1

(Table: Marginal and Total Benefit) Look at the table Marginal and Total Benefit. Sed is deciding how many football games he wants to attend this year. If tickets to each football game cost $10, then he should attend _____ game(s).

5

Faruq spends all of his income on tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. Put tacos on the horizontal axis and milkshakes on the vertical axis. If Faruq spends all of his income, the opportunity cost of one taco equals _____ milkshakes.

5

What is the law of diminishing marginal utility?

Additional units provide less additional utility over a short time period.

(Figure: Budget Lines for Oranges and Apples) Look at the figure Budget Lines for Oranges and Apples. For some time, Antonio has had $5 per month to spend on oranges and apples. The price of an orange is $0.50 and the price of an apple is $0.25. Which of the charts shows what will happen to his budget line if his income decreases to $4?

Arrow pointing to the left

the situation where an additional unit of a good or service costs the same as each of the former uni

Constant marginal cost

(Figure: Estimating Price Elasticity) Look at the figure Estimating Price Elasticity. Between the two prices, P1 and P2, which demand curve has the lowest price elasticity?

D4

the situation where the gain from an additional unit of a good or service is less than the gain from producing the previous unit

Decreasing marginal benefit

Diego spends all of his income on milkshakes and french fries. At his current consumption levels the marginal utility of one milkshake and the marginal utility of one order of french fries are equal. According to the optimal consumption rule:

Diego is maximizing his utility only if one milkshake and one order of french fries have the same price.

Which of the following is an "either-or" decision?

Dylan must decide whether to major in economics or finance.

The incidence of a tax is determined by which group (buyers or sellers) must write the check to the government.

False

Blake eats two bags of generic potato chips each day, and does not purchase any name-brand chips. Blake's hourly wage increases from $8$8 to $15$15, and he decides to eat one name-brand bag and one generic-brand bag each day. Calculate Blake's income elasticity of demand for generic potato chips.

Income elasticity-generic chips= -1.08 Generic potato chips are a inferior good As a good, generic potato chips are neither income elastic, nor income inelastic

a situation where the expense of producing one more unit of a good or service is greater than that of producing the previous unit

Increasing marginal cost

Alexander is heavily invested in the stock of Nortel, a telecommunications giant. However, Nortel has been in steady decline, and even though all signs point to the fact that Nortel will likely go bankrupt, Alexander holds onto his stocks, unwilling to sell unless he makes back at least the money he invested.

Loss aversion

the benefit experienced from undertaking one more unit of an activity

Marginal Benefit

the cost of producing one more unit of a good or service

Marginal cost

Jim is washing his laundry and, as he checks his pockets, finds an unexpected windfall of $50. Elated because it is $50 more than he had before, he decides to splurge on a lobster-and-filet-mignon dinner.

Mental accounting

Tiffany lives in Alameda, California. She recently received two job offers, one in Oakland and one in San Francisco. The San Francisco job pays $1000 more per year, so Tiffany accepts the job. However, the travel time, which is an hour more each way, quickly becomes a burden.

Misperceiving opportunity cost

the amount that, when produced or consumed, results in the greatest possible net gain

Optimal quality

The price elasticity of demand for gasoline in the short run has been estimated to be 0.4. If a war in the Middle East causes the price of oil (from which gasoline is made) to increase, how will that affect total revenue from gasoline in the short run, all other things unchanged?

Quantity demanded will decrease; total revenue will rise.

Cathy is a very good driver. In fact, she has never been in an accident in her life. However, she still takes out a comprehensive car insurance policy every year, rather than just the liability coverage the state requires.

Risk aversion

Now imagine the price of butter falls to $25 per gallon. Graphically, how has Billy's budget line changed?

Shifted out along the butter's axis

(Table: Marginal Analysis of Sweatshirt Production I) Look at the table Marginal Analysis of Sweatshirt Production I. The optimal quantity of sweatshirts to produce is:

Three

Which of the following is a "how much" decision?

Tim is trying to decide the amount of money to save each month to buy a new car next year.

Contain Yourself!, a plastic container company, raises the price of its signature Lunchbox container from $3.00to $4.00. As a result, the quantity sold drops from 20,000 to 15,000. Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5 Capital Metro decides to increase bus fare rates from $2.00 to $2.21 Consequently, the number of passengers who decide to take the bus in Austin drops from an average of 70,000 riders a day to an average of 61,000 riders a day.

Unit elastic Inelastic elastic

What is the primary difference between accounting profits and economic profits? The primary difference is that

accounting profits ignore implicit costs; economic profits consider them.

Use of the midpoint method to calculate the price elasticity of demand eliminates the problem of computing:

different elasticities, depending on whether price decreases or increases.

When Ruko, a device used to stream movies at home, increases prices by 54%, total revenue decreases by 57%. When Cinema Supreme decreases ticket prices by 26%, total revenue does not change. When Bluebox, a DVD rental kiosk, increases its prices by 52%, total revenue increases by 31%.

elastic Unit elastic inelastic

A men's tie store sold an average of 30 ties per day at $5 per tie but sold 50 of the same ties per day at $3 per tie. The price elasticity of demand, by the midpoint method, is:

equal to 1.

Charlotte delivers food for a fried chicken restaurant. When Charlotte delivers a meal to a household during a major icestorm, the family, feeling sorry that Charlotte has to work in extreme weather, decides to give her a $20 tip for a $10 delivery.

fairness.

The effect of an excise (or commodity) tax on the equilibrium price is the same regardless of who the tax is levied upon.

false

When the price elasticity of demand is high and the price elasticity of supply is low, the burden of a tax falls mainly on consumers.

false

If the price of chocolate-covered peanuts decreases from $1.15 to $1.05 and the quantity demanded increases from 190 bags to 220 bags, then the price elasticity of demand (by the midpoint method) is:

greater than 1.

Russ owns a fried chicken stand at the local beach. In calculating how much he earns from his business, Russ notices a difference between his economic and accounting profits. Why would Russ' economic profits differ from his accounting profits?

he may have implicit costs associated with operating the chicken stand in addition to explicit costs.

To maximize her grade in economics, Stacey should study until:

her marginal benefit of studying equals her marginal cost of studying.

Sylvia's annual salary increases from $102,300 to $109,500, and she decides to increase the number of vacations she takes per year from three to four. Calculate her income elasticity of demand for vacations.

income elasticity vacations= 4.20 Vacations are a normal good As a good, vacations are Income-elastic

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:

increase by about 2.9%.

Suppose the government levies a $4 per month excise tax on cable TV. If the demand for cable TV is relatively (but not perfectly) inelastic and the supply curve is relatively (but not perfectly) elastic, then the price of cable TV will:

increase by less than $4

Excise taxes that raise the most revenue and cause the least deadweight loss are likely to be levied on goods for which demand is _____ and supply is _____.

inelastic; inelastic

When there are fewer substitutes, demand tends to be

less elastic.

Economic profit is:

less than accounting profit if implicit costs exist.

(Table: Consumer Equilibrium) Look at the table Consumer Equilibrium. Assume that the price of both goods is $1 per unit, that you consume four units of good X and two units of good Y, and that you are spending all of your income. To maximize utility, assuming that the goods are divisible, you would consume _____ of X and _____ of Y

less; more

Demand for an item that uses a large portion of your budget tends to be

more elastic

Over longer periods of time, demand tends to be

more elastic

Over longer periods of time, demand tends to become

more elastic

Demand for a luxury item tends to be

more elastic.

Assume that diminishing marginal utility applies to both coffee and football tickets and that the consumer is spending all of her income. If a consumer purchases a combination of coffee and football tickets such that MUCoffee / PCoffee = 20 and MUFootball tickets / PFootball tickets = 10, to maximize utility, the consumer should buy _____ coffee and _____ football tickets.

more; fewer

(Table: Consumer Equilibrium) Look at the table Consumer Equilibrium. Assume that the price of both goods is $1 per unit, that you consume three units of good X and three units of good Y, and that you are spending all of your income. To maximize utility, assuming that the goods are divisible, you would consume _____ of X and _____ of Y.

more; less

Figure: Budget Lines for Oranges and Apples) Look at the figure Budget Lines for Oranges and Apples. For some time, Antonio has had $5 per month to spend on oranges and apples. The price of an orange is $0.50 and the price of an apple is $0.25. Which of the charts shows what will happen to his budget line if his income increases to $6?

shifting up and down

An excise tax that the government collects from the producers of a good:

shifts the supply curve upward.

If the marginal benefit received from consuming a good is less than the marginal cost of production

society's well-being can be improved if production decreases.

Geneva is a researcher at a biotech firm, and faces decision paralysis every time a big question is posed to her. Whenever her boss asks her what project she wants to work on, she always says she is indifferent, so eventually her boss stops asking for her input and just assigns her however he wants.

status quo bias

Jenny believes that spending one hour studying for economics will increase her grade by 20 points. Studying for a second hour will increase her grade by 10 points. She also believes that studying for an hour for history will increase her grade by 15 points, but spending a second hour will increase her grade by only 5 points. Jenny has two hours to study. If Jenny wants to maximize her scores, what should she do?

study 1 hour for economics and 1 hour for history

If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when the price of shirts increases from $8 to $12, for you, shoes and shirts are considered:

substitute goods

The optimal consumption rule for all goods requires

the marginal utility of all goods consumed divided by the respective price to be equal.

The deadweight loss from an excise tax comes about because:

the number of transactions in the market is reduced and some mutually beneficial transactions do not take place.

The implicit cost of capital is:

the opportunity cost of capital used by a business.

Total revenue is:

the price of a good times the quantity of the good that is sold.

When the price goes down, the quantity demanded goes up. The price elasticity of demand measures:

the responsiveness of the quantity change to the price change.

Jacquelyn is a student at a major state university. Which of the following is NOT an explicit cost of her attending college?

the salary that she could have earned working full-time

Profit is the difference between _____ and _____.

total revenues; total costs

An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions.

true

A perfectly price-inelastic demand curve is:

vertical.

Tax incidence refers to:

who really pays the tax.