Micro exam 1 &2 review

If the demand curve for product B shifts to the right because the price of product A declines, then

A and B are complements.

Which of the following changes would not shift the demand curve for a good or service?

A change in the price of the good or service

Refer to the graph below. Which of the following best describes the movement from E1 to E2? (shift left of supply curve)

A decrease in supply

Which of the following is not correct?

A monopolist can charge any price and sell any quantity that it chooses

. Which of the following would not shift the demand curve for beef?

A reduction in the price of cattle feed

t/f: Suppliers in monopolistic competition and monopolies are price takers

false

The entry of new firms into a competitive market will

increase market supply and decrease market price.

When Gigi's income increased from $10,000 to $20,000, her consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. Using the midpoint method, we can conclude that for Gigi, macaroni

is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income elasticity of 1.

When a factory is operating in the short run,

it cannot adjust the fixed costs.

micro/macro: More workers are being hired by the nation's businesses.

macro

Economists normally assume that the goal of a firm is to

maximize profit

micro/macro: New discoveries in medicine are leading to strong growth in the biotech industry.

micro

Refer to the diagram below. Realized economic growth is best represented by a

move from X on AB to Y on CD. (shift of the PPF outward)

positive/normative: A little bit of inflation is worse for society than a little bit of unemployment

normative

positive/normative: The Federal government should increase income taxes on the wealthy to reduce the budget deficit.

normative

Who was the founder who was forced to disolve his monopoly in 1911

rockefellar

Refer to graph below. An increase in quantity supplied is depicted by a

shift to the right of supply curve

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should

shut down because staying open would be more expensive.

Which of these curves is the competitive firm's short-run supply curve?

the marginal cost curve above average variable cost

If at the current price, there is a surplus of a good

Sellers are producing more than buyers wish to buy

For a yogurt shop, which of the following would be a fixed cost?

The $25,000 per year salary paid to the company's bookkeeper

Refer to the graph below. Which of the following would explain a movement from E1 to E2? (shift from supply 1 cure to supply 2 curve, points still on the demand curve)

The cost of an input to the production of this good increases

The demand for a good tends to be more elastic

The greater the availability of close substitutes

A rational decision maker takes an action only if

The marginal benefit is greater than the marginal cost

Economists understand people respond to

incentives

An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?

$15,000

Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is

$1600

Refer to Exhibit 6. Suppose the monopolist has fixed costs equal to $5 and a variable cost equal to $4 per unit for all units produced. What is the profit-maximizing price? Exhibit 6 A Monopolist Faces the following demand curve: Quantity Price 1 $30 2 $24 3 $18 4 $12 5 $6

$18

Maddie sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $3.50 per knife for as many knives as Anita is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.50, the third knife for $3.00, and the fourth knife for $3.50. Assume Maddie is rational in deciding how many knives to sharpen. Her producer surplus is

$3.00

Monopolistic competition is characterized by which of the following attributes? (i)free entry (ii)product differentiation (iii)many sellers

(i), (ii), and (iii)

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? (i)Marginal revenue equals $5. (ii)Average revenue equals $5. (iii)Price equals $5.

(i), (ii), and (iii)

-be able to calculate price index, and find opportunity cost, absolute adv., and comparative adv. -be able to label points on ppf -know when to shift supply/demand curves and how it affects equilibrium price/quantity

(review questions 4-6 on exam 1)

Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y decreases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about

-1.2, and X & Y are complements

how to find consumer surplus on a graph

-Consumer surplus is the area below the demand curve but above the price -base x height x 0.5

Using the midpoint method, what is the income elasticity of Good X in the table below. Income Q Demanded Good X $60,000 1,000 $80,000 1,500

1.4

When the price of bubble gum is $1.50, the quantity demanded is 400 packs per day. When the price falls to $1.25, the quantity demanded increases to 600. Given this information and using the midpoint method, what is the price elasticity of demand? is the demand elastic/inelastic?

2.2 elastic

Refer to Exhibit 2. At which number of workers does diminishing marginal product begin? Exhibit 2 #of Workers 0 1 2 3 4 5 Total Product 0 50 110 180 260 330

5

A supply curve slopes upward because

An increase in price gives producers incentive to supply a larger quantity

Amy used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings, (which paid 3 percent interest) and borrowed $30,000 from her uncle (like the problem done in class, assume she does not make any principle payment on this loan), whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Chris the accountant and Bobbie the economist to calculate her profit for her.

Chris says her profit is $34,100 and Bobbie says she lost $6,500.

What is the effect to the demand curve if the price of Gucci shoes increases?

Demand curve doesn't shift, the point moves along the curve

A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between

Efficiency and equality

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

Flatter the demand curve will be

Which economic system is the United States and the majority of the countries?

Free Market

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes

The price elasticity of demand measures

How responsive consumers are to a change in price

Katie and Dan are both capable of repairing cars and cooking meals. Which of the following scenarios is not possible?

Katie has a comparative advantage in repairing cars and in cooking meals

Micro/macro: The U.S. economy grew at an annual rate of 4.2 percent last year

Macro

The term used to describe a situation in which markets do not allocate resources efficiently is

Market failure

Which market system has zero economic profit in the long-run

Monopolistic competition

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

The mayor thinks demand is inelastic and city manager think demand is elastic

Economics is defined as

The study of how society manages its scarce resources

What is the law of demand?

When the price of the good falls, buyers respond by purchasing more

Of the pairs of goods, which ones are more elastic than the others

Yachts & Lamborghinis

Which of the following would be most likely to have monopoly power?

a municipal water company

Trade can benefit society as a whole because it allows

a. For goods to be obtained at a lower opportunity cost b. For a more efficient use of resources thus allowing a country to consume at a point outside its PPF c. People to specialize in activities in which they have a comparative advantage

In market economies

a. Prices guide economic decisions and thereby allocate scarce resources b. Prices ensure that quantity supplied, and quantity demanded move towards balance c. Prices influence how much of a good buyers will choose to purchase and how much sellers will choose to produce

The marginal cost curve crosses the average total cost curve at

a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising.

Excess capacity is

an example of the inefficiencies of monopolistically competitive markets.

The fundamental source of monopoly power is

barriers to entry

at what point on a graph would firms produce if they could perfectly discriminate?

equilibrium

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes

decreases, and the consumer surplus in the market for red wine decreases.

Which of the following is not a characteristic of a monopoly?

free entry and exit

Which of the following is not a typical characteristic of a market system?

government ownership of most property resources

In the short run, a firm that produces and sells house paint can adjust

how many workers to hire

Refer to Exhibit 3. Which market system is represented? -be able to look at graph

perfectly competitve

positive/normative: The minimum wage creates unemployment among young & unskilled workers

positive

The term shutdown

refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a firm might make.

-be able to find total cost,revenue ,profit, fixed/variable cost, avg total cost, and economic/accounting profit -be able to differentiate between markets -draw a monopoly curve (MR curve) -be able to tell which market has loss/market from a graph -be able to label profit maximizing point, price point, profit area, deadweight loss on a graph

review short answer on exam 2

McDonald's restaurants has recently announced intentions to open a new restaurant in Smalltown, Indiana. Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition. As a result of the new McDonald's, existing fast-food restaurants in Smalltown are likely to

suffer from a business-stealing externality

deadweight loss -be able to calculate from a graph

the total loss of producer and consumer surplus from underproduction or overproduction

t/f: P > MC in a monopolistic competition

true

Jolie owns a coffee shop. Which of the following costs would be included by an economist but not an accountant?

wages Jolie could earn giving music lessons

Which product is perfect competition

wheat

Name the company that was sued for being a monopoly we discussed in class

whole foods

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she

will earn zero economic profits but positive accounting profits.