Microecon Final Exam Practice Test

Those who believe that "there is no such thing as bad publicity" base this argument on which of the following ideas from behavioral economics?

The recognition heuristic will overcome any negative emotional associations.

Fatal automobile accidents occur much more frequently than do fatal airplane crashes, yet airplane crashes receive a disproportionate amount of media coverage. As a result, some people are overly fearful of flying in planes yet have no problem riding in cars. Which of the following cognitive biases best explains this disconnect between these people's fears and the statistical realities?

availability heuristic

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.

downsloping; perfectly elastic

When a firm is on the inelastic segment of its demand curve, it can

increase profits by increasing price.

The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 If, other things equal, Creamy Crisp's revenue fell to $286,000,

it would earn a normal profit but not an economic profit.

Curve (2) in the diagram is a purely competitive firm's

marginal revenue curve.

The quantitative difference between areas Q1bcQ2 and P1P2ba in the diagram measures

marginal revenue.

Assuming a firm is selling its output in a purely competitive market, its resource demand curve can be determined by

multiplying marginal product by product price.

An industry comprising a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called

oligopoly.

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the

overconfidence effect.

Which of the following supermarket strategies to increase sales would be most consistent with a neoclassical economics (versus behavioral economics) approach?

providing discounts for buying in bulk

Production costs to an economist

reflect opportunity costs.

Marginal product is

the amount an additional worker adds to the firm's total output.

Normal profit is

the return to the entrepreneur when economic profits are zero.

Economists use the term imperfect competition to describe

those markets that are not purely competitive.

Accounting profits equal total revenue minus

total explicit costs.

A profit-maximizing firm employs resources to the point where

MRP = MRC.

The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's explicit costs are

$150,000.

Quantity of Labor Total Product Total Revenue 1 4 $16 2 8 32 3 11 44 4 13 52 5 14 56 Refer to the given data. The marginal revenue product of the second worker is

$16.

Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000. Instructions: Enter your answers as whole numbers. a.Calculate the accounting profit for Gomez's pottery firm. b. Now calculate Gomez's economic profit.

Explanation Explicit costs are the direct costs incurred from production: $37,000 (= $12,000 for the helper + $5,000 for rent + $20,000 for materials). Implicit costs are the costs that are indirectly incurred by the activity: $22,000 (= $4,000 of forgone interest + $15,000 of forgone salary + $3,000 of entrepreneurship). a. Accounting profit = $35,000 (= $72,000 of revenue - $37,000 of explicit costs). b. Economic profit = $13,000 (= $72,000 of revenue - $37,000 of explicit costs - $22,000 of implicit costs).

ADVANCED ANALYSIS In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for x represents remaining at the status quo. The so-called value function, v(x), has separate equations for translating gains and losses into, respectively, positive values (utility) and negative values (disutility). The gain or loss is typically measured in dollars while the resulting value (utility or disutility) is measured in utils. A typical person values gains (x > 0) using the function v(x) = x0.88 and losses (x < 0) using the function v(x) = − 2.5*(- x)0.88. In addition, if she stays at the status quo (x = 0), then v(x) = 0. Calculate the typical person's value functions for gains and losses to fill out the missing spaces in the table below. Then answer the questions that follow. Instructions: Round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is the total value of gaining $1? Of gaining $2? b. What is the marginal value of going from $0 to gaining $1? Of going from gaining $1 to gaining $2? Does the typical person experience diminishing marginal utility from gains? Yes Correct c. What is the marginal value of going from $0 to losing $1? Of going from losing $1 to losing $2? Does the typical person experience diminishing marginal disutility from losses? Yes Correct d. Suppose that a person simultaneously gains $1 from one source and loses $1 from another source. What is the person's total utility after summing the values from these two events? Can a combination of events that leaves a person with the same wealth as they started with be perceived negatively? Yes Correct e. Suppose that an investor has one investment that gains $2 while another investment simultaneously loses $1. What is the person's total utility after summing the values from these two events? Will an investor need to have gains that are bigger than her losses just to feel as good as she would if she did not invest at all and simply remained at the status quo? Yes

Explanation The completed table should look like this: Gain or Loss Total Value of Gain or Loss Marginal Value of Gain or Loss - 3 - 6.57 - 1.97 - 2 - 4.60 - 2.10 - 1 - 2.50 - 2.50 0 0.00 — 1 1.00 1.00 2 1.84 0.84 3 2.63 0.79 a. The total value of gaining $1 is 1.00 util. The total value of gaining $2 is 1.84 utils. b. The marginal value of going from $0 to gaining $1 is 1.00 util (= 1.00 util - 0.00 utils). The marginal value of going from gaining $1 to gaining $2 is 0.84 util (= 1.84 utils - 1.00 util). Thus, the typical person does experience diminishing marginal utility for gains. c. The marginal value of going from $0 to losing $1 is - 2.50 utils (= - 2.50 utils - 0.00 utils). The marginal value of going from losing $1 to losing $2 is - 2.10 utils (= - 4.60 utils - (- 2.50 utils)). Thus, the typical person does experience diminishing marginal disutility for losses. d. The person's combined total utility from the two events will be - 1.50 utils (= 1.00 util from the gain of $1 - 2.50 utils from the loss of $1). Thus, a combination of events that leaves a person with the same amount of wealth as she held initially can leave the person feeling worse off. This is one explanation for the origin of status quo bias. People don't want to make changes because losses feel so much worse than gains—that even ending up back where they started can feel worse than if they had simply stayed at the status quo. e. This investor's total utility will be - 0.66 utils (= 1.84 utils from gaining $2 - 2.50 utils from losing $1). So, yes, an investor will have to have gains that exceed her losses by a substantial amount if she wants to end up feeling better than if she had done nothing and remained at the status quo.

A new production technology for making vitamins is invented by a college professor who decides not to patent it. Thus, it is available for anybody to copy and put into use. The TC per bottle for production up to 100,000 bottles per day is given in the following table. a. What is ATC for each level of output listed in the table? Instructions: Round your answers to 1 decimal place. b. Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, TC increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $85,000 and 150,000 bottles per day would generate total costs of $90,000). Is this a decreasing-cost industry? Yes Correct c. Suppose that the price of a bottle of vitamins is $1.33 and that at that price the total quantity demanded by consumers is 75,000,000 bottles. How many firms will there be in this industry? One firm Correct d. Suppose that, instead, the market quantity demanded at a price of $1.33 is only 75,000. How many firms do you expect there to be in this industry? One firm Correct e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure? No

Explanation a. ATC = total cost/output. b. The last two rows provide the additional cost and output information (you could continue to add rows for additional output). Output TC ATC 25,000 $50,000 $2.00 50,000 70,000 1.40 75,000 75,000 1.00 100,000 80,000 0.80 125,000 85,000 0.68 150,000 90,000 0.60 From this additional information, we can conclude this is a decreasing-cost industry because ATC falls as output increases at all levels. c. Since this is a decreasing-cost industry, we have a natural monopoly situation, and there will only be one firm. d. Again, since this is a decreasing-cost industry, we have a natural monopoly situation, and there will only be one firm. e. No, since this is a decreasing-cost industry, there will only be one firm regardless of demand.

A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. a. In the table below, answer the following questions. How many bushels will each of the farmer's five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? b. If the marginal cost of planting and harvesting an acre is $7,000 per acre for each of the five acres, how many acres should the farmer plant and harvest?

Explanation a. The first step is to calculate the revenue generated by each acre (column 3). Each entry, the acre's revenue, is found by multiplying the price per bushel by the acre's yield. The revenue generated by the first acre is $10,000 (= $10 × 1,000), the second acre $9,000 (= $10 × 900), the third acre $8,000 (= $10 × 800), etc. The next step is to calculate total revenue (column 4). Total revenue equals the sum of revenue generated by each successive acre being cultivated. Total revenue for the first acre is $10,000, total revenue for first and second acre is $19,000 (= $10,000 + $9,000), total revenue for the first, second, and third acre is $27,000 (= $10,000 + $9,000 + $8,000), etc. The final step is to calculate marginal revenue (column 5). Marginal revenue equals the change in total revenue as each successive acre is cultivated. Marginal revenue for the first unit is $10,000 because as we move from cultivating zero acres to one acre our total revenue changes by $10,000. The marginal revenue for the second acre equals $9,000, which is the total revenue of the second acre minus the revenue generated by the first acre (= $19,000 − $10,000), etc. b. Using our MC = MR rule, the farmer should plant and harvest 4 acres. Marginal revenue for the fourth acre equals $7,000 and the marginal cost equals $7,000.

One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a local market. But he is unwilling to drive 20 minutes out of his way to save $10 on a laptop that costs $400 at a local store. Instructions: Round your answers to 1 decimal place. a. In percentage terms, how big is the savings on the grocery item? On the laptop? Instructions: Enter your answers as whole numbers. b. In absolute terms, how big is the savings on the grocery item? On the laptop? c. If Samir is willing to sacrifice 20 minutes of his time to save $4 in one case, should he also be willing to sacrifice 20 minutes of his time to save $10? Yes

Explanation a. The percentage savings on the grocery item is 40 percent (= ($4/$10) × 100). The percentage savings on the laptop is 2.5 percent (= ($10/$400) × 100). b. In absolute terms, the savings on the grocery item is $4 and the savings on the laptop is $10. c. Yes, if Samir is willing to sacrifice 20 minutes of his time to save $4 in one case, he should be more than happy to get $10 for sacrificing 20 minutes in the other case. In terms of economic terminology, his behavior in the first case indicates that saving $4 exceeds the opportunity cost of whatever else he could be doing with 20 minutes' worth of time. If that is so, then $10 will also exceed that same opportunity cost.

Which of the following is not a basic characteristic of pure competition?

considerable nonprice competition