Microeconomics

Shift in Both Supply and Demand

Q rises, but effect on P is ambiguous: If demand increases more than supply, P rises. if supply increases more than demand, P falls.

The law of supply states that, holding other factors constant, as price increases_____.

Quantity supplied increases

Economists assume that people are motivated by_____.

Rational self-interest

Fall in price of tax return software

S curve does not shift. Move down along the curve to a lower P and lower Q.

Fall in cost of producing the software

S shifts to the right: at each price, Q increases.

The fundamental reason people must choose between goods to buy and consume is because of____.

Scarcity

Suppose that when the price of good X falls from $6 to $4, the quantity demanded of good Y rises from 30 units to 40 units. Using the midpoint method, the cross-price elasticity of demand is:

Since CPEoD < 0, goods are complements.

Last year, Olivia bought 6 pairs of shoes when her income was $50,000. This year, her income is $55,000, and she purchased 8 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Olivia's income elasticity of demand is about:

Since IEoD > 0, Olivia regards shoes as a normal good.

When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information and using the midpoint method, we know that the demand for eBooks is

Since PEoD > 1, the demand is elastic. So, the answer is B.

Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to:

So, a 50% reduction or fall in quantity of jelly purchased.

Studies indicate that the price elasticity of demand for beer is about 0.9. A government policy aimed at reducing beer consumption changed the price of a case of beer from $10 to $20. According to the midpoint method, the government policy should have reduced beer consumption by:

So, a 60% reduction in beer consumption.

Price of music downloads falls

The D curve does not shift.Price moves from P1 to P2 and quantity moves from Q1 to Q2.

For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to

shift to the right

Suppose the price of hamburgers rises, and you observe that as a result, the demand for hotdogs rises. This makes hotdogs and hamburgers _______.

substitutes

Dana, who is a trained yoga instructor, spends 4 hours on Monday baking and packing 10 boxes of cookies. She sells the cookies for $10 a box. Given that she can also teach yoga for $80 an hour, what is her opportunity cost of baking cookies?

$320

Hedge fund is a landscaping firm that specializes in topiary. Last year, the firm has 60 employees and served 120 customers. This year, he had 70 employees insert 140 customers. What is the marginal product of labor?

2

Fred works 40 hours a week managing Fred's convenient store, without drawing a salary. He could earn 600 a week doing the same work for Bob. Fred's convenient store owes its bank 100,000, and Fred has invested 100,000 of his own money. If Fred's accounting profits are 1000 per week while the interests on his bank that is 200 per week and savings accounts interest in loans interest are equal, his economic profits are_____.

.200 per week

Goods and services that are independent of each other have a cross elasticity of demand that is ________.

0

To maximize profit, the firm should set output at the levels where_____.

Marginal revenue is equal to marginal cost

Price of iPods falls

Music downloads and iPods are complements. A fall in price of iPods shifts the demand curve for music downloads to the right.

Which of the following would necessarily cause a decrease in the price of a product?

A decrease in the price of a substitute product and an improvement in production technology.

Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations. What is the accounting profit for the family farm? What is the economic profit for the family farm?

Accounting Profit=𝑇𝑅−Explicit costs Accounting Profit = $100,000 − ($25,000 + $40,000 + $25,000) = $10,000 Economic Profit=Accounting Profit−Implicit costs Economic Profit = $10,000 − $20,000 = −$10,000

The total economic cost of pursuing a three-year Master degree after college is equal to

All educational expenses during the program plus three years of wages that the individual would have earned if she had not elected the program.

Which of the following is false? a. Products with close substitutes have elastic demand. b. Demand for individual brand is less elastic than industry aggregate demand. c. Products with many complements have less elastic demand. d. In the long run, demand curves become more elastic.

B is false. Price elasticity is higher for narrowly defined goods than broadly defined goods. An individual brand demand is narrow while the industry aggregate demand is broad.

Price of CDs falls

CDs and music downloads are substitutes.A fall in price of CDs shifts demand for music downloads to the left. Given the price at P1, Q decreases from Q1 to Q2

Which of the following products is likely to have the most elastic demand?

Coca Cola

Bill is restoring a car and has already spent $4000 on the on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do.

He should sell the car now for $3800

You need $150,000 to start your business. The annual interest rate is 10% on loans and savings accounts. What would be the implicit and explicit costs if you (1) borrowed the entire $150,000 or (2) if you only borrowed $80,000 and used $70,000 from savings?

In both cases, total costs (explicit + implicit) are $15,000.

What of the following statements best summarizes the law of diminishing marginal returns?

In the short run, as more labor is hired, output increases at a diminishing rate.

A restriction on the number of people allowed to be medical doctors in the United States would most likely_____.

Increase doctors' fees

A tradeoff exists between a clean environment and A higher level of income in that ____.

Laws that are reduce pollution raise costs of production and reduce incomes.

Consider inferior goods. As real income raise, customers tend to buy inferior goods in____.

Less quantity

The optimal amount of studying is determined by comparing the_____.

Marginal benefit and the marginal cost of studying

A firm should build an additional distribution center if______.

The marginal revenue of building the distribution center is larger than the marginal cost of building it

A rational student will continue studying in a given study session until_____.

The marginal value of the last unit studied equals the marginal cost of the last unit

Average total costs is equal to which of the following?

The sum of average variable costs and average fixed costs

In economics, the cost of doing something is_____.

The value of the next best opportunity not taken.

March was unusually rainy and windy, leading more car owners to take their cars to the car wash. Prices at local car washes did not change. Economists might describe that change in consumer behavior this way

The weather caused an increase in the demand for carwashes

Professional preparers raise their price

This shifts the demand curve for tax preparation software, not the supply curve.

A shift in the demand curve denotes

a change in demand

Corporations

a corporation is a legal entity in its own right and can be closely held (with few shareholders) or widely held (with hundreds of thousands of shareholders).

For any good or service, we can represent the quantity demanded under various prices by _________.

a demand curve

Profit maximization occurs when _____________.

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

Not-for-Profit entities

a firm may be formed with a philanthropic or altruistic motive - such firms do not pursue profit as an objective.

Cooperatives

a number of individuals can come together in a cooperative venture - farming, milk production, and small banks in the emerging economies are fertile ground for cooperatives.

Suppose the demand is perfectly elastic. The implication would be that the smallest possible change would result in _____

a virtually infinite change in quantity

When supply is inelastic

an increase in demand has a bigger impact on price than on quantity.

When supply is elastic

an increase in demand has a bigger impact on quantity than on price.

Given that digital music players are used to play music downloaded from the Internet, a fall in the price of digital music players will lead to _______.

an increase in the demand for downloaded songs

People respond to incentives

by calculating their individual costs and benefits and determining which is greater

People respond to incentives _______.

by calculating their individual costs and benefits and determining which is greater

An incentive _______.

could be either a reward or a punishment

average total cost is equal to which of the following

d) the sum of average variable costs and average fixed costs

For goods and services that have an elastic demand, if price is increased, total revenue _______.

decreases

A market or even an economy can be said to be in _______ if supply and demand are equal

equilibrium

Assume the demand for insulin is inelastic. If the price of insulin rises by 5%, the quality demanded of insulin will

fall by less than 5%

A perfectly elastic demand is a ___________ curve.

horizontal

Potatoes are used in the production of potato chips. Suppose the price of potatoes falls. Then,_______.

it is likely an outward shift in the supply curve of potato chips

If A is a complement to B, an increase in the price of A will

lead to a decrease in demand for B

A drought in the Midwest will raise the price of wheat because of a

leftward shift in the supply curve.

The diminishing marginal product of labor exists when the last worker hired produces:

less output than the previous worker

The optimal amount of studying is determined by comparing the _______.

marginal benefit and the marginal cost of studying

All other inputs remaining the same, the additional output that may result from an additional unit of labor is ________.

marginal product

Suppose the demand is perfectly inelastic. The implication would be that the smallest change in price would result in ________.

no change in quantity

Suppose the demand is perfectly inelastic. The implication would be that the smallest change in price would result in

no change in quantity demanded.

Sole proprietorships

one person owns the firm

The cost of a trade is known as

opportunity cost

John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates the principle that

people face trade-offs

Because the resources immediately available for use are limited, _______.

people must make choices about resource use

income elasticity of demand is the extent to which the demand of goods responds to change in

real income

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

sell the ticket because the marginal benefit exceeds the marginal cost.

In economics, the opportunity cost of doing something is _______.

the value of the next best opportunity not taken

Partnerships

two or more persons come together to form a partnership