Microeconomics- Exam 2 Study Guide

Refer to Figure 8-14. If the firm produces 15 units of output, its average fixed cost is a. 4. b. 5. c. 6. d. 60.

a. 4.

Refer to Figure 8-14. The marginal cost of producing the tenth unit is a. 7. b. 13. c. 70. d. 130.

a. 7.

Which of the following is true? a. Economic profits are generally lower than accounting profits. b. Economic profits are generally greater than accounting profits. c. Economic profits are generally equal to accounting profits. d. Economic profits plus accounting profits must equal zero.

a. Economic profits are generally lower than accounting profits.

Bob goes out to dinner three times per week, usually either to the local steak house or a Chinese restaurant in town. If the steak house were to raise its prices, Bob would probably (1) be less inclined to eat at the steak house and more inclined to eat at the Chinese restaurant when he did go out and (2) eat out fewer times per week because at the higher prices he cannot afford to eat out as much. a. Part 1 is an example of the substitution effect, part 2 of the income effect. b. Part 1 is an example of the income effect, part 2 of the substitution effect. c. Part 1 is an example of the law of diminishing marginal utility, part 2 of the substitution effect. d. Part 1 is an example of the proportions hypothesis, part 2 of the income effect.

a. Part 1 is an example of the substitution effect, part 2 of the income effect.

Refer to Figure 8-14. Diminishing returns to the variable factor of production for this firm set in at a. Q = 6. b. Q = 10. c. Q = 15. d. none of the above.

a. Q = 6.

Coach Ballford: "To increase our revenue from football games, we need to lower ticket prices." University President Smith: "Coach, that would be counterproductive; a reduction in ticket prices would reduce our revenue, not increase it." Which of the following best explains this disagreement? a. The coach thinks that demand is elastic, whereas the university president thinks that demand is inelastic. b. The coach thinks that demand is inelastic, whereas the university president thinks that demand is elastic. c. The coach believes that lower ticket prices will increase attendance, but the university president must not believe attendance will increase when prices are lowered. d. Although both the coach and the president believe demand is of unitary elasticity, they disagree about how much attendance will rise.

a. The coach thinks that demand is elastic, whereas the university president thinks that demand is inelastic.

The price elasticity of demand for automobiles measures the responsiveness of a. consumer purchases to a change in the price of automobiles. b. consumer purchases to a change in the quality of automobiles. c. supplier production levels to a change in the price of automobiles. d. consumer purchases of automobiles to a change in their income.

a. consumer purchases to a change in the price of automobiles.

All else equal, if a firm raises its price by 20 percent and the firm's total revenue falls by 20 percent, a. demand must be elastic. b. demand must be inelastic. c. demand must be unit elastic. d. the price elasticity of demand must be equal to 1.

a. demand must be elastic.

Making drugs, such as cocaine, illegal results in a higher price than would be present if the drugs were legal. All else constant, the higher price results in drug users spending a. more on drugs if the demand for drugs is inelastic. b. more on drugs if the demand for drugs is elastic. c. less on drugs if the demand for drugs is inelastic. d. more on drugs if the demand for drugs is unitary elastic.

a. more on drugs if the demand for drugs is inelastic.

The market demand for a good is a. the horizontal sum of all individual demand curves for the good. b. generally upward sloping, unlike individual demand curves. c. usually a vertical line at a quantity of one hundred. d. the average amount purchased by each individual in the market.

a. the horizontal sum of all individual demand curves for the good.

If Joe's income increased and as a result he purchased more wine and less fast food, a. wine is a normal good and fast food an inferior good for Joe. b. wine is an inferior good and fast food a normal good for Joe. c. both wine and fast food are inferior goods for Joe. d. both wine and fast food are normal goods for Joe.

a. wine is a normal good and fast food an inferior good for Joe.

A homeowner will be away from her house for six months. The monthly mortgage payment on the house is $300. The utilities, to be paid by the owner, cost $100 per month if the house is occupied; otherwise zero. If the owner wishes to minimize her losses from the house, she should rent the house for as much as the market will bear, as long as monthly rent is greater than which of the following? (Assume wear and tear to be zero regardless of whether the house is occupied.) (Hint: Remember the concept of sunk cost.) a. $0 b. $100 c. $200 d. $400

b. $100

If Russell values a ticket to a rock concert at $100 and is able to purchase it for only $40, he has received ____ in consumer surplus on his purchase. (Fill in the blank.) a. $40 b. $60 c. $100 d. $140

b. $60

Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14 and his marginal cost $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day? a. $5 b. $7 c. $8 d. $15

b. $7

Refer to Figure 8-14. If the firm produces 10 units of output, its total fixed cost is a. 6. b. 60. c. 70. d. 130.

b. 60.

The exhibit illustrates two possible demand curves for a product, D1 and D2. Which of the following is true regarding these demand curves? a. Demand curve D1 represents a demand curve that is relatively more elastic than demand curve D2. b. Demand curve D1 represents a demand curve that is relatively more inelastic than demand curve D2. c. Demand curve D1 represents a demand curve that shows consumer purchases being more responsive to a change in the price of the good than demand curve D2. d. Both are examples of unitary elastic demand curves.

b. Demand curve D1 represents a demand curve that is relatively more inelastic than demand curve D2.

Which of the following statements is true regarding the price elasticity of supply? a. The price elasticity of supply is always negative. b. The price elasticity of supply is always positive. c. The price elasticity of supply will be greater when suppliers have a shorter time to respond to a price change. d. None of the above statements are true.

b. The price elasticity of supply is always positive.

If the price elasticity of demand for grapes was 2.5, a. the demand for grapes would be considered inelastic. b. an increase in the price of grapes would decrease total consumer spending on grapes. c. consumer purchases are less sensitive to a change in the price of grapes than to a change in the price of bananas, which have a price elasticity of 1.6. d. the income elasticity for grapes must also be 2.5.

b. an increase in the price of grapes would decrease total consumer spending on grapes.

A 15 percent increase in the price of beef reduces the quantity of beef consumed by 30 percent. Thus, the demand for beef is ____, and total consumer expenditure (or total firm revenue) will ____ as a result of the price increase. (Fill in the blanks.) a. elastic; increase b. elastic; decrease c. inelastic; increase d. inelastic; decrease

b. elastic; decrease

Larger firms will often have lower minimum per-unit costs than smaller firms because a. employee shirking is less of a problem. b. large-scale output allows greater specialization for both labor and machines in the production process. c. mass production techniques, with high setup and development costs, are appropriate only when a small output is planned. d. all of the above are correct.

b. large-scale output allows greater specialization for both labor and machines in the production process.

Sunk or "historical" costs are costs a. associated with current operational decisions. b. that have already been incurred as the result of past decisions. c. that add to the firm's marginal costs. d. that form the major component of the firm's variable costs.

b. that have already been incurred as the result of past decisions.

Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop but not as much as the first layer. What economic concept best explains this observation? a. the law of diminishing marginal utility b. the law of diminishing returns c. return equalization principle d. the principal-agent problem

b. the law of diminishing returns

When the owner of a business invests his or her own money in the business, they give up the interest this money could be earning in the bank. This forgone interest is called a. the marginal cost of diminishing financial services. b. the opportunity cost of equity capital. c. the opportunity cost of labor services. d. interest expense and is included as a cost in the accounting statements of the business.

b. the opportunity cost of equity capital.

As output is expanded, if MC is more than ATC, a. ATC must be at its minimum. b. ATC must be at its maximum. c. ATC must be increasing. d. ATC must be constant.

c. ATC must be increasing.

Refer to Figure 8-14. This firm minimizes its per-unit costs of production at an output level of a. Q = 6. b. Q = 10. c. Q = 15. d. none of the above.

c. Q = 15.

The average variable cost curve and average total cost curve become closer together as output increases because a. the marginal cost curve intersects the average total cost curve at its minimum. b. average fixed cost remains constant as output rises. c. average fixed cost, which is the difference between them, declines with output. d. output is rising more rapidly than inputs are being increased.

c. average fixed cost, which is the difference between them, declines with output.

"Because of the unseasonably cold weather, Florida orange growers expect (1) fewer bushels of oranges to be harvested, (2) a higher market price for oranges, and (3) larger total revenues from this year's crop." This statement would most likely be correct if the a. demand for Florida oranges was elastic. b. demand for Florida oranges was unitary elastic. c. demand for Florida oranges was inelastic. d. income elasticity of Florida oranges was negative.

c. demand for Florida oranges was inelastic

When the price elasticity of demand is greater than one, it means that demand is a. inelastic and the percent change in quantity is greater than the percent change in price. b. inelastic and the percent change in quantity is less than the percent change in price. c. elastic and the percent change in quantity is greater than the percent change in price. d. elastic and the percent change in quantity is less than the percent change in price.

c. elastic and the percent change in quantity is greater than the percent change in price.

When an economist says a firm is earning zero economic profit, this implies that the firm a. will be forced out of business in the near future unless market conditions change. b. is earning a zero rate of return on its assets. c. is earning as high a rate of return now as could be earned in other industries. d. has an accounting profit of zero.

c. is earning as high a rate of return now as could be earned in other industries.

The short run is a time period of insufficient length for the firm to change its a. output. b. amount of labor employed. c. plant size and heavy equipment. d. price.

c. plant size and heavy equipment.

The long run is a period of a. at least one year. b. sufficient length to allow a firm to expand output by hiring additional workers. c. sufficient length to allow a firm to alter its plant size and capacity and all other factors of production. d. sufficient length to allow a firm to transform economic losses into economic profits.

c. sufficient length to allow a firm to alter its plant size and capacity and all other factors of production.

Which of the following factors is most likely to shift the cost curves of an Iowa corn farmer downward? a. an increase in the price of fertilizer b. an increase in the tax on diesel fuel, which is used by the farmer c. the development of a new, more efficient corn harvester d. the adoption of a regulation requiring farmers to treat their crops with three new pesticides.

c. the development of a new, more efficient corn harvester

If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of hula hoops purchased, the price elasticity of demand is a. 5 and the demand for hula hoops is elastic. b. 0.2 and the demand for hula hoops is elastic. c. 5 and the demand for hula hoops is inelastic. d. 0.2 and the demand for hula hoops is inelastic.

d. 0.2 and the demand for hula hoops is inelastic.

Refer to Figure 8-14. If the firm produces 10 units of output, its average total cost is a. 6. b. 7. c. 12. d. 13.

d. 13.

Refer to Figure 8-14. If the firm produces 10 units of output, its total cost is a. 7. b. 13. c. 70. d. 130.

d. 130.

Which of the following is true about marginal benefit? a. A consumer's marginal benefit is equal to the height of her demand curve. b. Consumers will continue to purchase up until the point where marginal benefit equals price. c. Marginal benefit declines as consumption increases because of the law of diminishing marginal utility. d. All of the above are true.

d. All of the above are true.

Which of the following factors would not shift the cost curves of an automobile company upward? a. a regulation requiring all automobiles be equipped with improved safety equipment b. an increase in the price of steel used to make automobiles c. an increase in the property tax on buildings and equipment used by the automobile company d. An employee develops a new method of installing doors on the cars that requires half as many workers as before.

d. An employee develops a new method of installing doors on the cars that requires half as many workers as before.

Which of the following is not a fundamental that underlies consumer behavior? a. Goods can be substituted for one another. b. Consumers make decisions purposefully based upon past experience and knowledge. c. The law of diminishing marginal utility applies to all goods. d. Consumers always make choices with perfect information.

d. Consumers always make choices with perfect information.

The law of diminishing returns indicates why a. beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller amounts of additional satisfaction. b. the firm's total fixed costs do not change with output in the short run. c. a firm's long-run average total cost curve is U-shaped. d. a firm's marginal costs will eventually increase as the firm expands output in the short run.

d. a firm's marginal costs will eventually increase as the firm expands output in the short run.

The law of diminishing returns states that a. as we continually add variable factors to a fixed amount of other resources, output eventually increases at a decreasing rate. b. as we increase plant size, costs must diminish. c. the additional output generated by the employment of additional units of a variable input eventually decline. d. both a and c are correct.

d. both a and c are correct.

"After eating nothing but fast-food hamburgers on spring break, I was anxious to return home and eat something different." This statement most clearly reflects the law of a. the budget constraint. b. consumer irrationality. c. greater demand elasticity with time. d. diminishing marginal utility.

d. diminishing marginal utility.

When a firm increases its plant size in the long run and its per-unit costs fall, this is called a. diminishing returns and is shown by the downward-sloping portion of the MP curve (or the upward-sloping portion of the MC curve). b. constant returns to scale and is shown by the flat portion of the LRATC curve. c. diseconomies of scale and is shown by the upward-sloping portion of the LRATC curve. d. economies of scale and is shown by the downward-sloping portion of the LRATC curve.

d. economies of scale and is shown by the downward-sloping portion of the LRATC curve.

Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry a. has an income elasticity of two. b. is a normal good. c. is a luxury good. d. is all of the above.

d. is all of the above.

The firm's average total costs will be a minimum at the output level where the a. firm just begins to confront diminishing returns to the variable factors. b. marginal costs are a minimum. c. firm's average fixed costs are at their minimum. d. marginal cost curve crosses the firm's average total cost curve.

d. marginal cost curve crosses the firm's average total cost curve.

An inferior good is distinguished by a a. negative price elasticity of demand. b. positive price elasticity of demand. c. positive income elasticity of demand. d. negative income elasticity of demand.

d. negative income elasticity of demand.