MicroEconomics Final StudyGuide
Suppose that the price of a money clip increases from $0.75 to $0.90 and quantity supplied rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of supply.
1.22
Refer to the table to the right which shows the technology of production at the Matsuko's Mushroom Farm for the month of May. What is the average product of labor when the farm hires 5 workers?
10.8 bushels
Refer to the diagram to the right. The marginal product of the 3rd worker is
15.
Shakti Inc. has been granted a patent for its arnica toothache balm. The table to the right shows the demand and the total cost schedule for the firm. What is Shakti's profit-maximizing output?
4 units
Refer to the diagram to the right. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the profit maximizing quantity?
480 units
When the average total cost is $16 and the level of total cost is $800, then the number of units the firm is producing is
50.
The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia) and the rest of the market. At a price of $5, the quantity demanded in the market would be
63 lbs.
If the firm is producing no output in the short run, then its total costs are zero.
False
Market power in the United States causes a huge loss of economic efficiency.
False
The demand for most farm products is relatively inelastic. A drought that reduces the supply of farm products will also cause farm revenues to fall.
False
The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.
False
The substitution effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to consume goods and services.
False
Identify the two goods which are compliments.
Good Y and Good Z
Refer to the table to the right. What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is die to the price effect?
Output effect = $5.50; Price effect = -$2.00
Refer to the diagrams above. Assume that the graphs in this figure represents the demand and supply curves for bicycle helmets. Which panel best describes what happens in this market if there is a substantial increase in the price of bicycles?
Panel (d)
A perfectly competitive wheat farmer is a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run?
The price falls to below $12.
Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and week killer Which of the pairs listed will have a negative-price elasticity?
a and b only
If the current market price is $10, the market will achieve equilibrium by
a price increase, increasing the quantity supplied and decreasing the quantity demanded.
The figure to the right illustrates the U.S. market for rugs made in a particular foreign country. Suppose the market price of rugs is $750. At a price of $750, there will be ___________, of rugs. To reach an equilibrium, the price of rugs in this market must ______.
a shortage, rise
Most movie theaters charge different prices to different groups of customers for movie admission but not on movie popcorn. Which of the following is real for this?
because it is easier to limit resale in movie admissions but not in popcorn
Refer to the table to the right. Over what range of prices is the demand price inelastic?
between $2 and $8
Which of the following goods would have the most inelastic demand?
bread
If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because
buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.
Refer to the diagram to the right. The diagram demonstrates that
it is not possible for a monopolistic competitor to produce the productively efficient output level, Q4 because of product differentiation.
If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is
price elastic.
Total revenue equals
price per unity times quantity sold.
The table to the right lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the market price of The Waco Kid's cowboy hats is $40,
producer surplus will equal $28.
If, for a given percentage decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is
relatively price inelastic.
The basic economic problem of _______ has always existed and will continue to exist.
scarcity
In Porter's Five Competitive Forces model, "competition from substitute goods or services" refers to
substitute products that come from outside the industry.
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful?
the ability to produce the product at a lower cost
A firm's cost of production is determined by all of the following except
the amount of corporate taxes it must pay on its profit.
Brand management refers to
the efforts to maintain the differentiation of product over time.
If a firm expects that the price of its products will be lower in the future than it is today
the firm has an incentive to increase supply now and decrease supply in the future.
If a firm's average total cost is less than price where MR=MC,
the firm should produce if its price exceeds average variable costs.
A very large number of small sellers who sell identical products imply
the inability of one seller to influence price.
In a competitive market equilibrium
the marginal benefit equals the marginal cost of the last unit sold.
One would speak of a change in the quantity of a good supplied, rather than a change in supply, if
the price of the good changes.
The figure to the right represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3,
the quantity supplied is less than the economically efficient quantity.
Refer to the diagram to the right. The marginal cost of reducing pollution curve is the same curve as
the supply of pollution reduction curve.
When a competitive equilibrium is achieved in a market
the total net benefit to society is maximized.
The demand curve shows
the willingness of consumers to buy a product at different prices.
At the price of $15,
there would be a surplus of 4 units.
If average product is decreasing, then marginal product must be negative.
False
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be?
$(P2-P0) per ton of output
The figure to the right shows the market for beer. The government plans to impose a unit tax in this market. The price buyers pay after the tax is
$27.
Refer to the diagram to the right which shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?
$3,900
Refer to the diagram to the right which shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry. What is the minimum price the firm requires to produce output?
$5
If, at the firm's projected sales level, the marginal cost is $40, the average cost is $50 and the markup is 30 percent, then its selling price is
$65.
At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price to $125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula.
0.9
The table above shows the output of two jewelers, Serena and Haley. They can either devote their time to making bracelets or making necklaces. What is Haley's opportunity cost of making a bracelet?
1 1/3 necklaces
If the 15th unity of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced?
Average cost will fall.
If a firm's cost exceeds its total revenue, the firm should stop production by shutting down temporarily.
False
In recent years the cost of producing organic produce in the U.S. has decreased largely due to technological advancement. At the same time, more and more Americans prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market?
Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.
________ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production.
Competition
Refer tot he diagram to the right. The size of marginal external benefits can be determined by
D2-D1 at each output level.
Which of the following statements is true about the price elasticity of demand along a downward sloping linear demand curve?
It is elastic at high prices and inelastic at low prices.
Refer to the table at the right which shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units. Suppose the fixed cost of production rises by $500 and if the price per unit is still $8. What happens to the firm's profit maximizing output level?
It will remain the same.
Suppose the demand for milk is relatively inelastic. What happens to sales revenues if the government imposes a price floor above the free market equilibrium price in the market for milk?
Sales revenue rises.
The table above shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea. If the two countries specialized and trade, who should export digital cameras?
South Korea
Which of the following is one reason why the income of small family farms has decreased over time?
The demand for farm products, such as wheat, is income inelastic.
Tom Searchinger, a senior attorney at the Environmental Defense fund, observed that generous farm subsidies have encouraged farmers to produce more corn and more wheat. How does this affect the market for fertilizer?
The demand for fertilizer increases.
The graph illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change?
The equilibrium point will move from A to E.
What is the difference between labor's marginal product and marginal revenue product?
The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
"Because apple and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement?
The statement is false because a change in the price of apples would not change the demand for apples.
The popularity of digital cameras has enticed large discount stores like Wal-Mart and Costco to offer digital photo printing services. How does this affect the digital photo printing market?
The supply curve for digital photo printing services shifts to the right.
Which of the following statements is false about positive economic analysis?
There is much more disagreement among economists over positive economic analysis than over normative economic analysis.
An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.
True
As output increases, average fixed costs get smaller and smaller.
True
Firms in perfect competition produce the allocatively efficient output in the short run and in the long run.
True
In the 1930s and 1940s, the Technicolor company, was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce color films.
True
In the long run the relevant cost is total cost.
True
The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.
True
When there are a few number of substitutes available for a good, demand tends to be relatively inelastic.
True
If, for the last unit of a good produced by a perfectly competitive firm, MR>MC, then in producing it, the firm
added more to total revenue than it added to total costs.
Which of the following is an example of a way a firm in oligopoly can escape the prisoners' dilemma?
advertising that it will match its rival's price
A tax that imposes a small excess burden relative to the tax revenue that it raises is
an efficient tax.
If an increase in income leads to a decrease in the demand for popcorn, then popcorn is
an inferior good.
An article in the Wall Street Journal noted the following: Instead of relying on a full-coach, round-trip unrestricted fare of about $2,000 between Cleveland and Los Angeles... Continental [Airlines] since June has offered a $716 unrestricted fare in that market... Through October, the rest resulted in about the same revenue that Continental thinks it would have collected with its higher fare. What is the absolute value of the price elasticity of demand on this airline route?
approximately 1
A firm's efforts to increase profit by price discrimination can be undermined by
arbitrage by buyers.
Private costs
are borne by producers of a good while social costs are borne by society at large.
Microeconomics is the study of
how households and firms make choices.
If production displays economies of scale, the long run average cost curve is
downward-sloping.
In a subgame perfect equilibrium,
each player's strategy constitutes a Nash equilibrium at every subgame of the original game.
The opportunity cost of taking a semester-long class is
equal to the highest value of an alternative use of the time and money spent on the class.
If fixed costs do not change, then marginal costs
equals the change in variable cost divided by the change in output.
For many products, such as fast foods, a variety of prices can be found, but sellers with higher prices can expect to sell their products because
firms differentiate products in many ways, for example, higher priced fast food restaurants may offer better service.
An organization of producers that limits the amount of goods produced is known as a
guild.
Jayanthi moves her yoga studio from her home to a space she rents in Oakland, California. Holding everything else constant, as a result of this move,
her implicit cost falls and her explicit cost rises.
Market supply is found by
horizontally summing the relevant part of each individual producer's marginal cost curve.
If the production possibilities frontier is _______, then opportunity costs are constant as more of one good is produced.
linear
In the short run, if marginal product is at its maximum, then
margin cost is at its minimum.
A perfectly competitive firm's supply curve is its
marginal cost curve above its minimum average variable cost.
In a natural monopoly, throughout the range of market demand
marginal cost is below average total cost and pulls average total cost downward.
If a typical firms in a perfectly competitive industry is earning profits, then
new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease.
DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the detailing service?
no, his marginal benefit is less than his marginal cost
Refer to the diagram to the right. What is the value of the net gain to society as a result of subsidizing chicken pox vaccinations?
value equal to the area of FEG
Economists are reluctant to state that price controls are desirable or undesirable because
whether the gains from the winners exceeds the losses from the losers is not strictly an economic question.
A product is considered to be nonexludable if
you cannot keep those who did not pay for the item from enjoying its benefits.
If demand is perfectly inelastic, the absolute value of the price elasticity of demand is
zero.
