Microeconomics FINAL
Suppose Peter faces this budget line for eating out. If his weekly budget for pancakes is $40, a breakfast at IHOP costs ___ and a breakfast at the Original Pancake House costs ___
$10;$8
To exercise market power, a firm must:
have some control over price
In the table, as Samuels consumption of ice cream cones increases,
his total utility increases, but his marginal utility decreases
If a firm sells a product that has a perfectly inelastic demand curve, then, if price doubles, it can be expected that:
total revenue will double
Consumer surplus is shown graphically as the area:
under the demand curve and above the market price
Using the utility maximization rule, if Vicky's marginal utility of the last orange consumed is 20 and her marginal utility of the last pineapple consumed is 80, what is the price of pineapples if the price of oranges is $1 and Vicky has maximized her utility?
$4
When output is 100 units, the firm's total fixed cost is $500. What will this firm's total fixed cost be if output doubles to 200 units?
$500
Darrell owns a furniture store. His total costs are $225,000 per year, and his variable costs are $75,000 per year. This means that his fixed costs are:
$75,000
The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to ____ and demand is described as____.
0.2;inelastic
The Wonderful Gadget Company produces 500 gadgets per week 50 employees. It hires an additional worker and output rises to 507 gadgets. The marginal product of the last worker hired is ___ gadgets.
7
What event would cause the budget line to shift inward?
A decrease in income
Equilibrium: Explain in words how equilibrium price and quantity are determined. Be explicit in what factors determine the market supply and demand curves.
A market will determine the price at which the quantity of a product demanded is equal to the quantity supplied. When the amount that producers are willing and able to purchase is matched exactly by the amount that producers are willing and able to sell this is equilibrium price and quantity. Market demand is based on taste/preferences, income, prices of related goods, number of buyers, and expectations about future product. Market supply is based on production technology, cost of resources, related commodity price, number of sellers and taxes.
Price Controls: Describe the difference between price ceilings and price floors and their affects in the market.
A price ceiling is the maximum price the government says people can pay for a product. Price ceilings cause there to be a shortage. A price floor is the minimum price the government says people can pay for a product. Price floors result in surpluses.
Which of the following will cause the demand curve for burgers to shift to the right?
A study is published by the National Association for Burger Research that says eating burgers can reduce the risk for bad acne.
Absolute and comparative advantage: Differentiate between the two. Which is the basis for trade?
Absolute advantage one country can produce more of a good than another country. Comparative advantage is one country has a lower opportunity cost of producing a good than another country. Comparative advantage generates gains from trade.
Profits: Differentiate between accounting and economic profit.
Accounting profit is the difference between total revenue and explicit costs. While economic profit is the process in excess of normal profits.
Which statement is false?
All costs are fixed costs in the long run.
Which event would cause the budget line to shift outward?
An increase in income
Cost curves: Explain why the average fixed cost curve is not U-shaped? Why does it not turn up as the average variable cost and average total cost curves do?
Average fixed cost curve is not U-shaped because it is distributed over a larger volume when the quantity produced increased. AFC is equal to the difference between ATC and AVC thus it is downward sloping.
In many parts of the United States when Wal-Mart opens a new store, some smaller retailers go out of business. One of the reasons for this development could be that: A. Wal-Mart practices unfair pricing methods that reduce consumer surplus over time. B. consumers in those areas receive no consumer surplus from Wal-Mart. C. consumers in those areas receive a larger consumer surplus from shopping at Wal-Mart than from the smaller stores. D. smaller stores increase prices to compete.
C. consumers in those areas receive a larger consumer surplus from shopping at Wal-Mart than from the smaller stores.
Which of the following factors would cause a movement along the demand curve?
Change in the price of the good
The tax incidence of items such as gasoline, tobacco, and alcohol tends to fall heavily on ___ because these goods have _____.
Consumers; relatively inelastic demand.
______ describe a type of barrier to entry for a monopoly in which one firm can operate more efficiently than two or more firms
Economies of scale
If a firm is making zero economic profit,
Firm A is breaking even when opportunity cost is taken into consideration
Utility measures
How much satisfaction is gained from the consumption of a good or service
If income increases by 12% and the quantity demanded of a good increases by 14%, the good is a _____ good.
Luxury
Which statement is NOT true in determining the equilibrium price and quantity for a monopolist?
Monopolists select the price that is equal to the average total cost.
Explain why perfectly competitive firms sell their products only at the market price. Why can't they try to raise prices to make more profit or lower them to garner more sales? Why do monopoly and monopolistically competitive firms have a marginal revenue curve that is different than the demand curve?
Perfectly competitive markets have many buyers and sellers, each of them so small that none can individually influence product price. Since they are price takers, they must take what they can get for their products. Raising prices can cause them to gain an economic profit but if they lower prices then they will be operating as a loss. Monopoly and monopolistically competitive firms have a marginal revenue that is less than price, thus the demand decreases over time.
Which of these is NOT a determinant of elasticity?
Sales tax rate placed on an item
Which question would be considered a normative question?
Should obstacle races be regulated to ensure the safety of its participants.
Elasticity: Explain how taxes on inelastic versus elastic goods affects revenue. How does the concept of elasticity help explain who (consumers or producers) bear the most burden of the tax?
Taxes on inelastic goods affects revenue because it allows producers to shift a greater portion of the tax forward on consumers giving them more revenue and vice versa for elastic goods. If the price elasticity of demand is low then the greater share of the total tax burden shifted to consumers. and vice versa if price elasticity of demand is greater.
Explain the marginal utility and its relationship to the total utility. Why does marginal utility diminish?
The marginal utility is the additional satisfaction received from consuming one more unit of a given product or service. Its relationship to total utility because it's the total satisfaction that a person receives from consuming a given amount of goods and services. Marginal utility diminishes no matter our personal tastes and preferences we eventually become sated once we have consumed a certain amount of any given commodity.
Suppose the price of good X increases. In terms of demand, what is the result?
The quantity demanded of X decreases.
Which statement is NOT correct about markets?
They require a physical location for transactions to take place.
The primary difference between a change in demand and a change in the quantity demanded is:
a change in quantity demanded is a movement along the demand curve and a change in demand is a shift in the demand curve
The difference between a natural monopoly and a monopoly is that:
a natural monopoly maximizes profit at a quantity where marginal cost is falling
___ is found by dividing total product by the number of workers employed to produce that product.
average product
Producer surplus is the area
below the price and above the supply curve
The ____ graphically illustrates the possible combinations of two goods a consumer can purchase with a given the prices of both products
budget line
When talking about economic profits in a perfectly competitive market, the difference between the long run and the short run is that in the short run, firms:
can earn positive or negative economic profits but in the long run, firms have zero economic profits.
An extreme case of oligopoly in which firms collude to raise joint profits is known as a:
cartel
An increase in the price of one product but not the other:
changes the slope of the budget line
If the government feels that the equilibrium price in the market is too high for the ___, it can impose a _____.
consumers; price ceiling
When a large factory closed in the town of Greenville, income fell for many residents. As a result, demand for normal goods would ___ and demand for inferior goods would ____.
decrease; increase
Monopolistic competition is similar to perfect competition in that firms in both market structures:
do not face any barriers to entry into the industry in the long run
Monopolistic competitive firms have zero economic profits in the long run because of:
easy entry and exit
The most important source of oligopoly is:
economies of scale
Firms will break even if the price they charge is
equal to their minimum average total cost (ATC)
The demand curve facing a monopoly firm is:
equivalent to the market demand curve
Which elasticity would be the most responsive to a change in price if good A has an elasticity of 0.05, good B has an elasticity of 0.8, good C has an elasticity of 1.8, and good D has an elasticity of 47?
good D
Which of the following products would have the highest price elasticity of demand?
hot dogs sold by a street vendor
If the opportunity cost of manufacturing machinery is lower in the United States than in Britain and the opportunity cost of manufacturing sweaters is higher in the United States than in Britain, then the United States will:
import sweaters from Britain and export machinery to Britain
An increase in supply with no change in demand will lead to ___ in equilibrium quantity and ____ in equilibrium price.
increase; decrease
An increase in demand, with no change in supply will lead to ____ in equilibrium quantity and _____ equilibrium price.
increase;increase
Suppose a firm is selling a product at a price on the inelastic portion of the demand line. The firm could increase revenue by doing what?
increasing the price; selling less units
Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:
interdependence
The price elasticity of demand for a vertical demand curve:
is 0.
The principle of diminishing marginal utility means that when Sarah eats pizza, her satisfaction from the second slice of pizza is probably:
less than that of the first
If there is a lack of competition in a market, a market failure results because the quantity of goods sold is __ than the optimal level
lower; higher
The main difference between macroeconomics and microeconomics is that:
macroeconomics focuses on the aggregate economy and microeconomics focuses on small component of the economy.
The Kansas market for corn is considered a competitive market. This means there are ____ buyers and ____ sellers of corn in Kansas.
many;many
The change in total product divided by the change in quantity of a labor input is:
marginal product
The main difference between marginal utility and total utility is that:
marginal utility looks at the satisfaction of an additional unit, while total utility looks at the satisfaction from the total quantity consumed
If you allocate your time between attending classes and practicing for an upcoming game, you will maximize your total utility by choosing a bundle in which the:
marginal utility per hour from each activity is equal
The greater the number of substitutes available the:
more elastic is demand
The slope of the budget line is:
negative, since to purchase more of one good means giving up some of the other good.
A monopoly differs from a perfectly competitive market in that:
no close substitutes exist for the monopolists product
Xiao has a budget of $150 to spend on T-shirts and jeans. The jeans she likes cost $56, and t-shirts with her college logo on them cost $10. The combination of three t-shirts and three pairs of jeans would fall:
outside the budget line
When a consumer chooses among a set of goods or services utility is maximized when marginal utility:
per dollar spent is equal for all goods
For a monopoly firm if AVC<P<ATC then the firms should:
produce at the point where MR=MC
The price elasticity of demand measures the responsiveness of the change in:
quantity demanded to change in price
When a firm uses price discrimination successfully the result is that the producer surplus ___ while deadweight loss ___ compared to a single price monopoly
rises;falls because output increases with price discrimination
The kinked demand curve model assumes that:
rivals will follow a price decrease but not a price increase
Gains from trade arise because of:
specialization in production
Goods A and B have a positive cross-price elasticity of demand. This means Goods A and B are:
substitutes
The price elasticity of supply measures the responsiveness of quantity _____ to changes in ____.
supplied; the price of the product
An inverse relationship between price and quantity is represented by:
the demand curve
If the production possibilities curve is a straight line sloping down from the left to right, this would suggest that:
the opportunity costs of the products are constant
In a market based economy, scarce resources are allocated by:
the price system
A budget line is linear because:
the prices of the two goods are held constant.
According to the law of demand, all other things being equal,
the quantity demanded falls when the price rises, and the quantity demanded rises when the price falls.
When markets are efficient:
the sum of consumer and producer surplus is maximized
A direct relationship between price and quantity is represented by:
the supply curve
The basic concern of economics is:
to study the individual choices people make.
