Microeconomics Test 2 Review (Frank)

Barriers to entry are forces that limit new firms from joining an industry, and one effect of barriers to entry is to reduce the ability of the invisible hand to

allocate resources efficiently.

Adam Smith coined the term "invisible hand" to describe the process by which self-interest leads to an

allocation of goods and services that is relatively efficient.

The statement, "price directs resources across different sectors of the economy" refers to the

allocative function of price

The No Cash on the Table principle means

unexploited opportunities cannot be exploited for long

Factors of production most likely to earn positive economic rent are

uniquely talented individuals

Explicit costs

measure the payments made to the firm's factors of production

Assume that a firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5, the wage rate is $10, and rent is $200. The firm will earn a profit of

$170. (Revenue is $5 times 100, or $500. Total labor costs are $130 and rent is $200, so total costs are $330. $500 - $330 = $170.)

Mary Jane is willing to baby-sit for $6 an hour. Her neighbor called and asked her to baby-sit for $8 an hour. Mary Jane will earn economic rent of

$2 per hour

If a firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then between 20 and 40 units of output, the marginal cost of production is

$24. (Total cost increased by $480 and the number of units increased by 20, so the increase in cost per unit is $480/20, or $24.)

Acme Dynamite has $2000 of variable costs and $500 of fixed costs when its output is 250 units. It sells each unit for

$25. (Average variable cost is $8 and average total cost is 10 at this output level. )

If an individual consumer is willing to pay $12 for one unit of a good but finds he can purchase it for $7, he has a consumer surplus of

$5.00

Normal profits occur when economic profits are

0

The tendency for marginal utility to decline as consumption increases beyond some point is called the?

Law of diminishing marginal utility.

Laura's total utility from consuming 8, 9, and 10 bonbons is 35, 43, and 45, respectively. Her marginal utility from the 9th bonbon is?

8

A price-taker confronts a demand curve that is horizontal at the market price

A perfectly competitive firm is a price taker because it cannot influence price.

The long run is defined as?

A period in which all factors of production are variable.

The short run is defined as?

A period in which at least one factor of production is fixed.

The price equals marginal cost rule for profit maximization is a specific example of the?

Cost-benefit core principle

According to the cost-benefit principle, you should switch to another task or job when the?

Benefit from performing the new task just exceeds the opportunity cost of performing that new task.

Casey earns $150 a week and consumes only fish and shrimp. The price of fish is $3 a pound and the price of shrimp is $5 a pound.

Casey can buy a maximum of 30 pounds of shrimp or a maximum of 50 pounds of fish.

The optimal combination of goods is the?

Combination of goods that yields the highest total utility given the consumer's income.

When some factors of production are fixed, in order to increase production by equal amounts, a firm would need to add successively larger and larger quantities of the variable factor. Because the law of ______________ says that it takes larger and larger increases in the variable input to increase output by the same amount.

Diminishing returns

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3.

Dusty can buy a maximum of 10 jars of peanut butter or a maximum of 20 loaves of bread.

A profit-maximizing perfectly competitive firm must decide only on how much to produce, taking price of the good as ___

Fixed

If a firm is experiencing diminishing returns, you can conclude that marginal costs are _______.

Increasing

A profit-maximizing firm will shut down when total revenues are ____ than the cost of variable factors of production.

Less

The primary objective of most private firms is to?

Maximize profit

Firms can easily buy and sell the productive resources necessary to compete in the market is a condition that is necessary for a market to be perfectly competitive.

Mobility of resources is a characteristic of perfectly competitive firms.

The absolute price of a good in dollar terms is the?

Nominal price

Home football games at your college are free for students and most of the students like to go to the game. The 5 hours you waited in the line to get ticket is the _________ cost for you to go to the game.

Non-monetary

Total revenue minus total explicit and implicit costs defines profit.

Profit is defined as total revenue from the sale of a firm's product minus all costs incurred producing it.

A firm's total profit equals (price minus average total cost) times the quantity sold.

Profit per unit is the price minus the average cost. Total profit is profit per unit times the number of units sold.

The dollar price of a good relative to the average dollar price of all other goods is the?

Real Price

In the _____ run, if a firm chooses to operate and produce output, it must be the case that total revenues are greater than or equal to the cost of variable factors of production. The firm must pay fixed costs whether it operates or not. As long as the firm is covering its variable costs in the short run it will operate even if profit is negative.

Short

The location of the firm is a factor of production that is likely to be fixed in the?

Short run

Suppose a firm is collecting $1,700 in total revenues and the total costs of its variable factors of production are $1,900 at its current level of output. One can predict that the firm will

Shut down, a firm is better off shutting down if its variable costs are greater than its revenues.

An individual's __________ shows his or her opportunity cost of producing at each quantity.

Supply curve

Utility maximization means?

That people try to allocate their resources to maximize their satisfaction.

When the price of shoes falls you will consume more shoes, this is an example of?

The Law of Demand

Marginal utility is?

The additional utility gained from consuming an additional unit of a good.

For two goods, coffee and scones, MU(coffee)/P(coffee) = 4 and MU(scones)/P(scones) = 3.

The consumer should purchase more coffee and fewer scones.

Individual supply curves generally slope upward because the easiest tasks are completed first.

The principle of increasing costs means that the first units supplied are those with the lowest opportunity cost.

What is utility?

The satisfaction people get from their consumption activities.

A person's reservation price for performing a task equals?

The value of the most attractive alternative activity that the person could be doing during that time.

If the marginal utility of the 3rd cup of coffee is 23 and the marginal utility of the 4th cup is 15, you can assume that...

There is evidence of the law of diminishing marginal utility.

It takes a bus and a driver to produce bus service for the students in a college town.

Therefore, the bus and the driver are the factors of production for bus service.

Average total cost is defined as ______ divided by output

Total cost

If marginal utility is positive as consumption increases, you can assume that...

Total utility will increase as consumption increases.

You are trying to decide how to spend your last lunch dollar.

You should use that dollar to buy more of the item that will give you the greatest marginal utility per dollar spent.

During Thanksgiving you participated in a pumpkin-pie eating contest since you love pumpkin pie. You really enjoyed the first two pies, the third one was OK, but as soon as you ate the 4th one you became ill and lost the contest. You can assume that...

Your total utility increased with each pie you ate up to the 3rd pie. You got more utility from eating the 1st pie than eating the 3rd pie.

Subsistence levels are?

a standard of living (or wage) that provides only the bare necessities of life.

Suppose several United States software design companies compete with each other in a perfectly competitive environment. If one company decides to move some of its offices to a low-wage country in order to reduce operating costs the other companies will

also move to the low wage country in order to remain in the industry. (Firms have an incentive to find the least-cost production methods.)

If buyers and sellers are free to pursue their own selfish interests, according to the invisible hand theory, the result would be

an efficient allocation of resources.

Economic profits are equal to total revenue minus

both explicit and implicit costs

To produce 150 units of output, the firm must use 3 employee-hours. To produce 300 units of output, the firm must use 8 employee-hours. Apparently, the firm is experiencing _______________. Because the law of diminishing returns says that it takes larger and larger increases in the variable input to increase output by the same amount.

diminishing marginal returns

Accounting profits minus implicit costs equals

economic profits

Total economic surplus is greatest when the market is in

equilibrium

Accounting profits are the difference between total revenues and

explicit

Last year Pat was a soybean farmer and Chris was a corn farmer. This year, high demand for ethanol, an automobile fuel made from corn, causes the price of corn to increase. Suppose Pat stopped growing soybeans and began growing corn. This is explained by the

incentive principle

One difference between the long run and the short run in a perfectly competitive industry is that firms necessarily earn zero economic profit in the ____ run but may earn positive or negative economic profit in the ____ run.

long, short

Barriers to entry are created by government regulation and natural characteristics of a

market

An improvement in production technology causes an increase in supply by firms and an increase in

market supply

The economic theory of business behavior assumes that the goal of a firm is to

maximize its profit

Implicit costs

measure the forgone opportunities of the owners of the business

Ten years ago you had never even heard of wireless internet. Now you complete assignments for class on a laptop that accesses the Internet using wireless technology. This is evidence that ___ remain the same, but ___ change.

needs, wants

Economic rent can never be

negative

Average variable cost is defined as Variable cost divided by _____?

output

Free entry of firms is a characteristic of

perfectly competitive industries

Perfectly competitive firms maximize profit when marginal costs equal

price

Marginal cost is calculated as the change in ________ divided by the change in ______.

total costs, output

If an individual producer is willing to produce one unit of a good for $2.50 but finds he can sell it for $7.50, he has a _______ surplus of $5.00

producer

The difference between the price of a good and the marginal cost of that good is called

producer surplus

The Smart for One, Dumb for All principle indicates that

pursuing selfish interests sometimes conflicts with social welfare

The statement, "price distributes goods and services to those that value them the most" refers to the

rationing function of price

Economic rent is the difference between the payment made to the supplier of an input and the supplier's

reservation price

The shutdown condition applies only in the

short run

Price ceilings that are below the equilibrium price result in

shortages

An example of an implicit cost is

the value of a spare bedroom turned into a home office.

According to the law of diminishing marginal utility, if you consume less of something

then your marginal utility from that consumption increases.