Quiz 5-9 for Exam 2

Refer to the accompanying figure. The equilibrium price in this market is ________ and the equilibrium quantity is ________.

$30; 25 (Equilibrium price and quantity occur at the intersection of the market supply curve and market demand curve.)

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 50 pizzas a day, its average variable cost is ________.

$5. (At 50 pizzas a day, total variable cost is $250, so average variable cost is $5 (= $250/50).)

Refer to the accompanying figure. The marginal utility of the 7th pizza is

-5. (Marginal utility is the change in total utility accompanying an one-unit change in consumption. Here, total utility falls by five (from 105 to 100) as consumption rises from six to seven. Thus, the marginal utility of the 7th pizza is -5.)

Refer to the accompanying figure. What is the slope of the supply curve?

1/2. (slope is computed as rise/run)

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist.

100; $80 (The monopolist chooses a quantity at which MC = MR, and charges the price that corresponds to that quantity on the demand curve.)

Refer to the accompanying figure. Total utility increases with each additional pizza up to the ________ and then declines, but marginal utility ________ with each additional pizza consumed.

6th pizza; decreases (The total utility curve is positively sloped up to the sixth pizza, indicating that total utility is increasing, On the other hand, the increases in total utility, or marginal utility, are smaller and smaller as consumption increases; as a result, we see that marginal utility is decreasing.)

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's profit-maximizing level of output is ________.

80

Refer to the accompanying figure. The total utility of consuming 4 pizzas a week is:

90. (From the graph, we can see that 4 pizzas per week yields a total utility of 90.)

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. When this monopolist maximizes its profit, consumer surplus equals the area:

ABJ. (The monopolist will produce F units and charge a price of B. Consumer surplus is the triangular region above price and below the demand curve, to the left of the profit-maximizing level of output.)

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product. (In perfectly competitive markets, all firms sell the same standardized product. Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the market demand curve does not have to be perfectly elastic.)

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing price for this monopolist to charge is:

B. (MC = MR at F units of output. From the demand curve, we can see that this corresponds to a price of B.)

Fixed costs of production in the short run:

Cannot be reduced by producing less output

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing level of output for this monopolist is ________ units per day.

F. (MC = MR at F units of output.)

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The socially optimal level of output is ________ units per day.

I THINK H.

The law of diminishing returns in a manufacturing plant of a fixed capacity implies that, eventually, employing one:

More worker will decrease the average amount of output per worker

The long run is best defined as:

a period of time sufficiently long that all factors of production are variable. (The long run is a period of time of sufficient length that all of the firm's factors of production are variable.)

A pure monopoly exists when:

a single firm produces a good with no close substitutes. (A monopoly is the only supplier of a unique product with no close substitutes.)

A technological innovation that reduces a firm's cost of producing additional units of output will lead to:

an increase in the firm's supply. (A reduction in marginal cost is equivalent to a rightward shift in the supply curve (that is, an increase in supply).)

If the cross-price elasticity of demand between lettuce and salad dressing is negative, then when the price of lettuce rises, the demand for salad dressing will ________.

decrease (If the cross-price elasticity of demand between two goods is negative, then the two goods are complements, implying that an increase in the price of one will lead to a decrease in demand for the other.)

As Lynn eats more pizza, we would typically expect her marginal utility from eating pizza to:

decrease (We generally think most activities satisfy the law of diminishing marginal utility. That is, the additional utility gained from consuming an additional unit of a good tends to diminish as consumption increases.)

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. After the third pie, your total utility:

decreased

When the demand for a good is inelastic, that good is likely to have:

few close substitutes. (If a good has few close substitutes, the change in quantity demanded will be small relative to a change in price, implying that demand is inelastic.)

If bagels and cereal are substitutes, then the cross-price elasticity of demand between bagels and cereal will be:

greater than zero. (The cross-price elasticity of demand is defined as the percentage by which the quantity demanded of the first good changes in response to a one percent change in the price of the second. In the case of substitutes, an increase in the price of one good will increase demand for the other, leading the cross-price elasticity of demand to be positive.)

An imperfectly competitive firm is one that:

has at least some influence over the market price.

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce. (Since firms in perfectly competitive markets have no control over the market price, their most important challenge is deciding how much to produce at a given price.)

A fixed factor of production:

is fixed only in the short run.

Demand tends to be ________ in the short run than in the long run.

less elastic

All else equal, the price elasticity of demand for small-budget items such as soap tends to be ________ than the price elasticity of demand for big-ticket items such as flat-screen TVs.

lower (Goods that account for a small share of a person's budget have a lower price elasticity of demand than do goods that account for a large share of a person's budget.)

One reason that the quantity demanded of a good increases when its price falls is that the:

lower price increases the real incomes of buyers, enabling them to buy more.

In general, perfectly competitive firms maximize their profit by producing the level of output at which:

marginal cost equals price. (The rule for profit maximization follows from the Cost-Benefit Principle: a firm should continue to produce output as long as price is at least as great as marginal cost.)

The monopolist will maximize profits at the output level for which:

marginal revenue equals marginal cost. (Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output at which marginal revenue equals marginal cost.)

The additional utility gained from consuming an additional unit of a good is called:

marginal utility. (Marginal utility is the additional utility gained from consuming an additional unit of a good. The word "additional" is synonymous with "marginal.")

A monopoly that results from economies of scale is called a(n):

natural monopoly. (A monopoly that results from economies of scale is called a natural monopoly.)

A seller's supply curve shows the seller's:

opportunity cost of producing an additional unit of output at each quantity. (A seller will supply an additional unit of output if the market price is greater than or equal to the seller's opportunity cost of producing an additional unit.)

If the demand curve is horizontal, then demand is:

perfectly elastic. (A horizontal demand curve has an infinite price elasticity of demand, implying that demand is perfectly elastic.)

When calculating price elasticity of demand, if the percentage change in price is negative, then the percentage change in quantity demanded is typically:

positive (If the percentage change in price is negative (that is, if price falls), then the percentage change in quantity demanded will be positive, since price and quantity demanded move in opposite directions.)

Refer to the accompanying figure. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 25 cents, then this firm should:

produce 80 doughnuts.(At a price of 25 cents, the firm should produce 80 doughnuts per day because, at that quantity, marginal cost equals 25 cents.)

The goal of utility maximization is to allocate your ________ in order to maximize your ________.

resources; satisfaction (Utility maximization is the process of allocating one's resources to obtain the greatest possible satisfaction (or, utility).)

The income and substitution effects account for:

the downward-sloping demand curve.

When more firms enter an industry:

the industry supply curve will shift right. (More suppliers increase the market supply.)

Suppose a monopolist faces the following demand curve. If the monopolist were to sell 20 units of output, its total revenue would be:

$1,000 (If the monopolist sells 20 units of output, then it can charge $50 per unit. Thus, its total revenue will be $1,000 (= 20 × $50).)

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's total cost at its profit-maximizing level of output is ________.

$1,600 (At Q = 80, ATC is $20. Thus, total cost (ATC × Q) is 80 × $20 = $1,600.)

If the percentage change in the price of a good is less than the resulting percentage change in the quantity demanded of that good, then the demand for that good is:

elastic.

Which of the following best explains why you are more likely to see a poor person than a wealthy person picking up aluminum cans to sell?

The opportunity cost of picking up cans is higher for wealthy people than for poor people. (Wealthy people are likely to place a higher dollar value on their time than are poor people, so the opportunity cost of picking up aluminum cans will be higher for the wealthy than for the poor.)

The demand for a good is unit elastic with respect to price if the price elasticity of demand is:

equal to one. (If the percentage change in quantity demanded equals the percentage change in price, then the price elasticity of demand will equal one, and demand is said to be unit elastic with respect to price.)

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue. (A perfectly competitive firm cannot raise its price without losing all of its customers to the many rival firms that produce the same product.)

In many cities in the United States, a single firm provides electricity. Those firms are:

monopolists.(A monopoly is the only supplier of a unique product with no close substitutes.)

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $15, then this firm should:

produce 60 units of output. (The firm should continue to operate in the short run because it earns enough revenue ($900) to cover its variable cost ($720 = AVC × Q = $12 × 60). Its fixed cost of $240 [FC = TC − VC = (ATC − AVC) × Q = $4 × 60 = $240] must be paid regardless, so it is better to lose $60 by operating than to lose $240 by shutting down.)

When the price of a product rises, consumers with a given money income shift their purchases to other products whose prices are now relatively lower. This statement describes:

the substitution effect.

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. If mushrooms sell for $10 per bushel, and Moe chooses the profit-maximizing quantity, he will gather:

zero bushels. ($10 is below the minimum of the AVC curve, so Moe should shutdown.)