ECON 4: MICROECON
What would probably occur if government policies to reduce poverty or to encourage economic equality, were taken to extremes?
It would reduce incentives for economic output.
What will most reasonably happen if a large number of individuals choose to be free riders in a city?
The city may never provide the public good.
The marginal revenue curve for a monopolist ________ the market demand curve.
always lies beneath
Which of the following describe a product with an inelastic demand?
an appointment with a dentist
When an owner uses resources they own in a business, that usage should be considered ________.
an implicit cost
A price ceiling when it is set ________ the equilibrium price creates ________.
below; excess demand
The law of demand states that as the price of a good decreases,
buyers desire to purchase more of it.
Because of our limited money, time, and effort, we are best off when we allocate things
by constantly assessing the opportunity costs of our choices.
Employment will be lower in a(n) ________ competitive industry than in a ________ competitive industry.
imperfectly; perfectly
What is one of the difficulties that emerges when the government uses price regulation? This can sometimes compromise ________.
it can sometimes compromise market competition
The demand for labor is a derived demand because
it is dependent on the demand for output.
Kate's 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate's variable costs (e.g., servers, cooks, electricity, food, etc.) per meal average $3.95. Her fixed costs (e.g., rent, insurance, cleaning supplies and business license) per meal average $1.25. Since the market is perfectly competitive, Kate should
keep the business open in the short-run, but plan to go out of business in the long-run.
What are the factors of production?
land, economic capital, labor, entrepreneurship
When new firms enter a perfectly competitive market, what is the impact on prices?
prices go down
Elastic supply occurs if the change in quantity supplied is ________ to a change in price.
relatively responsive
Marginal benefit is
the additional benefit that one more unit of something will provide.
Marcus is considering which college major to choose. In taking a rational approach, Marcus should consider
the benefit each major would bring and the cost of the degree.
If incomes rise for both low-income and high-income workers, but rise less for the high-income workers,
then poverty will fall and inequality will fall.
A competitive market is one in which
there is a large number of buyers and sellers.
When quantity demanded increases in response to a change in price
there is a movement from one point to another along the demand curve.
Scarcity is imposed on individual households in the form of income and
the prices of the goods that a person may purchase.
Budget constraints impose scarcity. They are based upon
the prices of the items purchased.
Most demand curves have a negative slope because
the substitution effect always causes consumers to try to substitute away from the consumption for a commodity when the commodity's price rises.
Which of the following is most likely to be a fixed cost?
mortgage payments
Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's revenue?
$0 because the firm will shut down
Given the level of demand below, what is the marginal revenue of the third unit of production?
$10
The table below shows cost data for WipeOutSki Company, which manufactures skis for beginners. If the company's fixed costs are $30, what is the average variable cost in A?
$12.50
Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's revenue?
$144
Refer to the graph below. Assuming the firm chooses the level of output that maximizes profit, what is total profit at that output level?
$144
Using the costs and demand in the table below for a monopolistic competitor to find the level of output for maximizing its profit, what would the corresponding price be?
$18
Refer to the figure below. Assuming the firm chooses the level of output that maximizes profit, what is total cost at that output level?
$264
A business produces 10 units of output. Its average variable cost (AVC) = $25, average fixed cost (AFC) = $5, and marginal cost (MC) = $30. The firm's average total cost (ATC) is ________.
$30 to find ATC = total cost/total Q Q = 10 (given) TC = FC + VC (must calculate) TC = 5 (10) + 25 (10) TC = 50 + 250 = 300 300/10 = 30
Refer to the figure below. If the government sets a price floor of $80, the price would be:
$30 higher than the equilibrium price
In October and November, Annabelle purchased winter sweaters and tights and spent all her clothing budge on those items. Each sweater was $100. At Annabelle's optimal choice, her marginal utility from the last sweater purchased is 400 and her marginal utility from the last pair of tights purchased is 200. This means that each pair of tights must cost ________.
$50
Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's total cost?
$96
Suppose, in the graph below, there is a price ceiling of $6. Then there is a shortage of
0 units = the price ceiling is equilibrium
Joseph has a budget of $11 to spend at the food court in the mall. His two favorite items are tacos (Product X) which cost $5 and cinnamon buns (Product Y) which cost $2. In the schedule below you can see the marginal utility for each of his favorite foods. What combination would maximize Joseph's utility and meal?
1 Taco and 3 cinnamon buns
A government decides to set a price ceiling on milk so that milk is affordable to the poor. The conditions of demand and supply are given in the table below. What will the excess supply or the shortage be if the price ceiling is set at $2.40? What is the equilibrium price before the price ceiling?
1,600 supply & $2.80 is where Qd = Qs
Suppose the monopolistic competitor faces costs and demand as depicted in the table below. Given the goal of maximizing profit, what level of output would the firm choose?
3
Which of the following represents consumer surplus?
A
Which of the following will shift the supply curve to the right?
A decrease in the price of inputs to production.
Which of the following are examples of economic activities with negative externalities?
A gold mine discharging arsenic into a natural lake that it's using for a tailings pond.
A new tool manufacturer opened a plant in town three months ago and hired 3000 new employees. People now have extra cash to spend and are out spending in the town. What is an example of how this extra money may shift the demand curve for goods and services in the town?
A local restaurant has a 40% increase in the number of dinners.
Which of these are used to determine the poverty line in the U.S.?
Amount of income to cover basic standard of living.
Why would businesses choose to reduce pollution?
Because their marginal cost is lower or equal to the marginal benefit of the reduction.
Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box: What is Firm B's dominant strategy? Should it collude or cheat?
Firm B should cheat.
Which of the following are considered barriers to entry?
Heavy spending on advertising by established companies.
Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. The table represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate?
If Raj is sure Mary will cooperate, he should cheat.
Elasticity measures the behavioral response of economic agents in a given situation. Which question is likely to be answered using elasticity?
If a restaurant puts their pizza on sale, will the additional number of pizzas sold offset the discount on each item? Will their sales revenues for pizza go up or down?
Consider peanut butter as a normal good and answer the questions of what would happen if a decrease in income occured?
It would cause the quantity consumed of peanut butter to decrease.
What is a key difference between the short run and the long run?
In the long run, all resources are variable; in the short run, at least one resource is fixed.
Where does an earning gap continue to exist in the U.S.?
It exists between both gender and race.
What happen when oligopoly firms engage in cut-throat competition?
It tends to result in zero economic profits
Kevin is maximizing his utility consumption of almond butter sandwiches and sushi. There is a boom in fish in the summer and the price of sushi suddenly drops. What will the price change most likely change in Kevin's consumption behaviour?
Kevin will increase consumption with the bundle of goods at a new higher indifference curve tangent to the new budget constraint.
What happens to marginal cost if a business's average total cost is decreasing?
Marginal cost must be lower than average total cost.
Why do economists use game theory to explain oligopolies?
Oligopolies are complex and varied and game theory allows economists to model different variations of competition and cooperation.
Paul has two tickets to the next Texan game while Bella has two tickets to the next Rockets game. Bella values the Rockets tickets at $200 while she values the Texans tickets at $250. Paul values the Rockets tickets at $250 and the Texans tickets at $150. Allocative efficiency can be improved for Paul and Bella if
Paul and Bella exchange tickets for a price agreeable to both.
If demand decreases and supply remains constant, what happens to the market equilibrium?
Quantity and price both fall.
When creating a graph for your economics course, which axis is most commonly used to represent quantity (q)?
Quantity is most commonly represented on the x-axis
How is the total revenue calculated in a perfectly competitive firm?
Quantity of goods sold times the market price.
A major hurricane is headed towards Southern Florida and as a result panic buying has set in. What would you conclude about the third step of the four step process in this example?
The economic change will shift the affected curve rightwards.
Take what you've learned from game theory and apply it to the framework of an oligopoly. Which of these strategies can work like a silent form of cooperation?
The firms always match other cartel firms' price cuts, but don't match price increases.
The graph below shows a perfectly competitive firm in short run equilibrium, where the firm has chosen the output level maximizing its profit. Consider the level of profits being earned here, and what will happen over time. What will happen in the long run?
The market price will decrease until economic profit is zero
Which topic below best applies to microeconomics?
The price that a farmer asks for her watermelons
The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is
The product is now relatively more expensive than it was before.
How does a production possibilities model differ from a budget constraint model?
The production possibilities model demonstrates diminishing returns
Suppose the local government is concerned about the health of local school children, and for that reason imposes a price ceiling of $3 on yogurt. Based on the graph below, which of the following is true?
The quantity demanded will be 5 yogurts.
In December there is a large demand for evergreen trees. They are sold on city corners and parking lots for Christmas. According to the law of supply, what scenario would you expect to see with the Christmas trees?
The supply and prices of the trees have increased since October.
What happens to the value of a firm's additional output sold when the firm has some market power?
The value of that additional output sold is its marginal revenue.
Assume there is a perfectly competitive market for tangerines. What will happen in the long run for the market to achieve both allocative and productive efficiency if the price for tangerines is lower than the marginal cost of producing tangerines?
There will be fewer tangerines produced.
How can oligopolies potentially benefit society?
They can produce using economies of scale to lower average costs.
Which of the following reasons is why oligopolies are inefficient?
They may lack incentives to provide innovative products and high-quality service.
Which of the following is a potential source of income inequality?
Wage disparity
Last year Hawaii did not received many rain storms and with eight months of little rain there was low demand for umbrellas. This year however, there have been three months of big rain storms and only a few weeks of sunny weather. If you were to draw a graph depicting the changing market for umbrellas from last year to this, how would the new equilibrium price and quantity demanded compare to last year's market?
With supply of umbrellas being constant, equilibrium price and quantity demanded increase for umbrellas compared to last year.
Which of the following are examples of positive externalities?
You are a bird watcher, and your neighbor puts up birdhouses and gardens to attract birds.
Dawnell is a skilled dancer. She is currently teaching modern dance full time for three high schools and makes $44,000 a year. She is now giving up her work and joining a touring dance company for the next two years. She will make $24,000 a year dancing, but gain much more in experience and connectoins. Dawnell's decision will result in
a two year opportunity cost of $40,000 after leaving her teaching position.
A price floor when it is set ________ the equilibrium price creates ________.
above; excess supply
In 2007, five or six major pharmaceutical companies formed a group in order to control the price of vitamins and adjust their production. Such an arrangement is called a ________.
cartel
Which of the following is illegal in the United States?
cartels
The ________ simplifies the economy into two groups, firms and households, and allows us to make predictions about economic behavior.
circular flow diagram
Self-interest can include more than a concern for oneself. To the extent that the happiness of others contributes significantly to the our own happiness, actions taken in our own self-interest may have benefits for
close friends and family.
Self-interest is not necessarily selfish, some say. In fact, self-interest likely includes an individual's consideration for
close friends and family.
If a community has a public vegetable garden at the city park with a take-as-you-wish policy, the veggies would be considered
common goods
In a prisoner's dilemma, assuming the individuals can't communicate, what type of behavior provides the most benefit for each of them?
confess
When the Long Run Average Cost (LRAC) curve is horizontal, it implies that there are ________.
constant returns to scale
Antitrust laws help guard against mergers that could hurt ________.
consumers
A Lorenz curve graphs the ________ received by everyone up to a certain quintile.
cumulative shares of income
Greg eats pizza every day of the week. The marginal utility of pizza will most likely ________ by the end of the week, and all else being equal, this demonstrates the law of ________.
decrease; diminishing marginal utility
If immigration consists of mainly high-skilled workers, then a(n) ________ in immigration will ________ the wages of high-skilled workers.
decrease; increase
The concept of derived demand of labor means that
demand for labor is created from a demand for a good or service
An example of a natural monopoly is
economies of scale
Economist use the ________ method to study income distribution in an economy.
dividing a whole group into fifths, or quintiles
A monopoly sees the demand curve as ________ while a perfectly competitive firm perceives its demand curve as ________.
downward-sloping; horizontal
In a monopolistically competitive industry, when a business faces a ________ demand curve, it will choose a combination of quantity and ________ to maximize its profit.
downward-sloping; price
Hannah has a small business making clothing alterations. Which of the following products would dramatically affect her profit margins if the price were to decrease for that product?
dresses
The price for a cell phone case is $25 with the quantity demanded at 10,000 a day. As time goes on the price for a cell phone case increases to $30 and the quantity demanded decreases to 5,000 a day. Based on the price elasticity of demand using the midpoint method, this cell phone case is
elastic
A source of income inequality is ________.
family structure
The earnings gap in the U.S. labor market between black and white workers ________.
has diminished since 1960, but a gap still remains
Accounting profit tends to be
higher than economic profit because economic cost includes implicit and explicit costs.
A price floor attempts to keep prices ________.
higher than the equilibrium price
The flatter the demand curve, the ________.
higher the elasticity of demand
Pete owns a firm that produces wheat in a purely competitive market. The firm's demand curve is a ________.
horizontal line
Because of the downward sloping demand curve, the singular way a monopolist can increase its profit revenue is to ________.
increase product production
Over the past half of a century in the United States, ethnic diversity and racial diversity is ________.
increasing
The theory of rational behavior
is an assumption that economists make to have a useful model for how decisions are made.
The effects of a poverty trap can be reduced by ________.
initially decreasing the government payments by smaller amounts
A monopolist is a price-
maker
A competitive firm earns positive economic profits when ________.
marginal revenue is above average cost
For firms with market power, they choose the number of workers where the market wage equals the firm's ________.
marginal revenue product
A manufacturer is trying to accurately predict how many more units of a product will be purchased by their business customers if a product is discounted by 5%. What tool will assist the manufacturer to most accurately predict the purchase behavior?
mathematical equations
Economic capital is productive, so it does NOT include
money
A public good is a good that is ________, and thus is difficult for market producers to sell to individual consumers.
nonexcludable and nonrivalrous
If the price of organic beef steak, regular beef steak, and pork chops each increased by 10%. Which of the products would you think was the most elastic. In other words, which has the most change to the quantity demanded because of the increase in price?
organic beef steak
When the social benefit of producing a good is higher than the private benefit, then
positive externalities exist.
The cross-price elasticity of demand is ________ for substitute goods and ________ for complementary goods.
positive; negative
The production possibilities model illustrates an inverse relationship between two goods or services because
production fo different types will compete for limited resources.
In order to explain consumer behavior that is irrational, behavioral economics uses observations from ________.
psychology
An extremely high degree of ________, with very high taxes on the rich, would be likely to discourage work and entrepreneurship.
redistribution
Externalities exist when
social costs are different from private costs.
Markets are inefficient when
social costs are different from private costs.
The sum of consumer surplus and producer surplus is know as ________.
social surplus
You are a lawyer representing a client who lost their $1 million home in a house fire. They are suing the home's architect as design flaws were a major cause of the fire. How large would the damages awarded by the court to your client need to be in order for them to be equally happy as they were before the fire?
some amount greater than $1 million
The advantages that society gains through trade lie in the ability to
specialize resources to the uses where opportunity cost is minimized.
If a perfectly competitive firm is producing output at a point where marginal revenue is equal to marginal cost, then it should
stick with that level of production in order to maximize profits.
The utility an individual will receive from consuming a good is determined by
that individual's own preferences.
Marginal product refers to
the change in output or production divided by the change in variable inputs (labor).
If a company produces at a quantity of output where marginal revenue exceeds marginal cost, it means that ________.
the company should keep expanding production
Externalities represent
the costs or benefits received by third parties from the production activities in a market.
When a 10% increase in income causes a 4% increase in quantity demanded of a good
the income elasticity is .4 and the good is a normal good.
The poverty line is determined by ________.
the level of income needed to cover basic needs.
The elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
Total revenue is defined as ________ and represented as ________.
the price of a product times the number of units sold; TR=P x Qd
Profits for a monopoly will be highest at the point where
total revenue is most above total cost.
Economists would say that the decisions we make are influenced by
trade-offs
If U.S. immigration consists of mainly low-skilled workers, then an increase in immigration ________ the wages of low-skilled workers.
will reduce
In order to maximize profit, firms will choose to
use the combination of available resources and technology that will minimize cost.
The very best models have an unusual combination of characteristics. They are both
useful and simple
In the short-run, the firm will operate (not shut down) as long as revenue is more than enough to cover ________.
variable costs
In order for a monopolistic competitor to produce at a level of output that is profit-maximizing, it will select an output level
where marginal revenue equals marginal cost.
Suppose demand for a monopoly's product falls so that its profit-maximizing price is below average variable cost. How much output should the firm supply? (Hint: draw the graph.)
It should shut down and produce no output.