ECON 528 Midterm
Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations. Total revenue $120,000 Cost of labor 40,000 Cost of materials 15,000 Equipment rental 5,000 Calculate her economic costs.
$121,000 = 40,000 (labor) + 15,000 (materials) + 5,000 (equipment)+ 10,000 (opportunity cost of building) + 1,000 (5% of 20,000, the opportunity cost of her savings) + 50,000 (opportunity cost of Sally's labor)
Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs?
$45,500
Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as
$50,000
Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations. Total revenue $120,000 Cost of labor 40,000 Cost of materials 15,000 Equipment rental 5,000 Calculate her accounting costs.
$60,000 = 40,000 (labor) + 15,000 (materials) + 5,000 (equipment)
Income elasticity of demand =
%change in qty demanded / %change in income
price elasticity of demand=
%change in qty demanded / %change in price
cross price elasticity of demand =
%change in qty demanded for good A / %change in price for good B
price elasticity of supply =
%change in quantity supplied / %change in price Always positive (changes in price and change in qty supplied always move in the same direction)
Rule for utility maximization
(MU of x / P of x) = (MU of y / P of y)
According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.
. False
5 properties of indifference curves
1) downard sloping 2)higher IC indicates higher utility 3)ICs never cross 4)ICs are bowed inward 5)Slope of the IC is the marginal rate of substitution (MRS)
The price elasticity of demand for Stork ice cream is -4. Suppose you're told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded?
2.5 percent
Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination?
3rd degree price discrimination
Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs?
41,500
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 weed killer Which of the pairs listed will have a negative cross-price elasticity?
A & B - they are complements
Suppose the value of the price elasticity of demand is -3. What does this mean?
A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent
average total cost=
AFC+AVC
All of the following statements are true of the minimum efficient scale except one. Which one? A) All possible economies of scale have been exhausted. B) The short-run average total cost curve's minimum point is equal to the long run average cost curve's minimum point. C) Any increase in the scale of operation will encounter diseconomies of scale. D) An increase in the output level will increase profit.
An increase in the output level will increase profit.
Linesha, a college student working part-time receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information
Blu-ray discs are normal goods and DVDs are inferior goods
If an economist says that firm practices price discrimination, that firm is:
Charging different prices for the same good or service
Which of the following statements about the price elasticity of demand is correct? A) The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good. B) The absolute value of the elasticity of demand ranges from zero to one. C) Demand is more elastic in the long run than it is in the short run. D) Demand is more elastic the smaller the percentage of the consumer's budget the item takes up.
Demand is more elastic in the long run than it is in the short run.
What is the difference between "diminishing marginal returns" and "diseconomies of scale"?
Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.
the economic short run
It is a period during which at least one of the firm's inputs is fixed.
The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." Based on this quote, what must be true of the plant's average cost of production curve?
It is upward-sloping.
cost minimization equilibrium can be written as
MP of labor / wage = MP of capital / rent where isocost and isoquant lines are the same
Managerial economics generally refers to the integration of economic theory with business
Practice
Why can Managerial Economics be applied to any business decision making process, regardless of the industry?
Managerial Economics is applicable to different types of organizations like for-profit firms, not-for profit-firms, and government agencies. All of these types of organizations provide goods and services, even though they do not all have the same objectives when it comes to maximizing wealth. According to the text, "[economic] models are simplified representations of a real-world organization and its environment" and managers can use these models to make decisions in a timely and cost effective manner. The models to do match every detail of an organization so, although the over arching objectives may be different from firm to firm, business transactions generally conform to similar standards and processes. A model can be used to redirect the outcome of a decision and it does not judge wether the outcome does/does not support the organizations objectives.
Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations. Total revenue $120,000 Cost of labor 40,000 Cost of materials 15,000 Equipment rental 5,000 Sally tells you that she would really like to move to a location closer to town but she decided against it because "right now I don't pay any rent and it will cost me $10,000 a year to rent near town." Do you agree with her reasoning?
No. Although she does not incur a monetary cost for her garage space now, it is an opportunity cost and part of the economic cost of doing business. Sally could just as well rent her space out now, collect the rent and move closer to town
Managerial Economics as a specialized branch of Economics
Provide logic and methodology to find solutions to business problems
If a firm charges customers $ 200 per unit of the first unit purchased, and $160 per unit for each additional unit purchased in excess of one unit. Then, what is the economic term of this strategy?
Second-degree price discrimination
Why is it useful to study Managerial Economics?
Studying and understanding Managerial Economics is important to make crucial business decisions to maximize profit and create value for the product or service one is providing. By blending economic theory and empirical data, managers can understand the "how" and "why" a certain business decision will maximize wealth. Once managers understand this reasoning behind economic theories, they can use data to refine the theory aspect of managerial economics to better fit their business, yielding continuous improved decisions and ultimately the most desirable results. This helps managers to create value. Consumers, just like firms, have scare resources. Consumers will invest their resources in the product or service that meets their needs with the greatest value. Understanding managerial economics gives managers an edge in creating value for their products.
Adam spent $10,000 on new equipment for his small business, "Adam's Fitness Studio." Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true? a. The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he'll need to continue operations is a marginal cost. b. The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost. Correct c. The variable cost of running the studio is $22,000. d. The fixed cost of running the studio is $22,000.
The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost.
For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): A Seiko watch or watches in general.
The Seiko watch would have a higher elasticity of demand. There are many substitutes for this brand of watch and it is a luxury good.
For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair coloring product.
The hair coloring product would have higher price elasticity of demand because there are most likely more substitutes for that product than the blood pressure medicine. The consumer with high blood pressure also most likely needs the medicine immediately and is more price inelastic.
First (Perfect) degree price discrimination means that a firm charge:
The maximum amount that buyers are willing to pay for each unit.
For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): A new Ford Fusion or a tank of gas for your current car.
The new Ford Fusion would have higher price elasticity of demand because it would be a luxury good. The tank of gas has a smaller budgetary allocation so demand would be more inelastic.
What are the two effects that explain the Law of Demand? Briefly explain each effect.
The substitution effect is the change in the quantity demanded based on the price change relative to other goods. It is always negative. When the price falls for a certain good, the consumer buys more of that good instead of more expensive goods and vise versa. The income effect is when price change affects consumer purchasing power. When price increases, purchasing power decreases and vise versa. For normal goods the income effect is negative (if price falls, purchasing power increases, and consumer buys more of that good). For inferior goods, the income effect is positive (when price falls, the increase in purchasing power leads consumers to buy less of that good and more of a "better" good).
If the marginal product per dollar pent on capital is less than the marginal product per dollar spent on labor
Then less capital and more labor should be used in production
Which type of workers is most likely to enjoy substantial economic rent?
Those with high wages which result from them possessing the innate ability to develop some skill to a very high level
accounting profit =
Total revenue - Explicit costs
Profit =
Total revenue - Total cost
MC, ATC and AVC are all ______ shaped
U-Shaped
If firms do not earn economic profits in a competitive equilibrium, why would the firms choose to stay in business?
When firms earn no economic profit but earn a normal profit, they earn precisely as much as they could have earned by investing their time and money elsewhere. In other words, each producer is able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating. The source of the confusion stems from the difference between accounting and economic profits.
technological change
change in the ability of a firm to produce a given level of output with given qty of inputs
income effect
change in qty demanded of a good based on a change in buying power. when price falls purchasing power increases. Can be positive or negative
Which of the following is the best example of a short run adjustment? a. Your local Wal-Mart hires two more associates. b. Toyota builds a new assembly plant in Texas. c. Smith University completed negotiations to acquire a large piece of land to build its new library. d. A local bakery purchases another commercial oven as part of its capacity expansion.
Your local Wal-Mart hires two more associates.
If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is
a luxury.
If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is
a normal good.
A firm earns a normal profit when its total revenues just offset both the ________ cost and ________ cost.
accounting; opportunity
Diseconomies of scale
add plant size; ang cost increases and production increases by a smaller percentage
Economies of scale
add plant size; avg cost goes down and production jumps up
constant returns to scale
add plant size; output increases by same percentage and avg cost remains the same
isocost line
all combinations of two inputs, such as capital and labor, that have the same total cost
Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that
an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
If an increase in income leads to a decrease in the demand for popcorn, then popcorn is
an inferior good.
if marginal product < avg product
ang product decreases
Accounting costs
are historical costs
The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." This quote suggests that
as Toyota expanded its capacity, it experienced diseconomies of scale
If marginal product > avg product then
avg product rises
income limitation in economics is represented by
budget constraint
A restaurant in an isolated spot on the coast of Maine sells only complete meals at a fixed price (called prix fixe), with the opportunity to select à la carte choices. Which type of price discrimination is being practiced?
bundling
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
depreciation costs
change in market value of capital over a given period
marginal cost
change in total cost that results from a one-unit increase in total product
Marginal product
change in total product from a 1 unit increase in the qty labor employed
Microeconomics includes the study of the
choices made by individuals and businesses
production
combining inputs to make an output
If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
complements
Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are
complements in consumption.
maw of diminishing marginal utility
consumers experience diminishing additional satisfaction as they consume more of a good during a given period of time
explicit costs
cos paid in money
_____ approach is the easier approach to achieve optimal production after the firm has already established a production plan and requires only incremental changes in their plan to achieve the maximum possible profit
cost
when ATV, MC, and AVC are rising
decreasing returns
if good is cheap,
demand is inelastic
if expected future income increases
demand shifts right
if number of buys increases
demand shifts right
in preference/taste decreases
demand shifts right
2 components of implicit costs
depreciation costs and normal profit
The price of a factor of production that is in fixed supply is called
economic rent.
Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend?
economies of scale in farming
If, when a firm double all its inputs, its average cost of production decreases, then production displays
economies of scale.
Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:
economies of scope.
If good has substitutes, demand would be
elastic
as time passes after a price change, producers find it easier to change production plans so supply becomes more
elastic
goods that can be produced at a constant or very gently rising opportunity cost have an ______ supply
elastic
if good is a luxury good, demand would be
elastic
the supply of a storable good is highly
elastic
When MC is falling, ATC and AVC are
falling
Charging a different price for tickets to movies at twilight than after 6 o'clock is an example of bundling.
false
Economic costs include implicit costs but not explicit costs.
false
Over time, more experienced workers will demand higher wage and therefore, will lead to an increased in the cost of production for the producers.
false
When you produce more, average cost of production increases.
false
Charging a different price for tickets to movies at twilight than after 6 o'clock is an example of bundling.
false - 3rd degree price discrimination
Total cost =
fixed cost + variable costs
Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication. Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year. The salaries and benefits of people in these job categories will be included in
fixed cost and total cost but not variable cost.
In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a
fixed cost.
If Melissa owns a software company that incurs no fixed costs, then
her total cost equals her total variable cost
Managerial economics is best defined as the economic study of:
how businesses can decide on the best use of scarce resources.
quantity demanded
how much a consumer is willing to buy at a given price
labor
human time used in production process
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.
When ATC, MC, and AVC are falling
increasing returns
The demand for gasoline in the short run is
inelastic because there are no good substitutes for gasoline.
if the good is a _____ _____ then an increase in income will decrease demand
inferior good
The marginal revenue product of labor for a firm
is the firm's demand curve for labor. will decrease if the firm hires more labor. will increase if the price of the firm's output increases.
A managerial decision is not profitable if
it increases costs more than revenue
The demand for labor is described as a derived demand because
it is derived from the demand for products that use labor in the production process.
natural resources (land)
land, sun, air etc
short run
level of capital is fixed
capital
machines used in production process
Managerial economics helps managers
make decisions in the face of scarcity.
Microeconomic models are used to
make predictions. explain real-life phenomena. evaluate production alternatives.
Marginal and average cost curves are mirror images of_________ & __________
marginal and average production
slope of the isoquant line is the
marginal rate of technical substitution (MRTS) −MPsubL/MPsubK
CEOs should focus on
maximizing firm profits.
The form of economics most relevant to managerial decision-making within the firm
microeconomics
If the marginal product per dollar spent on capital is higher than the marginal product per dollar spent on labor
more capital and less labor should be used in production
If the marginal product of capital is six times as large as the marginal product of labor and the price of capital is three times as large as the price of labor, for costs to be minimized:
more capital should be used and less labor.
over time, demand for every product becomes
more inelastic
Cross price elasticity of demand is for complements is always
negative
income elasticity of demand for an inferior good is
negative
For normal goods, income effect is
negative when price falls, consumer buys more
the substitution effect is always
negative when price goes up, demand goes down
Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is
negative, so Sefton considers potatoes to be an inferior good
If the good is a ____ ____ then an increase in income will increase demand
normal good
implicit costs
opportunity cost incurred by firm when it uses a factor of production for which is does not make a direct money payment
When an economist uses the term "cost" referring to a firm, the economist refers to the
opportunity cost of producing a good or service, which includes both implicit and explicit cost
goods produced only in a fixed qty have a _________ supply
perfectly inelastic supply
microeconomics
phenomena related to goods and services from perspective of individual buyers and businesses
A change in which variable will change the market demand for a product? A) the price of the product B) population C) technology D) the prices of substitutes in production
population
cross price elasticity of demand for substitutes is always
positive
income elasticity of demand for a normal good is
positive
for inferior goods, income effect is
positive when price falls, consumer buys less
technology
processes a firm uses to turn inputs into outputs
Economies of scope refers to the decrease in average total cost that can occur when a firm
produces more than one product.
purpose of managerial economics
provinde economic terminilogy and reasoning for the impovement of managerial decisions
Which of the statements about price discrimination is (are) false? a. There must be differences in the elasticity of demand from one segment to another. b. It must be possible to segment the market. c. Public utilities practice first-degree price discrimination. d. It must be difficult to transfer the seller's product from one market segment to another.
public utilities practice first-degree price discrimination
demand
reflects behavior of the buyers in the market
Unlike an accountant, an economist measures costs on a(n) ________ basis
replacement
_______ approach is the easier approach to achieve optimal production when the firm is at the start of their production plan
resource
Increasing marginal returns initially when TP ________ Decreasing marginal returns eventually when TP_______ Negative marginal returns when TP ______
rises sharply starts to flatten out starts falling
When MC is rising, ATC and AVC are
rising
Microeconomics studies the allocation of
scarce resources
if good A and good B are complementary, an increase in the price of Good A will cause demand curve of good be to
shift left
if good A and good B are substitute goods, an increase in the price of good A will cause the demand curve of good B
shift right
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm
should shut down.
isoquant line
shows all combinations of 2 inputs (labor & capital) , that will produce the same level of output
indifference curve
shows combinations of consumption bundles that give the consumer the same utility
LRAC (long run avg cost curve)
shows the lowest cost at which a firm is able to produce a given qty of output in the long run when no inputs are fixed
at the optimal point
slope of IC = Slope of BC
normal profit
the return to entrepreneurship
Suppose that when the price of strawberries decreases, Simone increases her purchase of whipped cream. To Simone
strawberries and whipped cream are complements.
Tomas increased his consumption of potato chips when the price of pistachios increased. For Tomas, potato chips and pistachios are
substitutes in consumption
the substitution effect
the change in qty demanded of a good when the price changes - making it more or less expensive than related goods
Marginal cost equals
the change in total cost that results from a one-unit increase in output
If the price of music downloads was to decrease, then a. the demand for MP3 players would decrease. b. the demand for MP3 players would increase. c. the supply of MP3 players would increase. d. the quantity demanded of MP3 players would decrease.
the demand for MP3 players would increase.
The term "derived demand" refers to
the demand for a factor of production that is derived from the demand for the good the factor produces.
At the minimum efficient scale
the firm has achieved the lowest possible average cost of production.
The long-run average cost curve shows
the lowest average cost of producing every level of output in the long run.
minimum efficient scale
the lowest level of output at which all economies of scale are exhausted
Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when:
the preference rankings of vacationers travelling together are negatively correlated.
A change in all of the following variables will change the market demand for a product except a. tastes. b. population and demographics. c. the price of the product. d. income.
the price of the product.
Third-degree price discrimination exists whenever:
the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.
When MC intersects ATC and AVC,
they are at their minimum
Some electric utilities offer one rate to commercial users and a different rate to residential users. This is an example of:
third degree price discrimination
average cost=
total cost / units of output
average fixed cost=
total fixed cost / units of output
average product =
total product / qty of labor AKA productivity
marginal product is slope of the
total product curve
Total product
total qty of a good produced in a given period. Increases initially then goes down
Economic profit =
total revenue - (explicit costs+implicit costs) or total revenue - opportunity cost
average variable costs=
total variable costs / units of output
A sale on men's slacks at T.J. Maxx, where if you buy the first pair at full price, you can buy the second pair at half price, is an example of differential pricing.
true
Accounting costs exclude implicit costs.
true
For a price discriminating airline, if the demand for business travelers were to expand, a proactive price discriminator would expand the number of seat assignments to business travelers and likely raise business traveler ticket prices.
true
Suppose a used-car salesman asks you the most you would be able to pay for a car and, unthinkingly, you answer truthfully, $4,800. Suppose, amazingly, that $4,800 is exactly the price for the car that you are presently examining. Then, the used-car salesman has effectively used perfect price discrimination on you.
true
Giffen good
upward sloping demand curve
Because the amount of labor a firm employs can be changed, the cost of labor is known as
variable cost.
A factor of production that can be easily changed in the relevant time period is called a:
variable input.
change in quantity demanded
when consumer changes the amount of good in question that he wants to buy. reflects movement along the same demand curve.
Law of Diminishing Returns
when marginal product starts falling. As a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases (Too Many Cooks Spoil the Broth!)
Law of Increasing Returns
when the marginal product of an additional worker exceeds the marginal product of the previous worker. Increasing marginal returns occur when a small number of workers are employed and arise from increased specialization and division of labor in the production process.
change in demand
whenever behavior towards the good in question changes. reflects a shift of demand curve
the law of demand
whenever the price for a good increases, the qty demanded decreases
If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded
will decrease by 45 percent.
The marginal revenue product of labor for a firm
will increase if the price of the firm's output increases. is the firm's demand curve for labor. will decrease if the firm hires more labor.
Would you expect economies of scope to occur in the following situation; Producing two goods that use the same resource
yes