ECON EXAM 2
When the price elasticity of demand is -0.36, a decrease in price will _____.
-0.36 is inelastic. This means that a decrease in price will not affect the quantity demanded and therefore will result in a loss in revenue.
Suppose that when the price of cereal raises by 10%, the quantity demanded for cereal falls by 20%. Based on this info, what is the approximate price elasticity of demand for cereal?
-20/10 = -2.0
** A local bakery gives information on consumer purchasing habits for muffins and cupcakes. It says that when the price of a muffin is $1, people buy 55 cupcakes. When the price of a muffin is raised to $2, cupcake purchases increase to 65 cupcakes. The cross-price elasticity of demand using the midpoint method is _________________ .
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** When the price of a basketball is $15, the quantity supplied is 5,000. When the price increases to $20, the quantity supplied is 10,000. Using the midpoint method, the price elasticity of supply is _______________________ .
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At a price of $2, the quantity demanded for pens is 16. When the price increases to $3, the quantity demanded for pens is 14. Using the midpoint method, the price elasticity of demand for pens is _____.
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Global warming (filling the air with CO2) is an example of what economic concept?
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Nicolette raised her quantity demanded of hockey pucks from 100 to 250 when the price fell from $6 to $4 per puck. Using the midpoint method, her price elasticity of demand is ______.
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Fatima owns a car shop that repairs, among other things, spoilers. She currently has 6 employees; with 6 employees, her repair shop can repair 9 spoilers per day. If she hired a seventh employee, she'd be able to repair 11 spoilers per day. Therefore, the marginal product of the seventh employee is ________ car spoilers.
11 - 9 = 2
If a firm generates $280,000 in revenue, earns $120,000 in economic profit, and its explicit costs are $80,000, how much are its implicit costs?
120,000 = 280,000 - (80,000 +x) -160,000 = 80,000 + x X = 80,000
Lisette is the owner of a bakery that earns zero economic profit. Last year, her total revenue was $145,000, her rent was $12,000, her labor costs were $65,000, and her other monetary expenses were $25,000. From this information, we know that her explicit costs were _______________________ .
145,000 - 12,000 - 65,000 - 25,000 = 43,000 * zero economic profit
If the percentage change in quantity demanded of Good B is 2% and the percentage change in the price of Good A is -10%, what is the cross-price elasticity of demand
2/-10 = -0.2
Remi owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per month, and the cost of ingredients averages $500 per month. Remi could earn $35,000 per year as the manager of a competing pizza restaurant nearby. His explicit costs last year were ______.
3000 (12) + 2000 (12) + 500 (12) = 66,000
If a firm has total costs of $535,000, and its implicit costs are $165,000, how much are its explicit costs?
535,000 - 165,000 = 370,000
If the percentage change in the quantity consumed of pizza is 6% and the percentage change in income is 2%, what is the income elasticity of demand for pizza?
6/2 = 3%
Lester owns a candy equipment store that produces, among other things, chocolate fountains. With his current 5 employees, his candy equipment store can produce 8 chocolate fountains per day. If he hired a sixth employee, he'd be able to produce 9 chocolate fountains per day. What is the marginal product of the sixth employee in terms of chocolate fountain(s)?
9 - 8 = 1
When the price increases by 20% and the quantity demands drop by 20%, the price elasticity of demand is ______ elastic.
= 0. This is perfectly inelastic. (vertical)
Between a five-star hotel, a doctor's visit, used clothing, and toilet paper, which of these goods would most likely have an income elasticity of demand equal to 8? Why?
A five star hotel. This is because it is a luxurious item, and requires having more income elasticity. IED = 8 is relatively elastic (positive # = normal good, all the rest will not change much in demand). * used clothing would be an inferior good and would be negative
Determine whether each of the following statements is true or false: a. Economists consider only explicit costs. b. Implicit and explicit costs are always equal. c. An implicit cost is an opportunity cost. d. All costs are explicit costs e. An implicit cost is monetary
A. False B. False C. True D. False
Accounting vs Economic Profit
Accounting profit = TR - explicit costs Economic profit = TR - (explicit + implicit costs)
As price elasticity of supply becomes ___________________over time, the overall shape of the supply curve becomes___________________________. (more horizontal, more vertical, or completely vertical)
As it becomes elastic over time, the shape curve becomes horizontal.
As we move downward along the demand curve, the price elasticity of demand _______.
As we move downward, price elasticity of demand becomes more inelastic. Highly el > relatively el > unitary > relatively in > highly in
Why can implicit costs be difficult to measure for business owners?
Business owners opportunity costs vary based on circumstances
Free public parking spaces are an example of what kind of good?
Club good (nonexcludable because available to anyone, but rival because cars cannot park simultaneously in one spot).
The challenge of public good provision and the tragedy of the commons are two problems associated with which characteristic of good?
Common resource good
If the cross-price elasticity of demand is -3, Goods A and B are _______________.
Complements
When you measure the change in the quantity demanded of one good because of a change in the price of another (related) good, you are measuring ___________________ .
Cross Price Elasticity of Demand
When the demand curve is perfectly horizontal, the price elasticity of demand is _______.
Elastic (-infinity)
For a business that manufactures bicycles, wages paid to employees are an example of what type of cost?
Explicit costs
Explicit and implicit costs
Explicit costs - Tangible, out of pocket expenses Ex: electricity bill, employee wages, utilities Implicit costs Opp costs of doing business, capital, or of owners time Ex: labor of owner who works for company but does not draw salary, use of owner's car or computer to conduct business
Negative externalities have what kind of costs for third parties?
External costs - Negative externalities = external costs - Positive externalities = external benefits
Common-resource goods are nonrival, like public goods, and nonexcludable, like private goods. T or F?
False - Nonexcludable because anyone has access to the good, but rival because the use of that good from one person reduces the ability of another to use it
Over time, the price elasticity of supply becomes more inelastic. True or False?
False - price elasticity of supply become more elastic over time. (same with demand)
Give examples of a common-resource good.
Fish in ocean, parks, nature preserves/natural resources
What is the responsiveness of quantity consumers buy to price changes, if a business finds that demand for its goods is very price elastic?
If a business knows that their product is elastic, then they know that the price is important. If the price increases, then quantity demanded will decrease, and vise versa. On the other hand if it's inelastic, the price change will not affect the quantity demanded very much (because the product is highly wanted).
Assume there are no externalities. The market works efficiently if the good is rival or nonrival? Excludable or non-excludable?
In the absence of externalities, certainly the efficient quantity of a rival and excludable good will be produced.
What good amongst gourmet pizza, steak, designer/fancy clothing or instant noodles is most likely to have a negative income elasticity of demand?
Instant noodles (inferior good - as income rises, people will buy less of it). - A negative income elasticity of demand = inferior goods (an increase in income results in a decrease in demand and changes to a more luxurious substitute) - A positive income elasticity of demand = normal goods (increase in income results in increase in demand, because they can afford it more)
Suzanne drives to work each day. The amount Suzanne pays to maintain her car is an example of what type of cost?
Internal cost
The amount an individual pays for gasoline for his or her car is an example of what type of cost?
Internal cost
Change in total output divided by the change in input equals ______.
Marginal product
When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______.
Marginal product
What is the price elasticity of supply?
Measures the responsiveness of quantity supplied due to a change in price
Are Shoes and Socks likely to have a negative or positive cross-price elasticity of demand? Why?
Negative - they are complements
What kind of externality exists when production of a good creates an external cost?
Negative externality
Is entertainment television a public good?
No - a club good
Can a club good be defined as rival or nonrival? Excludable or non-excludable?
Nonrival (they are not in danger of being used up) and excludable (people can be denied access to it)
Which characteristics best define a public good? Rival or nonrival? Excludable or non excludable?
Nonrival and nonexcludable
The tragedy of the commons occurs for goods that are rival or nonrival? Excludable or non excludable?
Occurs for goods that are rival and nonexcludable
When the price of scooters drops by 5%, the quantity demanded changes by 15%. We know that the price elasticity of demand for scooters is _____ elastic.
Perfectly elastic Elastic = big change in demand due to change in price. Numbers have a value that is >1. Inelastic = small or no change in demand due to change in price. Numbers have a value <1 (negative).
If a friend says, "I am never going to buy another Dua Lipa remix again!" his or her price elasticity of demand for Dua Lipa's remixes is: ___
Perfectly inelastic
When two goods are substitutes for each other, what will the cross-price elasticity be?
Positive - Substitutes = positive, because when the price of good A increases, the demand for good B increases. - Complements = negative, because if the price for good A increases, then the demand for the related good B will decrease due to the association.
Are Pepsi and Coke likely to have a positive or negative cross-price elasticity of demand? Why?
Positive - because they are substitutes
What kind of externality exists whenever production of good creates an external benefit?
Positive externality
Lila shares a house with two other people. She is a concert pianist and often practices at home. One roommate enjoys listening to her practice, but the other does not. For the roommate who enjoys listening to Lila play, this is an example of ; for the other roommate, it is an example of _____.
Positive externality; negative externality - Negative externalities: "too much" produced (cigarette smoking) - Positive externalities: "not enough" produced (vaccine)
Goods definitions
Private goods - Excludable: possible to prevent access from consumers who have not paid for it - Rival: the good cannot be enjoyed by more than one person at a time (in danger of being used up) - Ex: hamburger, watch, automobile Public goods - Can be consumed by many and difficult to exclude non-payers - Nonrival and nonexcludable - Free rider problem; underproduction - Ex: fireworks, street performers, national defenses Club goods - Excludable and non-rival - Ex: cable TV, country clubs Common resource good - Rival but nonexcludable - Ex: fish in the ocean, congested roads/beaches
Total revenue minus total cost equals _______________ .
Profit
Clean air is a ____________________ good.
Public good
Suppose that the price elasticity of demand for aspirin is -0.80. We could then say that the demand for aspirin is ______.
Relatively inelastic (perfectly inelastic = 0)
Salima is an avid Coke consumer, whereas Antonia will drink either Coke or Pepsi. Salima's demand for Coke will be _____, while Antonia's demand will be relatively more ____.
Salima = inelastic; Antonia = elastic
What is the relation between social costs, internal costs and external costs?
Social costs is the sum of internal plus external costs
If the cross-price elasticity of demand is 4, Goods A and B are _________________.
Substitutes
For a negative externality, some costs are borne by a third party. T or F?
TRUE
When pollution (a negative externality) is created by firms who produce good X, what are the valid ways for the government to restore the social optimum?
Tax the firm
When a firm is required to internalize the pollution costs associated with production, what will be the subsequent causes of this?
The cause will be because the firm's product had to much of an effect on the third party. It will also cause the supply to decrease. - often times gov. will step in and create a tax in order to get rid of the negative externality. Because of this tax, the firms will charge more and produce less. Some other things that gov can do is regulate production or encourage research/development of substitutes to the product.
Marginal product
The change in output associated with one additional unit of input
What are internal costs?
The costs of a market activity paid only by an individual person (supplier) Ex: labor, materials, equipment, management, construction, etc. (directly monetized costs) * supplier = costs, demand = benefits
What are external costs?
The costs of an activity imposed on people who are not participating in the market (third party) - demander
What are externalities?
The costs or benefits of a market activity that affect a third party.
The city decides to offer a subsidy to each homeowner's association that plants flowers in their common areas. In the market for flowers, what will be its effect on the demand curve?
The demand curve will shift right
Government can correct for the positive externality associated with vaccines by subsidizing consumers. What will be the effect of this on the demand curve for vaccines?
The demand curve will shift right (due to an increase)
For a market with a negative externality, what will happen to the market good quantity when the market participants tend to ignore external cost of their decision?
The market good quantity will increase
Consider a market where production of a good generates a positive externality. In the market equilibrium, what happens to the quantity of good being produced?
The quantity of the good being produced largely increases, and too much of the good is consumed/produced. - "not enough" of the good being produced and we want to encourage people to buy more of them - because of this, gov may offer a subsidy.
** A 15% increase in the price of cookies results in a 9% decrease in the quantity of cookies sold. The revenue received by cookie suppliers will ____ because the price elasticity of demand for cookies is _____.
The revenue will increase because the price elasticity of demand for cookies is inelastic. (inelastic = no effect on quantity and revenue will always increase)
When does the tragedy of the commons occur?
The tragedy of commons is when an individual neglects the well being of society for personal gain. Occurs when a rival and nonexcludable good (common resource good) becomes depleted or ruined. Ex: cattle grazing on a common ground shared by farmers - One farmers wants to go from 1 (sustainable level) to 2 cows > everyone else follows and there is now too many cows > the commons gets destroyed
What is the external cost per unit?
To find this, use the formula: internal + external = social costs. Ex: Q = 100; Int cost = 40; Social cost = 60 60 - 40 = 20/100 = 0.2 PER UNIT !!
Demand is always more price-elastic in the long run. T or F? Why?
True. More time to work on production, management, overall maintenance and changes. Also allows for consumers to have more time to respond and change shopping habits when prices change.
Costs in the Short Run
Variable costs (TVC) - Costs that change with the amount of output (labor) - Ex: commission on sales, credit card fees, wages of part time staff Fixed costs (TFC) - Costs that do not vary with output / do not vary in the short run (capital) - Ex: rent, insurance Total costs (TC) - Sum of variable and fixed costs - TC = TVC + TFC Average variable cost (AVC) - Variable cost divided by the number of units produced - AVC = TVC / Q Average fixed cost (AFC) - Fixed cost divided by the total number of units produced - AFC = TFC / Q Average total cost (ATC) - Total cost divided by the number of units produced - ATC = TC / Q Marginal cost (MC) - TC / Q
What do MC, ATC, AVC tell you about economic profits? In other words, given MC, ATC, AVC, how do you determine if firms are earning economic profits?
When ATC and MC cross, our ATC is minimized. - Once you know the MR, you can find the profit maximizing Q by setting MR = MC. - calc profit by (P - ATC) x Q YOU DET THROUGH PROF MAX RULE
When can a firm lower the price and still increase its revenue?
When the demand for their product is elastic - the more elastic the demand is, the more the change in price will affect the quantity.
Does the cost of producing a good affect the good's price elasticity of demand?
Yes. The cost affects it because more expensive items are more inelastic, and more inexpensive items are elastic. "Big ticket items" such as cars are elastic because they are already expensive, so if the price rises the consumer is likely to find an alternative. Whereas inexpensive items such as a reeces cup candy are inelastic because if the price rises, it will still be an inexpensive or cheap amount to purchase and will most likely still be bought.
When the demand curve is vertical, the price elasticity of demand is ______. (positive, negative, or zero?)
Zero and perfectly inelastic
Determine whether each of the following statements is true or false with respect to explicit costs:
a. They are not included when measuring accounting profit. b. They are not included when measuring economic profit c. They are tangible out-of-pocket expenses d. They are not measured in terms of dollars. e. They are more difficult to calculate and easier to miss than implicit costs. A. False B. False (both explicit and implicit) C. True D. False E. False
Downloadable music that you can buy is a _______________good.
club good
In a typical demand curve, the price-elastic portion of demand is in the ____ region and price-inelastic portion of demand is found in the ____ region of the graph.
elastic = upper region of demand curve inelastic = lower region of demand curve
________ costs are tangible out-of-pocket expenses.
explicit
An___________cost is best defined as the cost of an activity imposed on a third party.
external cost
The pollution emitted by a car is an example of a(n) _____________________cost.
external cost
When Heavenly Cookies prices its sugar cookies at $1.00, it sells 75 cookies. It lowers the price to $0.50 and sells 200 cookies. Its total revenue _________________ because the price elasticity of demand for sugar cookies is ____________________.
increased; elastic Sugar cookies are elastic in this case because when the price decreased, the total revenue increased. When a product is inelastic, a decrease in price will NOT generate an increase in demand. This results in less overall revenue (a loss) due to a lower price and no change in demand.
A local merchant raises the price of his goods and finds that his total revenues increase. The demand for this good must have been _____.
inelastic
A price change does not affect the firm's total revenue when the price elasticity of demand is _____.
inelastic
Pepsi vendors who raise their price at professional sporting events increase total revenue because the price elasticity of demand is ____________________. When they raise their prices at gas stations, they decrease total revenue because the price elasticity of demand is ____________________.
inelastic; elastic
For a market where external costs exist to work efficiently the external costs must be ______.
internalized - or equal to the internal costs. - can lead to market failure because social costs > true cost
Price elasticity measures the change in ___ due to the change in ___
measures the change in quantity demanded due to the change in price.
Over time, the price elasticity of supply for sunglasses will become __________________. (more elastic, more inelastic, or unchanged)
more elastic
Common resources are _______________ _. (overused or underused)
overused
"No matter the price, I will always buy 5 gallons of ice cream a week. I love ice cream!" This statement reflects a price elasticity of demand that is ______.
perfectly inelastic
A vertical supply curve can be described as _________________inelastic.
perfectly inelastic
Because any passerby can enjoy the show without paying, street performances can be considered a _____________good.
public good
__________________ goods can be jointly consumed by more than one person, and nonpayers are difficult to exclude.
public goods
If the price elasticity of supply is 1.5, we know that supply is __________________ elastic.
relatively elastic
If the supply of a good is perfectly inelastic, then the price elasticity of supply will equal __________________.
zero
