Econ222
Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11 and 0.29 for products W, X, Y and Z. A 1% decrease in price will increase total revenue in the case of
W and Y
Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan was $30. Jennifer experiences
a consumer surplus of $9 and Nathan experiences a producer surplus of $3
An explicit cost is
a money payment made for resources not owned by the firm itself
A purely competitive seller is
a price taker
When the percentage change in price is greater than the resulting percentage change in quantity demanded
an increase in price will increase total revenue
Economists would describe the US automobile industry as
an oligopoly
Fixed cost is
any cost that does not change when the firm changes it output
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point
If X is a normal good, a rise in money income will shift the
demand curve for X to the right
The law of diminishing marginal utility explains why
demand curves slope downward
If a competitive industry is neither expanding nor contracting, we would expect
economic profits to be zero
The price elasticity of demand of a straight-line demand curve is
elastic in high-price ranges and inelastic in low-price ranges
A producers minimum acceptable price for a particular unit of a good
equals the marginal cost of producing that particular unit
If competitive industry Z is making substantial economic profit, output will
expand in industry Z as more resources will move to that industry
To the economist, total (economic) cost includes
explicit and implicit costs
Assume product A is an input in the production of product B. In turn, product B is a complement to Product C. We can expect a decrease in the price of A to
increase the supply of B and increase the demand for C
The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from 3 Pepsi's is 38 units of utility. The marginal utility of the third Pepsi is
8 units of utility
The law of diminishing marginal utility states that
beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer
If the demand for product X is inelastic, a 4% increase in the price of X will
decrease the quantity of X demanded by less than 4%
Where total utility is at a max, marginal utility is
zero
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were
$200,000 and its economic profits were zero
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firms total fixed costs are
$5,000
In which of the following cases will total revenue increase?
Price rises and demand is inelastic
In moving along a supply curve, which of the following is not held constant?
The price of the product for which the supply curve is relevant
One can say with certainty that equilibrium price will decline when supply
increases and demand decreases
College students living off campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed mac and cheese are
inferior goods
The price of product X is reduced from $100 to $90 and as a result the quantity demanded increases from 50 to 60 unites. Therefore, demand for X in this price range
is elastic
An efficiency loss (or deadweight loss)
is measured as the combined loss of consumer surplus and producer surplus
Assume the XYZ corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation
is realizing an economic profit of $40
Consumer Surplus
is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price
The utility of a good or service
is the satisfaction or pleasure one gets from consuming it
If a purely competitive firm shuts down in the short run
it will realize a loss equal to its total fixed costs
We would expect the cross elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods
The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is
price
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing
price and minimum average variable cost
The Law of Demand states that, other things equal
price and quantity demanded are inversely related
Other things equal, if the price of a key resource used to produce product X falls, the
product supply curve of X will shift to the right
An industry comprised of a very large number of sellers producing a standardized product is known as
pure competition
An increase in product price will cause
quantity demanded to decrease
The term "quantity demanded"
refers to the amount of a product that will be purchased at some specific price
Other things the same, if a price change causes total revenue to change in the opposite direction, demand is
relatively elastic
The demand schedules for such products as eggs, bread, and electricity tend to be
relatively price inelastic
An effective price floor will
result in a product surplus
A demand curve
indicates the quantity demanded at each price in a series of prices
Average Total Cost is
TFC + TVC / Q
The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, would be consistent with consumer equilibrium?
$6 and $4
Assume the price of product Y (vertical axis) is $15 and the price of product X (horizontal axis) is $3. Also assume that money income is $60. The absolute value of the slope of the resulting budget line is
1/5
Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10%, the quantity demanded will increase by
2% and total expenditures on bread will fall
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16% increase in sales implies a
20% reduction in price
The total output of a firm will be at a max where
MP is zero
An economist for a bicycle company predicts that other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that
bicycles are normal goods
Suppose you find that the price of your product is less than minimum AVC. You should
close down because by producing your losses will exceed your total fixed costs
If competitive industry Y is incurring substantial losses, output will
contract as resources move away from industry Y
An indifference map implies that
curves farther from the origin yield higher levels of total utility
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) form or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. An increase in the prices of resources used to produce X will
decrease S, increase P, and decrease Q
The price elasticity of demand for beef is about 0.60. Other things equal, this means that a 20% increase in the price of beef will cause the quantity of beef demanded to
decrease by about 12%
A perfectly inelastic demand curve
graphs as a line parallel to the vertical axis
Accounting profits are typically
greater than economic profits because the former do not take implicit costs into account
To economists., the main difference between short run and the long run is that
in the long run all resources are variable, and in the short run at least one resource is fixed
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) form or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. If X is an inferior good, a decrease in income will
increase D, increase P, and increase Q
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) form or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. An increase in the price of a product that is a close substitute for X will
increase D, increase P, and increase Q
The equilibrium price and quantity in a market usually produce allocative efficiency because
marginal benefit and marginal cost are equal at that point
In the short run, the individual competitive firms supply curve is that segment of the
marginal cost curve lying above the average variable cost curve
The demand curve in a purely competitive industry is ________, while the demand curve to a single firm in that industry is _____
marginal revenue and marginal cost
An increase in quantity supplied is depicted by a
move from y to x- up from y to x
Assume that a 3% increase in income across the economy produces a 1% decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is
negative and there X is an inferior good
Suppose that a 20% increase in the price of normal good Y causes a 10% decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is
negative and therefore these goods are complements
The price elasticity of demand is generally
negative, but the minus sign is ignored
An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called
oligopoly
The demand schedule or curve confronted by the individual, purely competitive firm is
perfectly elastic
Assume that a 4% increase in income across the economy produces an 8% increase in the quantity demanded of good X. The coefficient of income elasticity of demand is
positive and there X is a normal good
An improvement in production technology will
shift the supply curve to the right
A leftward shift of a product supply curve might be caused by
some firms leaving an industry
in 2007, the price of oil increases, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are
substitute goods and the higher price for oil increased the demand for natural gas
The income and substitution effects account for
the downward sloping demand curve
Which of the following is not a characteristic of the demand for a commodity that is elastic?
the elasticity coefficient is less than one
The more time consumers have to adjust to a change in price
the greater will be the price elasticity of demand
When the price of a product falls, the purchasing power of our money income rides and thus permits consumers to purchases more of the product. This statement describes
the income effect
Marginal product is
the increase in total output attributable to the employment of one more worker
At the output where the combined amounts of consumer and producer surplus are largest
the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output
Farmers often find that large bumper crops are associated with declines in their gross incomes. This suggests that
the price elasticity of demand for farm products is less than 1
The diamond water paradox occurs because
the price of a product is related to its marginal utility, not its total utility
Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in
the price of some other product
The MR=MC rule applies
to firms in all types of industries
A firm reaches a break even point (normal profit position) where
total revenue and total cost are equal
The theory of consumer behavior assumes that consumers attempt to maximize
total utility
The equilibrium price and quantity for a market will be
where the demand and supply curve meet
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue
will also be $5
