Final
An equilibrium is a set of prices and quantities such that
1. firms are maximizing profit 2. consumers are maximizing utility 3. markets clear
Variable input
A production input that can be varied in both the short run and the long run
fixed input
A production input that can only be varied in the long run
Can an isoquant ever slope upward? Explain. A. No. It would imply that adding more of both inputs keeps output constant. B. Yes. If both inputs are inferior, then the isoquant is upward sloping. C. No. It would imply that adding more of both inputs decreases output. D. Yes. Where diminishing returns occur, the isoquant is upward sloping.
A. No. It would imply that adding more of both inputs keeps output constant.
Using calculus, we measure marginal utility as the utility change that results from A. a very small increase in consumption. B. a very large increase in consumption. C. an average increase in consumption. D.anything other than changes in consumption.
A. a very small increase in consumption
An isocost line shows A. all the input combinations that can be purchased at a given total cost. B. the total cost of producing each possible level of output. C.all the possible output levels that can be produced at a given total cost. D. all the input combinations that produce the same total output.
A. all the input combinations that can be purchased at a given total cost.
An Engel curve shows combinations of A.income and the quantity consumed of one good. B.two goods for different levels of prices. C.two goods for different levels of income. D.income and prices.
A. income and the quantity consumed of one good
indiffernce curve
All combinations of goods that provide a consumer with the same level of satisfaction
A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called A. an isoquant. B.a production function. C.a production possibility curve. D. an isocost function.
B. a production function.
At the point where average variable cost reaches its minimum value A.marginal cost also reaches its minimum value. B. average variable cost equals marginal cost. C.average variable cost equals average total cost. D. marginal cost equals zero.
B. average variable cost equals marginal cost.
If firms produce a homogeneous product, then A. consumers will be willing to pay different prices for output from different firms. B. products will be perfectly substitutable with one another. C. individual firms can raise price without losing all sales. D.the market may have multiple prices. E. market output will not be a commodity.
B. products will be perfectly substitutable with one another.
A perfectly competitive firm is producing the output that maximizes its profit. If its fixed cost increases, and industry price remains constant, how should it respond in the short run? A. It should produce more output. B. It should shut down. C. It should produce less output. D. It should keep output the same. E. It should raise its price.
D. It should keep output the same.
Which of the following is not an example of third-degree price discrimination? A. Higher fares for business travellers. B. Lower prices for students. C. Discounted movie tickets for senior citizens. D. Reservation pricing for each consumer. E. Manufacturer's coupons.
D. Reservation pricing for each consumer.
At the optimal point on an indifference curve and budget line diagram (assuming an interior solution) A.the consumer spends his or her entire budget on the two goods. B.the marginal rate of substitution between the two goods equals the ratio of their prices. C.the optimal indifference curve is tangent to the budget line. D.All of the above.
D. all of the above
The short run is A. three years. B. a time period in which at least one set of outputs has been decided upon. C.however long it takes to produce the planned output. D. less than a year. E. a time period in which at least one input is fixed.
E. a time period i which at least one input is fixed
Linear isoquant
The slope, or the MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input and output can be maintained. The inputs are perfect substitutes.
marginal product of labor
additional output from a small increase in labor
economic cost
the total cost of utilitzing resources
What is the difference between economies of scale and returns to scale? A. Economies of scale define whether joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product, and returns to scale define how output changes with input usage for a single firm. B. Economies of scale define how cost changes with output in the short run, and returns to scale define how cost changes with output in the long run. C. Economies of scale are present when the long-run average cost curve is increasing, and returns to scale are present when the long-run average cost curve is decreasing. D. Economies of scale are present when the expansion path is a straight line, and returns to scale are present when the expansion path is not a straight line. E. Economies of scale define how cost changes with output, and returns to scale define how output changes with input usage.
E. Economies of scale define how cost changes with output, and returns to scale define how output changes with input usage.
If firms can easily enter and exit a market, then A. firms will produce at minimum average fixed cost in the long run. B. firms will produce where price is less than marginal cost. C. firms will produce at minimum average cost in the short run. D. firms will produce where price is greater than marginal revenue. E. firms will earn zero economic profit in the long run.
E. firms will earn zero economic profit in the long run.
If firms are price takers, then A. they will earn zero economic profit. B. they will produce where price equals average variable cost. C. they will have market power. D. they will produce where marginal revenue is greater than marginal cost. E. they will produce where price equals marginal cost.
E. they will produce where price equals marginal cost.
What is the difference between a production function and an isoquant? A. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output. B. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. C. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. D. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.
A. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.
If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal cost, it should A. decrease its output. B. shut down. C. decrease its price. D.increase its output. E.increase its price.
A. decrease its output.
There is a social cost to monopoly power because A. monopoly production occurs where price is greater than marginal cost. Your answer is correct.B. monopolies earn less profit than competitive firms. C. monopolies charge prices that are below marginal revenue. D. monopolies create less producer surplus than competitive firms. E. the amount produced by monopolies is greater than competitive outcomes.
A. monopoly production occurs where price is greater than marginal cost. Your answer is correct.B. monopolies earn less profit than competitive firms.
In a perfectly competitive industry, if a firm is incurring losses, then it might choose to produce in the short run because A. price is greater than average variable cost, resulting in smaller losses than would result from shutting down. B. price is greater than average fixed cost, resulting in smaller losses than would result from shutting down. C. revenue is greater than variable costs, resulting in profit in the long run. D. fixed costs become zero in the long run, resulting in profit in the long run. E. variable costs are greater than fixed costs, resulting in smaller losses than would result from shutting down.
A. price is greater than average variable cost, resulting in smaller losses than would result from shutting down.
When the cost minimizing combination of inputs is being used and there is no corner solution, A. the isoquant line is tangent to the isocost line. B. the marginal product of each input is equal to its cost. C. the costs of the inputs are equal to each other. D. the marginal products of the inputs are equal to each other. E. All of the above.
A. the isoquant line is tangent to the isocost line.
When the optimal point on an indifference curve and budget line diagram is a corner solution, A.the marginal rate of substitution usually does not equal the ratio of prices for the two goods. B.the consumer does not spend her entire budget on the two goods. C.the budget line must have a kink in it. D.All of the above.
A. the marginal rate of substitution usually does not equal the ration of prices for the two goods
Faced with constantly changing conditions, why would a firm ever keep any factors fixed? What criteria determine whether a factor is fixed or variable? A. Some factors are simply fixed inputs by definition. For example, plant and equipment are fixed inputs regardless of the time horizon. B. Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables. C. Some factors are fixed in the short run, whether the firm likes it or not, simply because the firm may not have the resources to adjust the level of the variables. D. The production of most goods requires the use of both fixed and variable inputs. Fixed inputs are inputs that are not consumed during the production process, while variable inputs are consumed during the production process.
B. Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables.
If a law requires a price-discriminating monopolist to charge every consumer the same price, A. consumers who used to pay the high price will be worse off and those who used to pay the low price will be better off. In addition, the monopolist will be better off. B. consumers who used to pay the high price will be better off and those who used to pay the low price will be worse off. In addition, the monopolist will be worse off. C. all consumers will be worse off, but the monopolist will be better off. D. all consumers will be better off, but the monopolist will be worse off.
B. consumers who used to pay the high price will be better off and those who used to pay the low price will be worse off. In addition, the monopolist will be worse off.
For a market to be perfectly competitive, A. firms must have market power, firms must produce a differentiated product, and firms must be able to easily enter and exit the market. B. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market. C. only one firm can produce output, no close substitutes may exist, and firms must not be able to enter the market. D. only a few firms may produce output, firms must have market power, and firms must produce a homogenous product. E. only one firm can have access to a key input, the government must regulate entry of new firms, and the long-run average cost of production must be decreasing.
B. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market.
If a production function has straight line isoquants, then A. the industry is a constant cost industry. B. the inputs are perfect substitutes. C. there are constant returns to scale. D. All of the above are true.
B. the inputs are perfect substitutes.
Elasticity measures A. the slope of a demand curve. B. the percentage change in one variable in response to a one percent increase in another variable. C. the inverse of the slope of a demand curve. D. sensitivity of price to a change in quantity.
B. the percentage change in one variable in response to a one percent increase in another variable.
In the short run when some inputs are fixed, marginal cost must eventually rise as a firm's output increases because A.there will eventually be decreasing returns to scale. B. there will eventually be diminishing marginal products for the firm's variable inputs. C. the prices the firm pays for labor, material and other variable inputs will increase. D.All of the above.
B. there will eventually be diminishing marginal products for the firm's variable inputs.
If the marginal cost of production is less than the average variable cost of production, then A. average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. B.average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average. C.average variable cost is falling because the cost of the last unit produced is adding to total variable cost. D. average variable cost could be rising or falling because marginal cost and average variable cost are unrelated. E. average variable cost is falling because marginal cost and average variable cost are equal.
B.average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average.
Explain the term "marginal rate of technical substitution." (Assume a two-input production function.) A. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to increase output by one unit. B. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to keep output constant. C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. D. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output increases.
C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.
Assume the vitamin industry is perfectly competitive. When a new medical study shows that taking vitamins improves both the quality and length of life, demand for vitamins increases dramatically. As a result, vitamin producers' profits will A. remain unchanged in both the short-run and the long-run. B. decrease in the short-run but become positive in the long-run. C. increase in the short-run but fall to zero in the long-run. D. increase in the short-run and in the long-run.
C. increase in the short-run but fall to zero in the long-run.
A perfectly competitive firm should shut down in the short run if A. price is below minimum average total cost. B. it cannot earn a profit. C. price is below minimum average variable cost. D. the firm does not earn enough to pay for all its fixed costs.
C. price is below minimum average variable cost.
Firms would enter an industry if profit will eventually be zero because zero economic profit A. indicates other industries are earning negative economic profit. B. corresponds to positive producer surplus in the long run. C. signifies that a firm is earning as much as it could in its next best activity D. includes the opportunity cost of resources used in production and corresponds to negative accounting profit. E. becomes positive once the value of the next best use of resources used in production is included.
C. signifies that a firm is earning as much as it could in its next best activity
Suppose you have drawn a consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the price of food increases, A.the budget line shifts outward in a parallel fashion. B.the budget line shifts inward in a parallel fashion. C.the budget line becomes steeper. D.the budget line becomes flatter.
C. the budget line becomes steeper
The marginal utility associated with the additional consumption of X is given by A.the Lagrangian multiplier. B.its equality to total utility. C.the partial derivative of the utility function with respect to good X. D.the second derivative of the utility function with respect to good X.
C. the partial derivative of the utility function with respect to good X.
If consumers have different levels of demand but the same price elasticities, then the firm's profits A. will increase because the firm will charge the consumers with a higher level of demand a higher price. B. will increase because the firm will charge the consumers with a higher level of demand a lower price. C. will not increase because prices will be the same in both markets. D. will increase because prices will be the same in both markets. E. will increase because output will be different between the markets.
C. will not increase because prices will be the same in both markets.
An isoquant is a curve that shows A. all the combinations of inputs that cost the same total amount. B. the optimal combination of inputs to use to produce any given level of output. C. all the combinations of inputs that yield the same total output. D. all the output levels that can be produced from a given set of inputs
C> all the combinations of inputs that yield the same total output
A monopolist that practices perfect price discrimination A. charges each consumer the maximum price the consumer is willing to pay. B. drives consumer surplus to zero. C. produces the perfectly competitive level of output. D. All of the above are correct. E. Only A and B are correct.
D. All of the above are correct.
All firms in perfectly competitive industries earn zero economic profit in the long run because A. firms are price takers, maximizing profit by producing where price equals average cost. B. firms are price takers, maximizing profit by producing where price equals marginal cost. C. a positive profit would induce firms to produce more, increasing price and profit, and a negative profit would induce firms to produce less, decreasing price and profit. D. a positive profit would induce firms to enter, decreasing price and profit, and a negative profit would induce firms to exit, increasing price and profit. E. barriers to entry and exit prevent firms from earning positive or negative economic profit.
D. a positive profit would induce firms to enter, decreasing price and profit, and a negative profit would induce firms to exit, increasing price and profit.
An Engel curve A. slopes downward for both normal and inferior goods. B. slopes upward for both normal and inferior goods. C. slopes upward for inferior goods and downward for normal goods. D. slopes upward for normal goods and downward for inferior goods.
D. slopes upward for normal good and downward for inferior goods
Suppose you have drawn a consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the prices of food and clothing remain the same and the consumer's income increases, A.the budget line shifts inward in a parallel fashion. B.the budget line becomes steeper. C.the budget line becomes flatter. D.the budget line shifts outward in a parallel fashion
D. the budget line shifts outward in a parallel fashion
The income elasticity of demand refers to A. the change in income required for quantity demanded to change by 1%. B. the substitution of one good for another as income changes. C. a change in income following a change in quantity demanded. D. the percentage change in quantity demanded resulting from a 1 percent increase in income.
D. the percentage change in quantity demanded resulting from a 1 percent increase in income.
Which of the following does not create a barrier to entry? A. A patent for a new drug. B. A copyright on a new computer program. C. Economies of scale in production. D. A government license required to practice law. E. All of the above create barriers to entry.
E. All of the above create barriers to entry.
law of diminishing marginal returns
Holding other inputs fixed, increasing the use of an input will eventually result in decreasing amounts of additional output
income effect
The change in consumption due to a change in income, holding prices constant
Substitution effect
The change in consumption due to a change in price, holding utility constant
L-shaped isoquant
The inputs are perfect complements, or that the firm is producing under a fixed proportions type of technology. In this case, the firm cannot give up one input in exchange for the other and still maintain the same level of output.
What does a MRTS = 4 mean
It means that if the input on the horizontal axis is increased by one unit, then the input on the vertical axis decreases by 4 units and output will not change
the condition where consumers only consumer x.
MRS(x,y) > (px)/(py)
What happens to the marginal rate of substitution as you move down along a convex indifference curve
The marginal rate of substitution decreases
What happens to the marginal rate of substitution as you move along a linear indifference curve
The marginal rate of substitution is constant
marginal rate of substitution
The rate at which a consumer is willing to exchange one good for another and remain indifferent is called the Marginal Rate of Substitution
accounting cost
Which consists of actual expenditures (plus depreciation of capital)
Opportunity cost
Which is the cost of forgoing the next best alternative
Convex isoquant
Within some range, a declining number of units of one input can be substituted for a unit of the other input, and output can be maintained at the same level. In this case, the MRTS is diminishing as we move down along the isoquant.
partial equilibrium
an equilibrium in one market, ignoring the rest of the economy
Two goof are complements if
an increase in the price of one good leads to a decrease in quantity demanded of the other.
the indifference curve for two goods that are perfect substitutes are
downward-sloping straight lines
perfect price discrimation
each consumer is charged his/her exact willingness to pay
budget line
indicates all bundles (combinations of goods) for which the total amount of money spent is equal to income.
market power
is the ability to charge a price above marginal cost.
budget set
is the set of all feasible bundles (all possible combinations of goods the consumer can afford).
Individual demand curve
relates the quantity of a good that a single consumer will buy to the price of that good, all else equal.
the indifference curve for two goods that are perfect complements are
shaped as right angles
Strict monotonicity on a indifference map
the indifference curves further to the northeast provide greater utility
when is the marginal rate of substitution diminshing
where indifference curve are convex, which implies that consumer prefer a balanced bundle of goods
when preferences are complete
which means that consumers are able to rank all possible baskets
Preferences are transitive
which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle A is preferred to bundle C
rent seeking
a firm spends money in socially unproductive efforts to acquire, maintain, or exercise monopoly power, it is said that the firm
monopolist
a single seller that is the sole supplier for the market