Micro Economics Exam #2

Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000?

.8

perfectly inelastic =

0

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is:

2.5

In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be

2500

If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to

3.5

For product X, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

3.5 percent for each 1 percent decrease in price, ceteris paribus.

The marginal cost curve intersects the minimum of which of the following cost curves?

ATC.

Hideki is the owner/operator of Hideki's Flower Shop. Last year he earned $100,000 in total revenue. His explicit costs were $60,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the course of the year he received three offers to work for other flower shops with the highest offer being $60,000 per year. Calculate Hideki's accounting and economic profit.

Accounting profit = $40,000; economic profit = negative $20,000.

If demand is elastic, then

An increase in price will reduce total revenue.

If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that

Both goods are substitute goods because the cross-price elasticity is +2.

The average fixed cost (AFC) curve

Declines as long as output increases.

Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus:

Fall by 3.5 percent

If marginal utility is rising, then total utility must be falling.

False

If the marginal utility per dollar spent for candy bars is higher than the marginal utility per dollar spent for popcorn, you should buy more popcorn and fewer candy bars in order to maximize utility.

False

If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is elastic.

False

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase in football ticket prices would be expected to cause a 45 percent increase in quantity demanded.

False

The cross-price elasticity sign for substitute goods is negative.

False

The price elasticity of demand for a product tends to be smaller (i.e. less elastic), if the product has a large number of substitutes.

False

Price elasticity of demand refers to

How sensitive buyers are to a change in price.

The cross price elasticity between two products has been measured at 2.0. If the price of the first product is increased by 8%, demand for the second product will _____ and the two goods must be _________.

Increase by 16%; substitute goods

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to

Lower his price to increase revenue.

The law of diminishing returns states that beyond some point, the:

Marginal physical product of a variable input diminishes as more of that input is used.

If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,

New cars are a normal good, and the income elasticity is +2.0.

A good is normal if the sign on the income elasticity formula is

Positive

Utility refers to the:

Satisfaction obtained from a good or service.

Explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

Marginal utility for a good is computed as:

The change in total utility divided by the change in quantity.

consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because:

The marginal utility of the fourth plate would be zero or even negative.

An increase in production in the short run definitely results in an increase in

Total costs.

An individual's consumer surplus is the difference between the maximum price that she or he is willing to pay and the actual price.

True

If the marginal cost curve intersects the average variable cost curve, the averagevariable cost must be at its minimum.

True

If the price elasticity of demand is 0.4, a 5 percent increase in price will quantity demanded to fall by 2 percent.

True

If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two goods are complementary.

True

Marginal utility represents the additional satisfaction obtained from one more unit of a good or service.

True

price elasticity of demand

a measure of the sensitivity of demand to changes in price

implicit costs

are the cost of resources for which no payment is made - that is, the opportunity cost of using those resources. They can be identified only by the entrepreneur.

Variable inputs are defined as any resource that:

can be changed as output changes

If price is reduced and demand is price inelastic, then total revenue will:

decrease.

If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as:

elastic

When E>1

elastic

Economic cost=

explicit cost + implicit cost

In the short run, when a firm produces zero output, total cost equals

fixed costs

The absolute value is used

for the price elasticity of demand is taken in order to determine elastic or inelastic.

A demand curve that is completely elastic is

horizontal

There are no fixed costs

in the long run

When E<1

inelastic

A completely elastic demand curve has an elasticity coefficient of:

infinity

perfectly elastic=

infinity

Variable inputs are

inputs the manager can adjust to alter production

Fixed inputs are

inputs the manager cannot adjust in the short run

A consumer maximizes total utility from a given amount of income when the:

marginal utility per dollar spent on each good is the same.

For complementary goods, the cross-price elasticity is ______

negative

For Substitute goods, the cross-price elasticity of demand is

positive

Marginal cost

refers to additional cost of producing one more unit of output, i.e. change in total costs associated with one more unit of output.

law of diminishing marginal utility

rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

The period in which at least one input is fixed in quantity is the

short run

Ceteris paribus, as the number of substitutes for a good increases, the

should become larger

Marginal Physical Product

the change in total output associated with one additional unit of input

Optimal consumption

the mix of consumer purchases that maximizes the utility attainable from available income

price elasticity of demand

the percentage change in quantity demanded relative to a percentage change in price

long run is defined as

the period of time in which all factors of production are variable

diseconomies of scale.

the situation in which a firm's long-run average costs rise as the firm increases output

Total utility

the total amount of satisfaction obtained from consumption of a good or service

When E=1

unitary