Micro Exam #2

A good is classified as inferior if: a. consumers buy less when income rises. b. consumers buy less when the price rises. c. consumers buy more when income rises. d. consumers buy less when the price falls.

a. consumers buy less when income rises.

The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that output level in which: a. marginal revenue equals marginal cost. b. total revenue is maximized. c. total cost is minimized. d. marginal cost is minimized.

a. marginal revenue equals marginal cost.

Suppose that when output is 20, marginal cost is $20, and average total cost is $30. Then which of the following is most likely to be true? a. Average total cost is declining. b. Average total cost is less than average fixed cost. c. Average total cost is constant. d. Average total cost is rising.

a. Average total cost is declining.

Which of the following represents the key difference between the short run and the long run? a. In the short run, the firm makes commitments to a certain type of production technology, which are represented as fixed costs in the short run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the long run. b. In the short run, all costs are fixed but in the long run, capital costs are variable. c. In the long run, the firm makes commitments to a certain type of production technology which are represented as fixed costs in the long run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the short run. d. The short run refers to less than two years and the long run is over two years.

a. In the short run, the firm makes commitments to a certain type of production technology, which are represented as fixed costs in the short run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the long run.

As shown in Exhibit 8-12, the firm will not produce in the short-run if the price is below: a. OA. b. OB. c. OC. d. OD.

a. OA.

In order to prove that Dr. Pepper and 7-Up are substitutes, economists should test the ____ and get a ____. a. cross-price elasticity; positive number b. price elasticity of demand; number greater than 1 c. income elasticity; positive number d. price elasticity of demand; number less than 1

a. cross-price elasticity; positive number

The long run is a planning period: a. during which the firm can vary all inputs including its plant size. b. less than six months. c. less than five years. d. less than one year.

a. during which the firm can vary all inputs including its plant size.

A firm's opportunity cost of using resources provided by the firm's owners is called: a. explicit costs. b. sunk costs. c. implicit costs. d. fixed costs.

a. explicit costs.

The law of diminishing marginal returns implies that, in the short run: a. the marginal product of the variable input must eventually decrease. b. output must fall beyond a certain point. c. wages of workers must eventually increase. d. price must fall beyond a certain point.

a. the marginal product of the variable input must eventually decrease.

Which of the following best illustrates perfect competition? a. wheat farming b. General Motors advertising campaign for its cars c. Coca-Cola and Pepsi battling for market share d. orange growers setting quotas under the Sunkist cooperative

a. wheat farming

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in price: a. will decrease total revenue. b. raises the price elasticity of demand. c. decreases quantity demanded. d. will increase total revenue.

a. will decrease total revenue.

The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can infer the: a. shop sells 10,000 ice cream cones. b. economic profits are $20,000. c. price is less than average total cost. d. shop will be closed in the long run.

b. economic profits are $20,000

The more elastic the supply of a product, the more the actual burden of a tax on the product will: a. fall on sellers. b. fall on buyers. c. create a smaller deadweight loss (or excess burden). d. fall equally on both buyers and sellers.

b. fall on buyers.

If demand for a good is elastic, then the price elasticity will be: a. equal to zero. b. greater than one. c. equal to one. d. less than one

b. greater than one.

Which of the following best describes why a perfectly competitive firm will sometimes continue producing in the short run even if it incurs a loss? a. Short-run losses turn into long-run profits when there is entry into the market. b. As long as price exceeds average variable cost, the loss from producing will be smaller than the loss from shutting down, which is equal to the amount of total fixed costs. c. If price exceeds average total cost, the loss from covering the fixed costs will be smaller than the loss from covering the variable costs. d. A perfectly competitive firm should never produce if it incurs a loss because it is unable to influence the market price.

b. As long as price exceeds average variable cost, the loss from producing will be smaller than the loss from shutting down, which is equal to the amount of total fixed costs.

Which of the following is true about average fixed cost? a. Average fixed cost is the difference between marginal cost and average total cost. b. Average fixed cost is total fixed cost divided by the quantity of output produced, and it declines steadily as output increases. c. Average fixed cost has a U-shape, and marginal cost crosses average fixed cost at its minimum point. d. Average fixed cost does not vary as output increases.

b. Average fixed cost is total fixed cost divided by the quantity of output produced, and it declines steadily as output increases.

In Exhibit 8-13, the firm's short-run supply curve is the marginal cost curve above point a. B. b. C. c. A. d. D.

b. C.

Suppose the fixed cost of building a nuclear power plant is $1 billion. Suppose also that the only variable cost is the labor of Homer Simpson, and he earns $10 per hour. If the plant generates 1,000 kilowatts each hour, and has already generated 1 billion kilowatts, what can you say about the marginal cost of the next kilowatt? a. The marginal cost is equal to $1.01. b. The marginal cost is equal to $.01. c. The marginal cost is rising. d. The marginal cost is falling.

b. The marginal cost is equal to $.01.

Assuming the demand curve is more elastic (flatter) than the supply curve, which of the following is true? a. It does not make any difference how flat (elastic) the demand curve is; the tax is always split evenly between buyer and seller. b. The smaller the portion of a sales tax that is passed to the consumer. c. The full tax is always passed to the seller no matter how flat (elastic) the demand curve is. d. The full tax is always passed to the consumer no matter how flat (elastic) the demand curve is.

b. The smaller the portion of a sales tax that is passed to the consumer.

If the value of the price elasticity of demand is 0.2, this means that: a. a 0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded. b. a 5 percent decrease in price causes a 1 percent increase in quantity demanded. c. a 0.2 percent decrease in price causes a 1 percent increase in quantity demanded. d. a 20 percent decrease in price causes a 1 percent increase in quantity demanded.

b. a 5 percent decrease in price causes a 1 percent increase in quantity demanded

When total revenue minus total cost is equal to zero, the firm is: a. earning abnormally low profits. b. earning a normal profit. c. losing too much money to stay in business. d. earning above-average economic profit.

b. earning a normal profit.

A downward-sloping portion of a long-run average total cost curve is the result of: a. diseconomies of scale. b. economies of scale. c. the existence of fixed resources. d. diminishing returns.

b. economies of scale.

As shown in Exhibit 7-4, the law of diminishing returns applies in the range of: a. between 0 and 5 workers per day. b. over 3 workers per day. c. over 1 workers per day. d. between 0 and 3 workers per day.

b. over 3 workers per day.

If a demand curve for a good were completely vertical, it would be considered: a. unitary elastic. b. perfectly inelastic. c. perfectly elastic. d. relatively inelastic.

b. perfectly inelastic.

The longer the time period under study, a. the less sensitive consumers will be to price changes. b. the more elastic is the price elasticity of demand. c. the more inelastic is the price elasticity of demand. d. the more likely any given price cut will result in a smaller reaction by the consumer.

b. the more elastic is the price elasticity of demand.

What is the largest possible loss that is consistent with a firm producing in a perfectly competitive market in long-run competitive equilibrium? a. an amount equal to total fixed cost b. zero c. an amount equal to total variable d. an amount equal to price minus average variable cost

b. zero

Assume both the marginal cost and the average variable cost curves are U-shaped. At the minimum point on the AVC curve, marginal cost must be: a. ​at its minimum. b. ​equal to the average variable cost. c. greater than the average variable cost. d. ​less than the average variable cost.

b. ​equal to the average variable cost.

In Exhibit 7-5, the marginal product of the second worker is: a. 20. b. 8. c. 12. d. 10

c. 12.

If automobiles and gasoline are complements, then their cross-elasticity coefficient will be: a. equal to zero. b. positive. c. negative. d. strictly greater than one.

c. negative.

Under perfect competition, which of the following are equal at all levels of output? a. price and marginal cost b. marginal cost and marginal revenue c. price and marginal revenue d. marginal cost and short-run average total cost

c. price and marginal revenue

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then: a. consumers are more responsive to price changes in product A than in product B. b. product A is more elastic than product B. c. product B is more elastic than product A. d. products A and B must be substitutes.

c. product B is more elastic than product A.

All things equal, the price elasticity of supply: a. is the same for the short run and the long run. b. approaches zero in the long run. c. will be greater in the long run than in the short run. d. will be greater in the short run than in the long run.

c. will be greater in the long run than in the short run.

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price elasticity of demand for Starbucks coffee is: a. 2.50. b. 0.40. c. 1.25. d. 0.80.

c. 1.25.

Which of the following is not a characteristic of a perfectly competitive market? a. Firms sell a homogeneous product. b. Firms can easily enter or exit the market. c. Firms are price makers, not price takers. d. There is a large number of small firms.

c. Firms are price makers, not price takers.

Suppose the value of income elasticity of demand for a private college education is equal to 1.5. This means that: a. a 10 percent decrease in private college tuition will have a large enough income effect to increase spending on private college education by 15 percent. b. a 15 percent increase in income causes a 10 percent increase in the quantity of private college education purchased. c. a 10 percent increase in income causes a 15 percent increase in the quantity of private college education purchased. d. every $1 increase in income provides an incentive for a $1.50 increase in expenditures on private college education.

c. a 10 percent increase in income causes a 15 percent increase in the quantity of private college education purchased.

The short-run supply curve for a perfectly competitive firm is the marginal cost curve ​ a. above the minimum point of the average variable cost (AVC) curve because as the price falls, the firm maximizes profit by producing more output to account for a smaller profit margin on each unit. b. above the minimum point of the average total cost (ATC) curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of ATC the firm will shut down to minimize its losses. c. above the minimum point of the average variable cost (AVC) curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of AVC the firm will shut down to minimize its losses. d. at all price levels because the firm chooses the profit-maximizing quantity of output where marginal revenue equals marginal cost.

c. above the minimum point of the average variable cost (AVC) curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of AVC the firm will shut down to minimize its losses.

The opportunity costs associated with the use of resources owned by a firm are: a. sunk costs. b. explicit costs. c. implicit costs. d. externalities.

c. implicit costs.

As the economy recovers from a recession, we should expect that demand for: a. all goods will rise. b. all goods will fall. c. inferior goods will fall and demand for normal goods will rise. d. inferior goods will rise and demand for non-inferior goods will fall.

c. inferior goods will fall and demand for normal goods will rise.

As market price increases in the short run, a profit-maximizing firm in a perfectly competitive market will expand output along its: a. average variable cost curve. b. market demand curve. c. marginal cost curve. d. average total cost curve.

c. marginal cost curve.

The demand for the product of a competitive price-taker firm is: a. perfectly inelastic. b. dependent on the availability of substitutes for the firm's product. c. perfectly elastic. d. greater than zero but less than one.

c. perfectly elastic.

In Exhibit 7-14, constant returns to scale only exist for output levels between: a. 3,000 and 4,000. b. 1,000 and 2,000. c. 0 and 1,000. d. 2,000 and 3,000.

d. 2,000 and 3,000.

If a straight-line demand curve slopes down, price elasticity will: a. remain the same at all points on the demand curve. b. always equal one. c. always be greater than one. d. change between any two points along the demand curve.

d. change between any two points along the demand curve.

When the curve that envelops the series of possible short-run average total cost curves is horizontal, this means that there are: a. diseconomies of scale. b. diminishing returns. c. economies of scale. d. constant returns to scale.

d. constant returns to scale.

Cash payments to a steel mill for steel used in production would be an example of: a. entrepreneurial costs. b. fixed costs. c. implicit costs. d. explicit costs.

d. explicit costs.

In a perfectly competitive industry, assume the short-run average total cost increases as the output of the industry expands. In the long run, the industry supply curve will: a. be perfectly vertical. b. be perfectly horizontal. c. have a negative slope. d. have a positive slope.

d. have a positive slope.

If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is: a. perfectly inelastic. b. elastic. c. unitary elastic. d. inelastic.

d. inelastic.

If a competitive firm is losing money then it should: a. shut down if its total fixed costs are greater than losses. b. always shut down. c. raise its price. d. shut down if its losses are greater than total fixed costs.

d. shut down if its losses are greater than total fixed costs.

Economic profit is: a. total revenues minus implicit costs. b. total revenues minus explicit costs. c. total revenues minus variable costs. d. total revenues minus explicit costs minus implicit costs.

d. total revenues minus explicit costs minus implicit costs.

In Exhibit 7-14, the U-shaped LRAC curve indicates which of the following as quantity increases from 0 to 4,000? a. Constant returns to scale; economies of scale; diseconomies of scale. b. Diseconomies of scale; constant returns to scale; economies of scale. c. Economies of scale; diseconomies of scale; constant returns to scale. d. Economies of scale; constant returns to scale; diseconomies of scale.

d. Economies of scale; constant returns to scale; diseconomies of scale.

As shown in Exhibit 8-12, the firm will shut down in the short-run at a price below: a. OD. b. OB. c. OC. d. OA.

d. OA

As shown in Exhibit 8-12, if the price is OD, the firm's total revenue at its most profitable level of output is: a. OYFB. b. OXLD. c. OYHD. d. OZID

d. OZID.

Which of the following is a characteristic of a competitive price-taker market? a. Profit maximizing firms in the market will expand output until price equals average variable cost. b. The product produced by each of the firms is differentiated. c. The market demand curve for the product is a horizontal line. d. There are many firms in the market, each producing a small share of total market output.

d. There are many firms in the market, each producing a small share of total market output.

The difference between a firm's total revenues and total costs when all explicit and implicit costs are included is the firm's: a. accounting profit. b. opportunity cost of capital. c. long-run average total cost. d. economic profit.

d. economic profit.

If the price of a product is $12, its average total cost is $2 and its average total cost is $15 at the profit-maximizing output level, in the short run the firm: a. must always shut down. b. should expand output until MR = MC. c. cannot cover total fixed costs. d. experiences a loss.

d. experiences a loss.

A 10 percent rise in the price of housing reduces the quantity demanded of housing by 3 percent. We can conclude that the demand for housing is: a. perfectly elastic. b. unitary elastic. c. elastic. d. inelastic.

d. inelastic.

Good A has a price elasticity of demand of .27, while good B has a price elasticity of demand of 2.9. To raise the most tax revenue, the government should: a. subsidize the production of good B. b. place a unit tax on good B. c. raise the price elasticity of demand for good A. d. place a unit tax on good A.

d. place a unit tax on good A.

If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should: a. shut down. b. produce only enough to cover variable costs. c. produce until the average total cost and average revenue are equal. d. produce where MR = MC.

d. produce where MR = MC

If a firm equates MR and MC, then: a. output is at a maximum. b. both TR and TC are at a maximum. c. TR is at a maximum, and TC is at a minimum. d. profits are at a maximum or losses are at a minimum.

d. profits are at a maximum or losses are at a minimum.

The total fixed cost curve: a. increases with output. b. decreases with output. c. varies with the quantity of inputs used. d. remains constant regardless of output.

d. remains constant regardless of output.