Micro Exam 2

According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Based on the information above, the demand for hotel rooms is

inelastic.

At a price of $8 per dozen, Chuy sells 40 dozen homemade tamales per week. When he raised his price to $12 per dozen, he still sold 40 dozen per week. Based on this information, the demand for his tamales is

perfectly inelastic.

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

implicit costs

a non-monetary opportunity cost

Brett buys a new cell phone for $100. He receives consumer surplus of $80 from the purchase. How much does Brett value his cell phone?

$180

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. Refer to Figure 4-3. What is the value of producer surplus at a price of $18??

$240

Lucinda buys a new GPS system for $250. She receives consumer surplus of $75 from the purchase. How much does Lucinda value her GPS system?

$325

midpoint formula

(end value - start value) / midpoint x 100

Calculating percentage change

(end value - start value) / start value x 100

Which of the following statements is false?

An explicit cost is a nonmonetary opportunity cost.

Economic surplus

-is equal to the sum of consumer surplus and producer surplus.

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

0.5

If a 6 percent increase in income leads to a 4 percent increase in quantity demanded for audio books the income elasticity of demand is

0.67.

Determinants of Price Elasticity of Supply

1. availability of inputs 2. flexibility of the production process 3. adjustment time

Why do some goods have a high price elasticity of demand, while others have a low price elasticity of demand?

1. the availability of close substitutes 2. the passage of time 3. whether a good is a luxury or necessity 4. the definition of the market 5. The share of a good in a consumer's budget

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships?

1.6

If 50 units are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula.

1.62

The price elasticity of supply of hot dog buns is estimated to be 1.5. Holding everything else constant, this means that a 10 percent decrease in the price of hot dog buns will cause the quantity of hot dog buns supplied to decrease by

15 percent.

Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand?

2.69

Figure 4-6 shows the demand and supply curves for the almond market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at Pf. Refer to Figure 4-6. What area represents consumer surplus after the imposition of the price floor?

A

Suppose the value of the price elasticity of demand is -3. What does this mean?

A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

relatively elastic demand

A change in price leads to a more than proportional change in the quantity demanded.

relatively inelastic demand

A change in price leads to a smaller than proportional change in the quantity demanded.

Elasticity

A measure of how much one economic variable responds to changes in another economic variable, based on percentage changes in the variables. -numerical measure of the responsiveness of Qd or Qs to one of its determinants

Which of the following is an implicit cost of production? A) rent that could have been earned on a building owned and used by the firm B) the utility bill paid to water, electricity, and natural gas companies C) wages paid to labor plus the cost of carrying benefits for workers D) interest paid on a loan to a bank

A) rent that could have been earned on a building owned and used by the firm

Which of the following could explain why the demand for table salt is inelastic? A. Households devote a very small portion of their income to salt purchases. B. Salt is a luxury good. C. Salt is a luxury for high income consumers but a necessity for low income consumers. D. Salt is a rare commodity.

A. Households devote a very small portion of their income to salt purchases.

Which of the following is a fixed cost? A) costs of raw materials B) payment to hire a security worker to guard the gate to the factory around the clock C) payments to an electric utility D) wages to hire assembly line workers

B) payment to hire a security worker to guard the gate to the factory around the clock

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant? A. Demand is likely to be perfectly elastic. B. Demand is likely to be relatively inelastic. C. Demand is likely to be unit elastic. D. Demand is likely to be relatively elastic

B. Demand is likely to be relatively inelastic.

availability of close substitutes

If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand.

Which of the following would result in a higher absolute value of the price elasticity of demand for a product? A. The expenditure on the good is small relative to one's budget. B. The good is a necessity. C. A wide variety of substitutes are available for the good. D. The time period under consideration is short.

C. A wide variety of substitutes are available for the good.

What is consumer surplus? Why would policy makers be interested in consumer surplus?

Consumer surplus is the difference between the highest price consumers are willing to pay for a good or service and the actual price a consumer pays. This would interest policymakers because it shows them the efficiency of producing or selling a good to consumers at a particular price and tells them if it needs to be adjusted.

fixed costs

Costs that do not vary with the quantity of output produced

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's total cost per day when she produces 50 gyros using two workers? A) $100 B) $124.40 C) $220 D) $340

D) $340

Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 in expenses on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs for the first year? A) $80,000 B) $70,000 C) $42,000 D) $41,500

D) $41,500

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?

Demand is likely to be relatively inelastic.

Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?

It is perfectly inelastic.

The demand for gasoline is perfectly inelastic because most people need gasoline to drive their cars.

False

substitutes

Goods and services that can be used for the same purpose.

If the price elasticity of demand for canned soup is estimated at -1.62. What happens to sales revenue if the price of canned soup rises?

It rises.

Jennifer Borts moves her office from the premises she rents at a local mall to her home. As a result of this move, ______________

Jennifer's explicit costs fall and her implicit costs rise.

Whether the good is a luxury or a necessity

People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries

price elasticty of demand

Percentage change in quantity demanded/Percentage change in price Measures the responsiveness to price changes -measures how much Qd responds to a change in Price

Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15 million gallons a day were sold. In October 2004, the price averaged $2.15 a gallon and 14 million gallons were sold. If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate whether demand was elastic or inelastic.

Price elasticity of demand = [(14 - 15) / (15 + 14)/2 ] / [(2.15 - 1.35) / (1.35 + 2.15)/2] = (-1 / 14.5) / (0.80 / 1.75) = (-0.069 / 0.457) = -0.15. Price elasticity of demand equals 0.15 (in absolute value) indicating that demand was inelastic.

long run

That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.

opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

the passage of time

The more time that passes, the more elastic the demand for a product becomes.

The cross-price elasticity between Gillette razors and a related good is -3.4. What happens to the demand for the related good if the price of Gillette razors falls by 10 percent?

The quantity demanded of the related good rises by 34 percent.

What is the difference between total costs, variable costs, and fixed costs?

Total costs are the costs of all inputs use in production, including variable and fixed costs. Variable costs are costs that change as output changes. Fixed cost are costs that remain constant as output changes.

If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic.

True

The price elasticity of demand for Kellogg's Raisin Bran is larger in absolute value than the price elasticity for all breakfast cereals.

True

True or False: The short run is the time period during which a firm has at least one input constraint.

True

Technological change is a key reason why Wal-Mart has become one of the largest firms in the world. Which of the following is a change in technology implemented by Wal-Mart?

Wal-Mart developed a supply chain that allows it to manage inventories efficiently.

perfectly inelastic supply

When the percentage change in the quantity supplied is zero for any percentage change in the price.

Consider the following pairs of items: a.shampoo and conditioner b.iPhones and earbuds c.a laptop computer and a desktop computer d.beef and pork e.air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

a and b only

Ranchers can raise either cattle or sheep on their land. Which of the following would cause the supply of sheep to increase?

a decrease in the price of cattle

normal good

a good that consumers demand more of when their incomes increase

black market

a market in which buying and selling take place at prices that violate government price regulations

economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

income elasticity of demand

a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income

Which of the following products comes closest to having a perfectly inelastic demand? A. cholesterol medication in general B. bus rides C. iPhones D. gasoline

cholesterol medication in general

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

complements

The maximum price that a buyer is willing to pay for a good measures his

consumer surplus.

variable costs

costs that change as output changes

explicit costs

costs that require a firm to spend money

The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means that a 20 percent increase in the price of beef, holding every thing else constant, will cause the quantity of beef demanded to

decrease by 12 percent.

inelastic demand

demand in which changes in price have little or no effect on the amount demanded

In 2016, Philadelphia imposed a tax of 1.5 cents per ounce on sweetened beverages, and PepsiCo indicated that its sales in Philadelphia fell by 40 percent after the tax took effect. If the price of PepsiCo's sweetened beverages in Philadelphia increased by 32 percent following the implementation of the tax, then demand for sweetened beverages in Philadelphia would be

elastic.

inferior goods

goods and services for which the quantity demanded falls as income increases

compliments

goods and services that are used together

The difference between the ________ for a good and the ________ is called consumer surplus.

highest price a consumer is willing to pay; price the consumer actually pays

the share of a good in a consumer's budget

if a good is a small portion of your budget, you will likely not be very sensitive to its price

Economic costs include both _____________ costs and _____________ costs.

implicit and explicit

To affect the market outcome, a price ceiling______

must be set below the legal price.

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is

negative, so Sefton considers potatoes to be an inferior good.

producer surplus measures the _______ benefit received by producers from participating in a market.

net

consumer surplus measures the _________ benefit to consumers from participating in a market rather than the total benefit

net benefit

For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between gasoline and public transportation is

positive

In New York City, about 1 million apartments are subject to rent control by the local government. Rent control ______________

puts a legal limit on the rent that landlords can charge for an apartment.

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

perfectly elastic demand

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

total cost

the cost of all the inputs a firm uses in production

marginal cost

the cost of producing one more unit of a good

Most people buy salt infrequently and in small quantities. Even a doubling of the price of salt is likely to result in a small decline in the quantity of salt demanded. Therefore

the demand for salt is relatively inelastic.

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

When demand is elastic, a fall in price causes total revenue to rise because

the increase in quantity sold is large enough to offset the lower price.

Definition of the Market

the more narrowly we define a market, the more elastic demand will be

Midpoint

the number halfway between the start and end values -also the average of those values

price elasticity of supply

the percentage change in quantity supplied divided by the percentage change in price

short run

the period of time during which at least one of a firm's inputs is fixed

economic surplus

the sum of consumer surplus and producer surplus

total revenue

the total amount of money a firm receives by selling goods or services -calculated by multiplying the price per unit by the number of units sold

Refer to Figure 3-5. At a price of $15,

there would be a surplus of 4 units.

average total cost

total cost divided by the quantity of output

Perfectly inelastic demand is represented by a demand curve which is ________, and relatively inelastic demand is represented by a demand curve which is ________.

vertical; downward sloping

Which of the following is typically considered a fixed cost by academic book publishers but a variable cost by companies that print books?

wages and salaries

perfectly elastic supply

when the quantity supplied changes by a very large percentage in response to an almost zero percentage change in price

If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded

will decrease by 45 percent.

If the demand for a product is perfectly inelastic, a decrease in the price of the product

will decrease total revenue.

If demand is perfectly inelastic, the absolute value of the price elasticity coefficient is

zero.