Micro Final Exam
Cindy is starting a dog grooming business - the "Furry Godmother." Cindy will purchase a new dog washing station for $3,000. At the end of the year, she thinks she could sell it used for $1,200. Cindy can borrow or save at a constant interest rate of 5 percent. What is the opportunity cost of the dog washing station for the first year of her business?
$1,950
Back in June, Gritty bought himself a ticket to attend a Flyers hockey game for $95. The game is next week, and he is debating whether to go to the game or not. If the Flyers ticket can be sold now on the re-sale ticket market for $75, what should Gritty consider to be the opportunity cost of attending the game in terms of the ticket to the hockey game?
$75
The following equation gives the demand for beer for a month, where P is the price per six-pack and Q measures thousands of six packs. Q = 210 - 5P If the price of a six-pack of beer is currently $4, what is the price elasticity of demand for beer?
-0.105
If the price of cranberry juice rises 10 percent, and as a result, the quantity demanded falls by 8 percent, the price elasticity of demand for cranberry juice is
-0.80.
Oscar has $45 per week to spend on two goods, yoga classes (Y=number classes per week) and fruit smoothies (S=number of smoothies per week).The price of Y is $15 per class and the price of S is $5 per smoothie. Assume yoga classes (Y) are measured on the vertical axis and fruit smoothies (S) are measured on the horizontal axis. What is the slope of his budget line?
-1/3
If at a point on an indifference curve, the marginal utility of good X (the horizontal good) is equal to 4 and the marginal utility of good Y (the vertical good) is equal to 2, the Marginal Rate of Substitution is equal to
-2
As in the previous question, Oscar has $45 per week to spend on two goods, yoga classes (Y=number classes per week) and fruit smoothies (S=number of smoothies per week).The price of Y is $15 per class and the price of S is $5 per smoothie. Assume yoga classes (Y) are measured on the vertical axis and fruit smoothies (S) are measured on the horizontal axis. Suppose Oscar is at a point on his budget line. Which of the following is an example of a market trade that will keep Oscar on his budget line?
1 less yoga class for 3 more smoothies
If MC is below ATC
ATC is falling
if MC is above ATC
ATC is rising
MRTS
Change in K/Change in L OR -w/r horizontal good/vertical good
bang for buck method
MUx / MU y = Px / Py --> MUx / Px = MUy / Py IF EQUAL, that is the optimal bundle
MRT (supply) - slope of the budget line
Marginal cost of x / Marginal cost of y
MRS (demand)
Marginal utility of x / Marginal utility of y change in x / change in y
If MC is positive and decreasing as output rises
TC is increasing at a decreasing rate
Which of the following statements best fits the description of the choice in the "consumer problem?"
The consumer chooses the bundle of goods that maximizes their utility given their budget constraint
If the Food and Drug Administration (a U.S. federal agency in charge of regulation of tobacco products) rules that vaping products that contain nicotine can no longer be sold, what impact will this have on the price elasticity of demand for traditional cigarettes?
The price elasticity of demand for traditional cigarettes will become less elastic because there will be fewer close substitutes for cigarettes
If the price elasticity of demand for whole milk is equal to -0.4, what must have happened to the price of whole milk if the quantity demanded of whole milk decreased by 2 percent?
The price must have increased by 5 percent.
Underlying assumptions about the supply and demand model
There are low transactions costs, There are many buyers and sellers in the market, buyer and sellers have equal amount of information about the good being sold, All units of the good or service are identical or "homogeneous."
X is inferior, Y is normal, D for X slopes upward, Px decreases
X decreases (SE up - small, IE down - big), Y increases (SE down - small, IE up - big)
X is inferior, Y is normal, D for X slopes downward, Px decreases
X increases (SE up - big, IE down - small), Y increases (SE down - small, IE up - big)
X and Y are both normal goods (substitutes) Px decreases
X increases (SE up, IE up), Y decreases (SE down - big, IE up - small)
X and Y are both normal goods (complements) Px decreases
X increases (SE up, IE up), Y increases (SE down - small, IE up - big)
In consumer theory, when income (I) increases
a consumer will choose more of a good if the good is normal, the budget line will shift outward, parallel to the original budget line, and the consumer's utility will increase regardless of whether the goods are normal or inferior
mark-up pricing of a price setting firm results in
a higher price being charged the less elastic the demand
A good that has an income elasticity of demand greater than 1 is called
a luxury good
In the short run, diminishing marginal returns to labor occurs because
additional units of labor have less capital to work with and there are fewer gains from specialization/coordination
The goals of workers at a for-profit firm
are often in opposition to the goal of owners of the firm because workers want higher pay and better working conditions.
Marginal cost intersects average variable cost
at the minimum point of average variable cos
If marginal revenue is positive and constant as output changes
average revenue will also be constant and equal to marginal revenue.
if quantities of both goods increase with the income effect
both are normal goods (not substitutes even if SE makes Q of one good go down)
Economies of scope
can occur when large firms share some labor costs (such as human resources or marketing departments) across multiple product lines.
if Px decreases, the substitution effect of good x
causes Qx to increase and Qy to decrease
If the price elasticity of demand for eggs is equal to -0.75 at the current price and price increases by 1 percent, quantity demanded will
decrease by approximately 0.75 percent.
At its current choice of K and L, a firm's marginal product of labor is 3 and its marginal product of capital is 6. If the firm adds one unit of capital but does not want its output quantity to change, the firm must
decrease labor by 2 units.
At its current choice of K and L, a firm's marginal product of labor is 4 and its marginal product of capital is 12. If the firm adds one unit of capital but does not want its output quantity to change, the firm must
decrease labor by 3 units.
The FUNDAMENTAL reason why supply curves slope upward in the short run is
diminishing marginal returns occur as output increases.
Nonsatiation or the "greed principle" assumption of consumer preferences implies indifference curves will be:
downward sloping
If the marginal products of capital and labor are positive and there are diminishing marginal returns to both capital and labor, an isoquant will be
downward sloping and convex
if substitution effect > income effect
downward sloping consumption curve
normal goods have a
downward sloping relationship in two-good consumer diagrams
over time, ATC and AVC
get closer and closer together, as AFC gets spread out among increasing output
An indifference curve
has a fixed level of utility or satisfaction at every point on the indifference curve.
for an inferior good, IE and SE work
in opposite directions
for a normal good, IE and SE work
in the same direction (if Px decreases, IE and SE increase Qx, if Px increases, IE and SE decrease Qx)
The change in the consumption of a good resulting from a change in real income or purchasing power, holding prices fixed at the new price ratio is called the
income effect of a price change.
If the price elasticity of supply for corn is equal to 1.2 at the current price and price increases by 3 percent, quantity supplied will
increase by 3.6 percent.
If the marginal cost of production is positive and decreasing as output increases, total cost is
increasing at a decreasing rate as output increases.
If the marginal cost of production is positive and increasing as output increases, total cost is
increasing at an increasing rate as output increases.
A monopoly firm's demand curve
is downward sloping and equal to the market demand curve.
When the demand curve is downward sloping, MR is
less than price
If a firm doubles its use of all inputs in production in the long run,
long run total cost will double but long run average cost could increase, decrease or stay the same.
the fundamental reason market supply curves are upward sloping is that
marginal cost is upward sloping due to the law of diminishing marginal returns
Typically, the short run marginal cost of production increases after some point. This is because
marginal product of labor begins to decline at some point
What do economists assume is the main goal of owners of private for-profit firms?
maximize profit
minimizing total cost when cost of labor and capital are equal
means choosing quantities of inputs so that the marginal products of each input is equal
at the monopoly's profit maximizing level of output
price is greater than marginal cost
diseconomies of scale
production becomes less efficient as the number of goods being produced increases, LRATC increases as output increases (BAD)
when decreasing returns to scale happens
production becomes less efficient when output increases partly due to difficulties running a large company with many employees
economies of scale
production becomes more efficient as the number of goods being produced increases, LRATC decreases as output increases (GOOD)
as the manager of a firm that is making a positive profit, you calculate the marginal revenue is $152 and the marginal cost is $200, you should
reduce output until MR = MC
MC intersects ATC to the ____ of AVC
right
The long run average cost curve
shows the minimum average cost of producing each level of output in the long run, is always less than or equal to the short run average total cost at each level of output, and can be downward sloping or upward sloping depending on how output is changing with input usage.
Qk = 75 − 5Pk + 2Ps where Qk is the quantity of kale measured in thousands of pounds per week Pk is the price of kale measured in dollars per pound, and Ps is the price of spinach measured in dollars per pound. In the above demand equation, spinach and kale are
substitutes because the price of spinach has a positive effect on the quantity demanded of spinach.
The change in the consumption of a good resulting from a change in relative prices, holding utility fixed at the original level, is called the
substitution effect of a price change
marginal returns
the additional output resulting from a one unit increase in the use of variable inputs, while other inputs are held constant.
what is the optimal bundle that maximizes utility
the bundle that is tangent to the IC and on the budget line, where MRS = MRT
When a firm's long run average cost is increasing as output is increasing
the firm could be experiencing decreasing returns to scale.
If a firm is selling an output for which marginal cost is increasing (upward sloping) and marginal cost is greater than marginal revenue at that output,
the firm should decrease output to increase its profit.
An individual firm's supply curve is equal to
the firm's marginal cost curve above minimum average variable cost
If the quantity of brown rice demanded decreases by 4 percent when consumers' incomes increase by 2 percent,
the income elasticity of demand for brown rice is equal to -2 and brown rice is an inferior good
when the marginal product of labor is falling
the marginal cost of production is rising
If the quantity in a perfectly competitive market is greater than the equilibrium quantity due to some government intervention in the market,
the marginal cost to society will be greater than the marginal benefit to society
In the long run for a perfectly competitive market in which all firms have the same costs of production,
the market price will be equal to the minimum long run average cost, all firms in the market are earning zero economic profit, and each firm is maximizing profit at the equilibrium price determined by the market supply and demand curves.
isoquants are convex because of
the property of diminishing marginal product - adding inputs will increase output at a decreasing rate
diminishing returns to scale
the property whereby each additional constant increase in inputs results in a smaller increase in the quantity produced
Suppose the price elasticity of demand for attending a University is equal to −2.5, where "price" is the yearly tuition. If the University increases tuition,
the quantity of students attending will decrease, and total revenue will decrease.
If a price ceiling is imposed on a perfectly competitive market at a price below the equilibrium price,
the quantity sold will be less than the equilibrium quantity.
Olivia prefers wine over beer, and she prefers gin over wine. If Olivia's preferences are transitive
then she prefers gin over beer.
Economic profit is equal to
total revenue - total economic cost.
if a firm's demand curve is horizontal
total revenue always increases
if a firms linear demand curve is downward sloping
total revenue increases then decreases as output increases
Marginal Utility of good X (or MUX) is positive but decreasing as X increases, holding all else constant. This means
total utility will increase but at a decreasing rate as X increases, the consumer is willing to trade a greater amount of X for more of another good as the amount of X increases to keep utility constant, and the consumer's preferences satisfy nonsatiation and diminishing marginal utility.
if income effect > substitution effect
upward sloping consumption curve (could be a Giffen Good if inferior)
Along any downward sloping linear demand curve the price elasticity
varies at every point, but the slope is constant.
To determine the market demand curve from individual consumers' demand curves,
we horizontally sum the individual demand curves to find the total quantity demanded at each price
diminishing marginal returns
when the marginal gain in output diminishes as each additional unit of input is added
For consumers with convex, well-behaved indifference curves over two goods, X and Y, the substitution effect of an increase in the price of X:
will always lead to a decrease in the quantity of X and an increase in the quantity of Y
In the two-good consumer model, if a consumer's income doubles and the price of both goods X and Y also double, the consumer's optimal choices of X and Y
will be exactly the same amounts as prior to the income and price changes.
The market demand for wheat is QW = 100 - 2PW + 1.5PB where PB is the price of barley (an alternative grain) and QW and PW are the quantity demanded and price of wheat, respectively. According to this demand curve, the cross-price elasticity of wheat with respect to the price of barley
will be positive and the two goods are substitutes.
In the short run, an increase in the fixed costs for a perfectly competitive firm
will have no effect on the firm's profit-maximizing quantity.
For consumers with convex, well-behaved indifference curves over two goods, X and Y, the income effect of an increase in the price of X:
will lead to a decrease in the quantity of X only if X is a normal good.
