MICRO Midterm

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be

perfectly elastic.

Total revenue minus both explicit and implicit costs defines a firm's:

profit.

If a consumer buys two different goods, the rational spending rule requires that the:

ratio of marginal utility to price be equal for the two goods. *The rational spending rule maintains that the ratio of marginal utility to price must be the same for both goods.

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

resources; satisfaction

The law of demand indicates that as the cost of an activity:

rises, less of the activity will occur.

The tendency for marginal utility to decline as consumption increases beyond some point is called:

the law of diminishing marginal utility.

Real price

the nominal price of a good relative to the average dollar price of all other goods

Utility

the satisfaction people derive from consumption

If marginal utility is positive, then as consumption increases:

total utility will increase.

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs.

According to economists, the satisfaction people get from their consumption activities is called:

utility.

Growing rice requires extensive irrigation in California. Economists consider water to be a ______ for rice farmers in California.

want

Taking a limousine to a five-star restaurant in New York is a:

want to both Joe Average and Richie Rich.

Higher education is a ______ and assigned textbooks are ______.

want; wants

Shelter for homeless people is an example of:

a need.

The long run is best defined as:

a period of time sufficiently long that all factors of production are variable.

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed.

Refer to the accompanying table. The law of diminishing marginal utility:

applies to both Good A and Good B.

According to the law of demand, when the price of shoes ______, people will consume ______ shoes.

falls; more

Refer to the accompanying figure. As Jeff watches more movies, his marginal utility:

gets smaller

An imperfectly competitive firm is one that:

has at least some influence over the market price.

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce.

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the first three pies you ate.

increased

price elasticity of demand

is defined as the percentage change in quantity demanded from a 1% change in price

Cory gets 18, 23, and 25 units worth of total utility from consuming 10, 11, and 12 raw oysters, respectively, and the price per oyster is 25 cents. Thus, one can infer that Cory:

is experiencing diminishing marginal utility. *The marginal utility of consuming an additional oyster gets smaller as more oysters are consumed. The marginal utility is 5 for the 11th oyster (total utility goes from 18 to 23) and 2 for the 12th oyster (total utility goes from 23 to 25), which is consistent with the law of diminishing marginal utility.

In some countries, medical care is provided free-of-charge to citizens and is paid for by the government. In those countries, medical care:

is rationed by some non-monetary method.

The ______ combination of goods is the combination that yields the highest total utility given a consumer's income.

optimal

After subsistence levels of food, shelter, and clothing have been provided, economists refer to all other goods and services as:

"wants."

What is this seller's reservation price for the 250th unit?

$4

The first hour John spends cleaning windows costs him ______ that he could have earned in the grocery store.

$7

Refer to the accompanying figure. The marginal utility of the 7th pizza is:

-5

Refer to the accompanying figure. The marginal utility of the 5th apple is:

-5 *Since total utility decreases from 50 to 45 when the 5th apple is consumed, the marginal utility of the 5th apple is -5.

Refer to the accompanying table. The marginal utility of the 4th dinner out per week is:

15 *The 4th dinner out per week increases total utility from 235 to 250, so the marginal utility of the 4th dinner is 15

Refer to the accompanying table. The total utility of consuming two dinners out per week is:

175 *The total utility of one dinner is 100, and the marginal utility of the second dinner is 75, so the total utility of two dinners is 175.

How many hours a day should John spend cleaning windows?

2 *John's opportunity cost of spending an hour cleaning windows is $7. His benefit from the first hour cleaning windows is $2 × 7 = $14. His benefit from his second hour cleaning windows is $2 × 4 = $8, and his benefit from his third, fourth and fifth hour cleaning windows is $6, $4 and $2, respectively. Thus, his benefit of spending an hour cleaning windows is only greater than his opportunity cost for the first 2 hours he spends cleaning windows.

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Dusty can buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

20; 10

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product. *In perfectly competitive markets, all firms sell the same standardized product. Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the market demand curve does not have to be perfectly elastic.

Which of the following would be considered a factor of production in the provision of bus service?

Bus drivers

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good.

The additional utility gained from consuming an additional unit of a good is called:

marginal utility.

Joe is shopping for a new computer. A computer can be delivered to Joe's home for $1,200. Alternatively, Joe can pick up the same computer at the warehouse for $1,000. How should Joe buy the computer?

Joe should drive to the warehouse if his cost of driving to the warehouse is less than $200.

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:

MUc/Pc will fall *We typically expect goods to satisfy the law of diminishing marginal utility. That is, as our consumption increases, the additional utility gained from consuming an additional unit of a good will fall. Thus, as Pablo's consumption of coffee increases, we would expect MUc/Pc to fall.

Law of demand

People do less of what they want to do as the cost of doing it rises

law of diminishing marginal utility

Tendency for additional utility gained from consuming an additional unit of a good to decrease as consumption increases beyond some point

Which of the following is the most likely to be a fixed factor of production at a farm?

The land on which the farm is located

Suppose a cup of tea costs $0.60 and a scone costs $1.20. If Edith spends all of her income on these two goods, and at her current level of consumption, she receives a marginal utility of 6 utils from the last cup of tea she buys and a marginal utility of 24 utils from the last scone she buys, then Edith should:

buy less tea and more scones. *Since MUT/PT = 10 and MUS/PS = 20, Edith should reallocate her spending away from tea and towards scones.

As Lynn eats more pizza, we would typically expect her marginal utility from eating pizza to:

decrease.

It is impossible for total utility to be ______ when marginal utility is ______.

decreasing; positive

If price elasticity is greater than 1 demand is:

elastic

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increases the output.

The tendency for consumers to purchase more of a good or service as its price falls is captured by the:

law of demand

If Terry's total utility is maximized when he owns 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs.

less than

The primary objective of most private firms is to:

maximize profit

The rational spending rule is derived from the consumer's desire to:

maximize utility.

In most markets, scarce goods or services are rationed among competing users using:

monetary prices

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. You got ______ utility from eating the first pie than from eating the third pie.

more

Joaquin's marginal utility from an additional slice of pumpkin pie is 4 utils and his marginal utility from an additional slice of pecan pie is 6 utils. If a slice of pumpkin pie costs $2.50, and a slice of pecan pie costs $3.00, then Joaquin:

should reallocate his spending towards pecan pie and away from pumpkin pie. *Since Joaquin's marginal utility per dollar spent on pumpkin pie is 4/2.5 = 1.6 utils, while his marginal utility per dollar of pecan pie is 6/3 = 2 utils, Joaquin should reallocate his spending towards pecan pie and away from pumpkin pie to maximize his utility.

Rational Spending Rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services

supply *John's opportunity cost of cleaning another window is his reservation price, the minimum amount you would have to pay him to get him to clean another window.

Nominal price

the absolute price of a good in dollar terms

Consumer surplus

the difference between the buyers reservation price and the market price

Refer to the accompanying figure. The marginal utility of the 6th pizza is:

5

Refer to the accompanying figure. The total utility of consuming two pizzas a week is:

55

Refer to the accompanying table. The marginal utility of the 3rd dinner is:

60. *The total utility of two dinners is 175 (100 from the first dinner and 75 from the second dinner) and the total utility of the three dinners is 235, so the marginal utility of the third dinner is 60 (since the third dinner increases total utility from 175 to 235).

What is John's opportunity cost of cleaning windows for an hour?

7 *Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.

Refer to the accompanying figure. The total utility of consuming 4 pizzas a week is:

90

Blair has vast riches and consumes thousands of dollars' worth of consumer goods each week, yet she is never satisfied. Why not?

People's wants are unlimited.

law of diminishing marginal utility

Tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point