Micro Test 04/01/19

a. FC + VC = b. TC/Q = c. FC/Q = d. VC/Q = e. AFC + AVC =

a. Total Cost b. Average Total Cost c. Average Fixed Cost d. Average Variable Cost e. Average Total Cost

Classify each of the following as fixed or variable costs for a coffee shop (assuming the short run): a. Coffee beans. b. Baristas. c. Espresso machine. d. Lease on the store.

a. Variable Cost b. Variable Cost c. Fixed Cost d. Fixed Cost

In the early 2000s car makers began to design vehicles' chassis, engine, and transmissions so that different models could be produced on the same assembly line. Within the first year of implementing the plan, Ford cut production costs by $240 per car. a. What cost concept was Ford taking advantage of to produce its savings? a. Diminishing marginal productivity b. Depreciation c. Increasing marginal productivity d. Economies of scale e. Economies of scope b. What effect did the plan likely have on Ford's short-run average total cost curve? a. The plan shifted the average total cost curve down. b. The plan shifted the average total cost curve up. c. The plan produced a more steeply-sloped total cost curve. d. The plan produced a flatter total cost curve.

(a) - d, economies of scale and e, economies of scope. (b) - A, the plan shifted the average total cost curve down.

Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer. A. A greater effect on equilibrium quantity in the long run because the longer the time period, the more elastic is the good's demand. B. The same effect on equilibrium quantity in the short run and the long run because when analyzing one good, it is predicted that elasticity does not change. C. A greater effect on equilibrium quantity in the short run because elasticity is higher the shorter the time period. This would lead consumers to adjust their quantity greatly. D. A greater effect on equilibrium quantity in the long run because the longer the time period, the greater the increase in income and thus demand. References

A. A greater effect on equilibrium quantity in the long run because the longer the time period, the more elastic is the good's demand.

A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect? A. In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale. B. In the long run, fixed cost increases as firms build new plants and purchase new capital. This means that the average total cost curve will eventually slope upward. C. In the long run, fixed cost decreases as costs are spread out over a greater quantity of output. Declining fixed cost accounts for the downward-sloping average total cost curve. D. In the long run, there are no fixed costs, meaning the average total cost curve shifts down.

A. In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.

Technology is now being developed so that road use can be priced by computer. A computer in the surface of the road picks up a signal from your car and automatically charges you for the use of the road. How would this affect bottlenecks and rush-hour congestion? A. It would decrease bottlenecks and rush-hour congestion. B. It would decrease bottlenecks but increase rush-hour congestion. C. It would increase bottlenecks and rush-hour congestion. D. It would increase bottlenecks but decrease rush-hour congestion.

A. It would decrease bottlenecks and rush-hour congestion.

Which of the costs discussed in the chapter is the most important when a firm is deciding how much to produce? A. Marginal cost because this cost shows the additional cost associated with producing one more unit of output. Firms will use this information to decide to produce more or less output. B. Variable costs because these costs change as output changes. If the firm wants to maximize profits, it will choose to produce a quantity where variable costs are minimized. C. Fixed costs because these costs are spent and cannot be changed in the time period under consideration. If fixed costs are higher, the firm will choose to produce more output. D. Costs that are spent to improve the image of the firm. A firm will choose to increase output if it spends a large amount on advertising and brand image.

A. Marginal cost because this cost shows the additional cost associated with producing one more unit of output. Firms will use this information to decide to produce more or less output.

Would a shift in demand have a greater effect on the percentage change in equilibrium quantity for a straight-line supply curve that intersects the quantity axis or the price axis? A. Price axis because supply will be more elastic. B. Quantity axis because supply will be less elastic. C. Quantity axis because supply will be more elastic. D. Price axis because supply will be less elastic. References

A. Price axis because supply will be more elastic.

What distinguishes the short run from the long run? A. In the short run, some inputs are fixed, and in the long run, some inputs are fixed. B. In the short run, all inputs are variable, and in the long run, all inputs are variable. C. In the short run, all inputs are variable, while in the long run, some inputs are fixed. D. In the short run, some inputs are fixed, while in the long run, all inputs are variable.

D. In the short run, some inputs are fixed, while in the long run, all inputs are variable.

Say that equilibrium price remained constant and quantity fell. What would you say was the most likely cause? There was _________ in demand and _________ in supply.

There was a decrease in demand and a decrease in supply.

Classify each of the following as fixed or variable costs: a. Outsourced payroll services. (Assume the payroll services company charges by the number of workers.) b. Leased offices. c. Company-owned building. d. Payroll taxes. References

a. Variable Cost b. Fixed Cost c. Fixed Cost d. Variable Cost

Which of the pairs of goods would you expect to have a greater price elasticity of demand? a. Cars or Transportation b. Leisure Travel or Housing c. Rubber during the entire 20th century or rubber during WWII

a. cars b. leisure travel c. rubber during the entire 20th century

Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking would fall by 28 percent and underage binge drinking would fall by 51 percent. (Binge drinking is consuming 5 or more drinks at one occasion.) Instructions: Enter your responses rounded to two decimal places. a. The elasticity for underage drinking is ________ The elasticity for binge drinking is _______ These results indicate that ________ is more elastic. b. What might explain the difference in elasticities? A. One possible explanation is that binge drinkers get caught more often and get more fines. Combined with the higher prices, these fines make binge drinking less appealing. B. These relative elasticities of demand are simply a coincidence; there is no real reason why elasticity should differ for binge drinking than for simply drinking a little. Higher prices affect binge drinkers and non-binge drinkers alike. C. One possible explanation is that binge drinking is more common in students who come from low-income families. This means that they cannot afford to binge drink when prices are doubled. D. One possible explanation is that binge drinking is a larger percentage of one's income and has a close substitute—drinking less. It is easier for students to decrease the amount they drink rather than to quit altogether.

a: .28 .51 binge drinking b: D. One possible explanation is that binge drinking is a larger percentage of one's income and has a close substitute—drinking less. It is easier for students to decrease the amount they drink rather than to quit altogether.

Explain how studying for an exam is subject to the law of diminishing marginal productivity. A. The more and more time you devote to studying, the amount of time you have to devote to other things diminishes at the margin. This is true for any activity. That is, all activities are subject to diminishing marginal productivity. B. Assuming you organize your studying reasonably, you will focus on the parts of the text that are most likely to show up on the exam and most likely to raise your grade. As you study less relevant material, your additional time spent studying will yield fewer additional points on the exam. At some point, additional studying can have a negative return. C. The law of diminishing marginal productivity implies that the optimal amount of studying is however many hours will lead to your highest possible score. After this point, your performance falls and you should not study any more. D. The law of diminishing marginal productivity pertains to studying in a group only. If you study with one or two people, your grade will likely improve because they can teach you information you don't know. However, at some point, as you add another person, the grades for everyone decline. References

B. Assuming you organize your studying reasonably, you will focus on the parts of the text that are most likely to show up on the exam and most likely to raise your grade. As you study less relevant material, your additional time spent studying will yield fewer additional points on the exam. At some point, additional studying can have a negative return.

Why does nearly every purchase you make provide you with consumer surplus? A. Because most consumers who trade in a market have a willingness to pay lower than the price, this means that few trades in a market provide consumer surplus. B. Because most consumers who trade in a market have a willingness to pay greater than the price, this means that most trades in a market provide consumer surplus. C. Most of the goods that a consumer purchases are expensive. Because these purchases are expensive, consumer surplus is very high. D. Most of the goods that a consumer purchases are inexpensive. Because these purchases are inexpensive, the consumer is provided with consumer surplus.

B. Because most consumers who trade in a market have a willingness to pay greater than the price, this means that most trades in a market provide consumer surplus.

Why could diseconomies of scale never occur if production relationships were only technical relationships? A. Because producers would have a greater variety of methods of production to avoid the diseconomies. B. Because the same technical process could be used over and over again at the same cost. C. Because having technical relationships would mean that managers would not have to choose among production techniques. D. Because technical relationships mean that the marginal cost curve would be flat.

B. Because the same technical process could be used over and over again at the same cost.

If average productivity falls, will marginal cost necessarily rise? How about average cost? A. If average productivity is falling, average cost must be falling; if marginal productivity is falling, marginal cost must be falling. But there is no necessary relationship between average productivity and marginal cost. B. If average productivity is falling, average cost must be rising; if marginal productivity is falling, marginal cost must be rising. But there is no necessary relationship between average productivity and marginal cost. C. If average productivity is falling, both average and marginal costs must be falling; if marginal productivity is falling, both average and marginal costs must be falling as well. In other words, saying that average productivity and marginal productivity are falling has the same repercussions for costs. D.If average productivity is falling, both average and marginal costs must be rising; if marginal productivity is falling, both average and marginal costs must be rising as well. In other words, saying that average productivity and marginal productivity are falling has the same repercussions for costs.

B. If average productivity is falling, average cost must be rising; if marginal productivity is falling, marginal cost must be rising. But there is no necessary relationship between average productivity and marginal cost.

Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book's price? Why? A. The author would raise or lower the price. Because the author's cost is a sunk cost, any increase or decrease in price will increase revenue and profit. B. The author would prefer to raise the book's price. Raising prices when demand is inelastic increases revenue. Because the author's cost is a sunk cost, profit also rises. C. The author would prefer to lower the book's price. Lowering prices when demand is inelastic increases revenue. Because the author's cost is a sunk cost, profit also rises. D. The author would not change the price. Because the author's cost is a sunk cost, any change in price will decrease revenue and profit. References

B. The author would prefer to raise the book's price. Raising prices when demand is inelastic increases revenue. Because the author's cost is a sunk cost, profit also rises.

What is the difference between marginal product and average product? A. Marginal product is the additional output that a firm decides to produce for the next quarter based on market conditions. Average product is the average output over the past four quarters. B.Marginal product is the additional output that will be forthcoming from an additional worker, assuming that other inputs are constant. Average product is output per worker, or the total output divided by the number of workers. C. Marginal product is the additional output for every extra dollar paid to workers, assuming that other inputs are constant. Average product is output divided by total wages. D. Marginal product is the additional output that will be forthcoming from building an additional factory. Average product is output per worker, or the total output divided by the number of workers.

B.Marginal product is the additional output that will be forthcoming from an additional worker, assuming that other inputs are constant. Average product is output per worker, or the total output divided by the number of workers.

How is elasticity related to the revenue from a sales tax? A. If demand is inelastic, then raising tax rates will decrease tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will increase quantity supplied and quantity demanded enough to cause an increase in tax revenue. B. If demand is inelastic, then raising tax rates will decrease tax revenue paid by consumers. The elasticity of supply has no effect on taxes because taxes only matter to consumers (who have to pay the taxes). C. If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will decrease quantity supplied and quantity demanded enough to cause a decrease in tax revenue. D. If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. The elasticity of supply has no effect on taxes because taxes only matter to consumers (who have to pay the taxes). References

C. If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will decrease quantity supplied and quantity demanded enough to cause a decrease in tax revenue.

If marginal cost is increasing, what do we know about average cost? A. Average cost is constant and always lower than marginal cost because of the law of decreasing marginal productivity. As more items are produced, marginal costs increase (the same as productivity decreasing), but average costs remain constant because the total number of items produced is also increasing. B. If marginal cost is increasing, average costs are rising. As the cost of the next item produced rises, the average cost of all items produced must also rise. C. If marginal cost is increasing, average costs could be rising, falling, or constant. The direction of average costs depends on whether marginal cost is higher or lower than average cost. D. If marginal cost is increasing, average costs are falling. Marginal costs only increase at very high levels of production. When items are mass-produced (because of economies of scale), their average costs always fall, even when marginal costs begin to increase.

C. If marginal cost is increasing, average costs could be rising, falling, or constant. The direction of average costs depends on whether marginal cost is higher or lower than average cost.

Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 4? A. The supply curve with slope of 4. Slope and elasticity are directly related so the higher the slope, the higher the elasticity. B. They both have the same elasticity. Any supply curve with a positive slope has the same elasticity. C. They both have the same elasticity. Any supply curve that goes through the origin has an elasticity of 1. D. The supply curve with slope of 1. Slope and elasticity are inversely related so the lower the slope, the higher the elasticity.

C. They both have the same elasticity. Any supply curve that goes through the origin has an elasticity of 1.

Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 5? A. The supply curve with slope of 1. Slope and elasticity are inversely related so the lower the slope, the higher the elasticity. B. They both have the same elasticity. Any supply curve with a positive slope has the same elasticity. C. They both have the same elasticity. Any supply curve that goes through the origin has an elasticity of 1. D. The supply curve with slope of 5. Slope and elasticity are directly related so the higher the slope, the higher the elasticity.

C. They both have the same elasticity. Any supply curve that goes through the origin has an elasticity of 1.

If average product is falling, what is happening to short-run average variable cost? A. If average productivity is falling, short-run average variable cost is also falling; to say that productivity falls is equivalent to saying that cost falls. B. If average productivity is falling, short-run average variable cost could be rising or falling; it depends on what is happening with marginal productivity. C. Short-run average variable costs are always falling. They are not related to average product. D. If average productivity is falling, short-run average variable cost is rising; to say that productivity falls is equivalent to saying that cost rises.

D. If average productivity is falling, short-run average variable cost is rising; to say that productivity falls is equivalent to saying that cost rises.

How is elasticity related to the revenue from a sales tax? A. If demand is inelastic, raising a tax increases tax revenue paid by consumers.The elasticity of supply is not relevant because producers pass the tax on to consumers. Thus, what happens to total tax revenue depends only on the elasticity of demand. B.If demand is elastic, raising a tax increases tax revenue paid by consumers;the same is true with supply. Thus, what happens to total tax revenue depends on the elasticity of both supply and demand. C. If demand is elastic, raising a tax increases tax revenue paid by consumers. The elasticity of supply is not relevant because producers pass the tax on to consumers. Thus, what happens to total tax revenue depends only on the elasticity of demand. D. If demand is inelastic,raising a tax increases tax revenue paid by consumers;the same is true with supply.If demand is elastic,however,raising a tax decreases tax revenue paid by consumers.Thus,what happens to total tax revenue depends on the elasticity..

D. If demand is inelastic,raising a tax increases tax revenue paid by consumers;the same is true with supply.If demand is elastic,however,raising a tax decreases tax revenue paid by consumers.Thus,what happens to total tax revenue depends on the elasticity.. References

Explain how each of the following will affect the average fixed cost, average variable cost, average total cost, and marginal cost curves faced by a steel manufacturer: a. New union agreement increases hourly pay. The average fixed cost curve will . The average variable cost curve will . The average total cost curve will . Marginal cost will . b. Local government imposes an annual lump-sum tax per plant. The average fixed cost curve will . The average variable cost curve will . The average total cost curve will . Marginal cost will . c. Federal government imposes a "stack tax" on emission of air pollutants by steel mills. The average fixed cost curve will . The average variable cost curve will . The average total cost curve will . Marginal cost will . d. New steel making technology increases productivity of every worker. The average fixed cost curve will . The average variable cost curve will . The average total cost curve will . Marginal cost will .

Explain how each of the following will affect the average fixed cost, average variable cost, average total cost, and marginal cost curves faced by a steel manufacturer: a. New union agreement increases hourly pay. The average fixed cost curve will remain unchanged. The average variable cost curve will shift up The average total cost curve will shift up Marginal cost will shift up b. Local government imposes an annual lump-sum tax per plant. The average fixed cost curve will shift up The average variable cost curve will remain unchanged The average total cost curve will shift up Marginal cost will remain unchanged. c. Federal government imposes a "stack tax" on emission of air pollutants by steel mills. The average fixed cost curve will remain unchanged The average variable cost curve will shift up The average total cost curve will shift up Marginal cost will shift up d. New steel making technology increases productivity of every worker. The average fixed cost curve will remain unchanged The average variable cost curve will shift down The average total cost curve will bust down Marginal cost will shift down

Say that equilibrium price fell and quantity remained constant. What would you say was the most likely cause? There was _________ in demand and __________ in supply.

There was a decrease in demand and an increase in supply.

Say that the equilibrium price and quantity both rose. What would you say was the most likely cause? There was ___________ in demand and ________ in supply. References

There was an increase in demand and no change in supply.

Say that the equilibrium price fell and equilibrium quantity rose. What would you say was the most likely cause? There was __________ in demand and _________ in supply.

There was no change in demand and an increase in supply

a. In what way is the market for public post secondary education an example of a third-party-payer market? A. Because students don't pay the entire cost of the education. B. Because students pay a third party for their education. C. Because the federal government gives research grants to faculty. D. Because the federal government grants colleges non-profit status. b. What is the impact of this on total educational expenditures? A. It does not impact total expenditures. B. Its effect on total expenditures cannot be determined. C. It decreases total expenditures. D. It increases total expenditures.

a: A. Because students don't pay the entire cost of the education. b: D. It increases total expenditures.

Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ. a. Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off-peak hours. A. These relative elasticities of demand are simply a coincidence; there is no real reason why elasticity should be lower during peak hours than during off-peak hours. B. Peak-hour travelers are likely to be commuters who buy long-term train passes and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses only occasionally for errands or other more discretionary activities. C. Peak-hour travelers are likely to be commuters who ride the bus because they know it is cheaper and faster than having to drive and park their own car and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses for errands or other more discretionary activities. D. Peak-hour travelers are likely to be commuters who have little choice but to go to work and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses for errands or other more discretionary activities. b. Elasticity of demand for buses is 0.7 in the short run and 1.5 in the long run. A. Demand tends to be more elastic in the short run because there are more substitutes. If fares rise enough, in the short run, people can find alternative modes of transportation. B. Demand tends to be less elastic in the short run because there are fewer substitutes. If fares rose enough, in the long run, people could find alternative modes of transportation. C. Demand tends to be less elastic in the short run because there are more substitutes. If fares rose enough, in the short run, people can find alternative modes of transportation. D. These relative elasticities of demand are simply a coincidence; there is no real reason why elasticity should be lower in the short run than in the long run. c. Elasticity of demand for toll roads is 4.7 for low-income commuters and 0.63 for high-income commuters. A. High-income commuters pay for more tolls because they drive more, contributing to a lower elasticity of demand. B. Low-income commuters are more likely to car pool or take public transportation, contributing to a lower elasticity of demand. C. These relative elasticities of demand are simply a coincidence; there is no real reason why elasticity should be lower for high-income commuters than for low-income commuters. D. Tolls are likely a much smaller portion of a high-income commuter's total income, contributing to a less elastic demand. References

a: D. Peak-hour travelers are likely to be commuters who have little choice but to go to work and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses for errands or other more discretionary activities. b: B. Peak-hour travelers are likely to be commuters who buy long-term train passes and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses only occasionally for errands or other more discretionary activities. c: D. Tolls are likely a much smaller portion of a high-income commuter's total income, contributing to a less elastic demand. References

Why are long-run costs always less than or equal to short-run costs? a. In the long run, technological change can occur, leading to lower costs over time. This means that long-run costs will always be less than or equal to short-run costs at the same level of output. b. In the long run, employees are more productive so the firm's costs will be lower. This means that long-run costs will always be less than or equal to short-run costs at the same level of output. c. In the long run, all inputs are flexible so the firm can minimize all costs. This means that long-run costs will always be less than or equal to short-run costs at the same level of output. d. In the long run, firms can choose how much output to produce based on demand, which will lead to lower costs. This means that long-run costs will always be less than or equal to short-run costs at the same level of output.

c. In the long run, all inputs are flexible so the firm can minimize all costs. This means that long-run costs will always be less than or equal to short-run costs at the same level of output.

Where along the long-run average total cost curve will an efficient firm try to produce in the long run? a. Along the downward-sloping portion when there are economies of scale because cost per unit of output is decreasing at that level of production. b. Along the upward-sloping portion when there are diseconomies of scale because a firm will sell more output at that level of production. c. When there are constant returns to scale because this is the minimum efficient level of production, and cost per unit of output is at its lowest.

c. When there are constant returns to scale because this is the minimum efficient level of production, and cost per unit of output is at its lowest.