MicroEcon exam 2
The purpose of the ceteris paribus assumption used in economic analysis is to:
Focus on the effect of a single factor on a certain variable
Cost of going to the movies is less than the marginal benefit of going to the movies
From an economic perspective, when a student decides to go to the movies instead of studying for a test, it indicates that in the student's thinking the marginal:
When the price of a product is increased 15 percent, the quantity demanded decreases 10 percent. We can therefore conclude that the demand for this product is:
Inelastic
The market system automatically corrects a surplus condition in a competitive market by:
Reducing the price of the commodity in question while increasing the quantity demanded
Opportunity cost
When a state government chooses to build more roads, the resources used are no longer available for public education programs. This dilemma illustrates the concept of:
Consumer sovereignty and "dollar votes" guide the market system in dealing with which fundamental economic question?
Which output will be produced?
Interest groups result when people:
Who share strong preferences on a choice band together
The representative firm in a purely competitive industry:
Will earn zero economic profit in the long run
A monopolistically competitive firm is producing at an output level in the short run where average total cost is $4.50, price is $4.00, marginal revenue is $2.50, and marginal cost is $2.50. This firm is operating:
With a loss
The incidence of a tax pertains to
who actually bears the burden of a tax.
For the music industry, the rise of Internet file-sharing of music has
worsened the free-rider problem.
In some markets consumers may buy many different brands of a product. Which of the statements below best represents a situation where demand for a particular brand would be very elastic?
"The different brands are almost identical. I always buy the cheapest"
Implicit costs are:
"payments" for self-employed resources
Suppose that Joe sells pork in a purely competitive market. The market price of pork is $3 per pound. Joe's marginal revenue from selling the twelfth pound would be:
$3
Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm earns an accounting profit of:
$500,000 and an economic profit of $200,000
The total revenue of a purely competitive firm from 8 units of output is $48. Based on this information, total revenue for 9 units of output must be:
$54
A 3 percent increase in the price of tea causes a 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is:
+2.0
A monopolist can sell 20 toys per day for $8.00 each. To sell 21 toys per day, the price must be cut to $7.00. The marginal revenue of the 21st toy is:
-$13
Assume that a consumer has a given budget or income of $12, and that she can buy only two goods, apples or bananas. The price of an apple is $1.50 and the price of a banana is $0.75.Refer to the information given above. What is the slope of the budget line, if the quantity of apples were measured on the horizontal axis and bananas on the vertical axis?
-2.0
Blossom, Inc. sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise price to $9, and the firm only manages to sell 460 bottles of perfume. The price elasticity of demand is:
0.33 and inelastic
The long-run supply curve for a purely competitive industry would be horizontal when:
A decrease in product demand causes no effect in resource prices
Which of the following will not cause the supply curve to shift?
A change in the price of the good
When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price-elasticity of demand coefficient for this product is:
1.5
With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. Its output quantity must be:
800 units
One feature of pure monopoly is that the firm is:
A price maker
When economists describe "a market," they mean:
A system that allows buyers and sellers to interact with one another
Which statement best illustrates the concept of diminishing marginal utility?
A typical consumer will receive less satisfaction from consuming the fourth hamburger than from the third hamburger in a week
The long-run market supply curve would be downward-sloping if the representative firms':
ATC curves shift down as the industry expands
In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if price is below:
Average variable cost
In a purely competitive industry, each firm:
Can easily enter or exit the industry
Barriers to entry:
Can result from government regulation
Fixed costs of production in the short run:
Cannot be reduced by producing less output
Marginal cost can be defined as the:
Change in total cost resulting from one more unit of production
Problems with collective decision-making and economic inefficiency in government are subjects that are studied in an area of economics called public:
Choice
The cross elasticity of demand for product X with respect to the price of product Y is -1.2. It can be inferred that X and Y are:
Complementary products
If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a:
Constant-cost industry
The price elasticity of demand increases with the length of the period considered because:
Consumers will be better able to find substitutes
In a market system, self-interest is the motivating force that:
Coordinates and creates consistency in the operations of various parts of the economy
Productive efficiency refers to:
Cost minimization, where P = minimum ATC
An increase in the demand for corn is more than offset by an increase in its supply. As a result the equilibrium price will:
Decrease and the equilibrium quantity will increase
If demand for farm crops is inelastic, a good harvest will cause farm revenues to:
Decrease because of a percentage fall in price greater than the percentage increase in quantity sold
A television station reports that the price of coffee has increased but the quantity traded in the market has decreased. This situation would be caused by a(n):
Decrease in supply
A news story states that "DVDs lose their appeal as consumers switch to online streaming for movies." In a competitive market for DVDs, this situation would lead to a(n):
Decrease in the price and the quantity sold of DVDs
A straight-line downward-sloping demand curve has a price elasticity of demand which:
Decreases as price decreases
The reason the marginal cost curve eventually increases as output increases for the typical firm is because of:
Diminishing marginal returns
If all resources used in the production of a product are increased by 10 percent and output increases by less than 5 percent, then the firm is experiencing:
Diseconomies of scale
A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:
Division of labor
Price is taken to be a "given" by an individual firm selling in a purely competitive market because:
Each seller supplies a negligible fraction of total market
Total revenue falls as the price of a good is raised, if the demand for the good is:
Elastic
A union argues that a price cut will boost the revenues of the firm, while management argues that the opposite is true. This suggests that the price elasticity of demand is:
Elastic from the union's perspective; inelastic from management's perspective
In long-run equilibrium a purely competitive firm will operate where price is:
Equal to MR, MC, and minimum ATC
Economic profits are:
Equal to the difference between accounting profits and implicit costs
Cash expenditures a firm makes to pay for resources are called:
Explicit costs
A firm encountering economies of scale over some range of output will have a:
Falling long-run average cost curve
The market system is an economic system that:
Gives private individuals the right to own resources used in production
A decrease in supply, holding demand constant, will cause:
Higher prices and a smaller quantity sold
The main difference between the short run and the long run is that:
In the short run, some inputs are fixed and some are variable
Marginal product of labor refers to the:
Increase in output resulting from employing one more unit of labor
You are the newly appointed sales manager of the Rock Computer Tablets Company and have been charged with the task of increasing revenues. Your economics consultants have informed you that at present price and output levels, price elasticity of demand for your product is less than one. You should:
Increase prices
A fall in the price of milk, used in the production of ice cream, will:
Increase the supply of ice cream
The law of increasing opportunity costs states that:
Increases in the production of one good require larger and larger sacrifices of the other good
A higher price reduces the quantity demanded for a product because:
Individuals can afford less of the product and will switch to substitutes
If the price-elasticity coefficient for a good is .75, the demand for that good is described as:
Inelastic
A purely competitive firm does not try to sell more of its product by lowering its price below the market price because:
It can sell all it wants to at the market price
The major virtues of the market system include all of the following, except:
It leads to equality in the distribution of income
Which of the following statements about the right to private ownership is false?
It weakens the incentive to maintain the property that one already owns
Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $1/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be:
Less than $1/unit
If the price of labor or some other variable resource decreased, the:
MC curve would shift downward
Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by:
Marginal cost = marginal revenue
Allocative efficiency occurs when the:
Marginal cost equals the marginal benefit to society
The non-discriminating pure monopolist must decrease price on all units of a product sold in order to sell more units. This explains why:
Marginal revenue is less than average revenue
Monopolistically competitive firms are similar to monopolies in that they have:
Marginal revenues that are less than price
Matt observes that "there is a high correlation between educational attainment and the level of income." Jean concurs and adds that "high school graduates should all proceed to college."
Matt's statement is positive while Jean's statement is normative
In the short run equilibrium, a monopolist's profits:
May be positive, negative, or zero
Majority voting fails to incorporate the strength of the preferences of individual voters, and therefore:
May produce economically inefficient outcomes
Which of the following is not a factor of production?
Money
The total revenue received by sellers of a good is computed by:
Multiplying the price times the quantity sold
A monopolistically competitive industry is like a purely competitive industry in that:
Neither industry has significant barriers to entry
Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are experiencing economic profits. In the long run, we can expect:
New firms to enter causing the market price of soybeans to fall
Which of the following is true under conditions of pure competition?
No single firm can influence the market price by changing its output
For most products, purchases tend to fall with decreases in buyers' incomes. Such products are known as:
Normal goods
Which would be an implicit cost for a firm? The cost:
Of wages foregone by the owner of the firm
If the representative firm in a purely competitive industry is in short-run equilibrium and at its current output level, its marginal cost exceeds its average total cost, then we can conclude that:
Other firms will enter the industry in the long run
One major barrier to entry under pure monopoly arises from:
Ownership of essential resources
In analyzing human decision and action, economists assume that:
People's behavior reflects rational self-interest
The trading of votes to secure favorable outcomes on decisions which would otherwise be defeated is called:
Political logrolling
At the profit-maximizing level of output for a monopolist:
Price is greater than marginal cost
The goal of product differentiation and advertising in monopolistic competition is to make:
Price less of a factor and product differences more of a factor in consumer purchases
Monopolistic competition is characterized by firms:
Producing differentiated products
Which is a feature of a purely competitive market?
Products are standardized or homogeneous
Which of the following is not an assumption that we make in analyzing pure competition in the long run?
Profits are not relevant to firm behavior anymore, because competitive firms earn zero profits in the long run
The price elasticity of demand is a measure of the:
Responsiveness of buyers of a good to changes in its price
Laissez-faire capitalism limits the government's economic functions to the following, except:
Setting prices of individual goods and services
If the price of gasoline increases significantly, then we'd expect the demand curve for large trucks and SUVs to:
Shift to the left
Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering economic losses. In the long run, we can expect:
Some firms to exit causing the market price of corn to rise
If a 10 percent increase in the price of one good A results in an increase of 5 percent in the quantity demanded of another good B, then it can be concluded that the two goods A and B are:
Substitute goods
According to the law of diminishing marginal returns:
The additional output generated by additional units of an input will diminish
Scarcity
The basic truth that underlies the study of economics is the fact that we all face:
Suppose a firm sells its product at a price lower than the opportunity cost of the inputs used to produce it. Which of the following statements is definitely true?
The firm may earn positive accounting profits, but will face economic losses
The idea that the desires of resource suppliers and firms to further their own self-interest will automatically further the public interest is known as:
The invisible hand
The price-elasticity of demand is always negative because of:
The law of demand
One defining characteristic of pure monopoly is that:
The monopolist produces a product with no close substitutes
Other things being equal, the law of demand suggests that as:
The price of iPads decreases, the quantity demanded will increase
A negative income elasticity of demand coefficient indicates that:
The product is an inferior good
If a price ceiling is set below the equilibrium price in a market:
The quantity demanded will exceed the quantity supplied
The demand curve confronting a non-discriminating pure monopolist is:
The same as the industry's demand curve
The opportunity cost of doing or getting something is best and fully defined as:
The value of the best alternative that is given up in order to do or get something
The demand for Cheerios cereal is more price-elastic than the demand for cereals as a whole. This is best explained by the fact that:
There are more substitutes for Cheerios than for cereals as a whole
Competition is more likely to exist when:
There is easy entry into and exit out of industries
Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality would involve
a much greater marginal cost than marginal benefit.
Public goods are those for which there
are nonrivalry and non excludability.
If pollution coming from factories is bad, then why would the socially optimal level of pollution not be zero?
because there are significant social costs of achieving zero pollution
The socially optimal amount of pollution abatement occurs where society's marginal
benefit of abatement equals its marginal cost of abatement.
Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings
can be resolved by the owners themselves through private bargaining.
It has been proposed that a government agency be charged with the task of determining the amount of pollution that the atmosphere (or a body of water) can safely absorb, establish "rights" to this limited amount of pollution, and sell those limited amount of rights to firms. The firms can then buy and sell these rights among themselves later. This approach is known as the
cap-and-trade system.
If a good that generates negative externalities were priced to take these negative externalities into account, then its
price would increase and its quantity would decrease.
If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be
subsidized.
The efficiency loss of a tax is the idea that
taxes cause a decline in output for which marginal benefit exceeds marginal cost.
Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following, except
taxing the sellers of the product.
Sometimes, public goods whose benefits are less than their costs still get produced because
the benefits accrue to politically powerful government officials and their constituents.