Microeconomics ch 4-7

for 2 goods, A and B, the rational spending rue is expressed as

(MUA/PA ) = (MUB/PB)

rational spending rule

...

The price elasticity of demand at the midpoint of any STRAIGHT-LINE demand curve must always be...

1

The price elasticity will always be what at any point along a STRAIGHT-LINE supply curve?

1

at her current consumption level Lynn gets 2 times more marginal utility from an additional bottle of water than from an additional bottle of soda, if the price of soda is 1$ per bottle then she is maximizing utility if the price of a bottle of water is

2$

Perfectly elastic demand

Demand is perfectly elastic with respect to price if price elasticity of demand is infinite.

Perfectly inelastic demand

Demand is perfectly inelastic with respect to price if price elasticity of demand is 0.

For something to be unit elastic the absolute value of price elasticity has to be...

Equal to 1

What factors govern the ease at which additional factors can be acquired by a producer?

Flexibility of inputs, mobility of inputs, ability to produce substitute inputs, and time.

For something to be elastic the absolute value of price elasticity has to be...

Greater than 1

For something to be inelastic the absolute value of price elasticity has to be...

Less than 1

You are having lunch at an all-you-can-eat buffet. If you are rational, what should be your marginal utility from the last morsel of food you swallow?

Marginal utility from the last morsel of food you swallow should be zero. (marginal cost of an additional morsel of food is 0 at a buffet. Applying the Rational Spending Rule, a rational person will eat until the marginal utility of the last morsel falls to 0)

For s straight line demand curve, total expenditure is highest at what point along the demand curve?

Midpoint

Is the demand for a particular brand of car, like a Chevrolet, likely to be more or less price-elastic than the demand for all cars?

More because of the availability of substitutes. (The price elasticity of a good generally increases with the number of available substitutes for the good.)

Is price elasticity of demand is always... positive or negative?

NEGATIVE

The expression for the elasticity of supply is

P/Q x 1/slope

when the price of an item that Pat regularaly purchases falls

Pat buys more of that item and Pats real income increases

What two factors govern total revenue?

Price and quantity

Income effect

Price change makes the consumer either poorer or richer in real terms. If the price of milk goes up, you have less available income to spend because you had to spend extra buying milk.

What is the rational spending rule?

Spending should be allocated across goods so that the marginal utility per dollar is the same for each good. (MUc/Pc)/(MUv/Pv) <- marginal utility formula

Perfectly elastic supply

Supply is perfectly elastic with respect to price if elasticity of supply is infinite.

Perfectly inelastic supply

Supply is perfectly inelastic with respect to price if elasticity is zero.

Marginal utility

The additional utility gained from consuming an additional unit of a good.

The law of demand is a direct consequence of what?

The cost benefit principle

Total daily expenditure

The daily number of units bought times the price at which it sells.

Consumer surplus

The difference between a buyers reservation price for a product and the price actually paid for it.

Cross-price elasticity of demand

The percentage by which the quantity demanded of the first good changes in response to a 1% change in the price of a second.

Price elasticity of supply

The percentage change in quantity supplied that occurs in response to a 1% change in its price. (DQ/Q)/(DP/P)

Price elasticity of demand

The percentage change in the quantity demand of a good or service that results from a 1 percent change in its price

law of diminishing marginal utility

The tendency for the additional utility gained from consuming an additional unit of a good to finish as consumption increases beyond some point

Income elasticity of demand

Then percentage by which quantity demanded changes in response to a 1% change in income.

Total expenditure is equal to what?

Total revenue. The dollar amount that consumers spend on a product (PXQ) is equal to the dollar amount that sellers receive.

Law of demand

When the price of a good rises, people will buy less of it.

When the price of a hot dog is $1.50 each, 500 hot dogs are sold every day. AFter lowering the price to $1.25 each, 510 hot dogs are sold every day. At the original price, what is the elasticity of demand for a hot dog? a..2 b.1 c. 66.67 d. 5 e. .015

a. .2

The long run is defined as a. a period which all factors of production are variable b. one year or more c. a period which only one factor of production is fixed. d. a period in which at least one factor is fixed e. the period of time between annual accounting reports.

a. a period which all factors of production are variable

Income elasticity for inferrer goods is a. negative b. positive

a. negative

If the slope of the demand curve is zero, the price elasticity of that demand curve will be a. perfectly elastic b. elastic c. inelastic d.perfectly inelastic e. unit elastic

a. perfectly elastic

If the local electricity utility wants to raise its revenues it should _____ its price because demand for electricity is likely to be _____ a. raise; inelastic b. lower; elastic c. lower; perfectly inelastic d. lower; inelastic e. raise; elastic

a. raise;inelastic

When truce elasticity of demand is less than 1, changes in price and changes in total expenditure always move in ___ directions a. the same direction b. opposite directions

a. the same direction

At her current consumption level, Lynn gets 2 times more marginal utility from an additional bottle of water than from an additional bottle of soda. If the price of soda is $1/bottle, then she is maximizing utility if the price of water is a. $2.50 b.$2.00 c. $3.00 d. $1.50 e. $1.00

b. $2.00

If a firms demand curve is perfectly elastic. the firm must be a. an oligopoly b. a perfect competitor c. a monopoly d. a revenue maximizer e. an imperfect competitor

b. a perfect competitor

If two demand curves have a point in common, the steeper curve must be ____ price elastic of the two with respect to that point. a. more b.less

b. less

If the demand for a good is elastic, the good is likely to have a. few close complements b. many close substitutes c.few close substitutes d. many close complements e. none of the above

b. many close substitutes

A profit maximizing perfectly competitive firm must decide a. only on how much revenue it wishes to collect. b. only on how much to produce, taking price of the good as fixed. c. only on what price to change, taking output as fixed. d. both what price to change and how much to produce. e. only on what industry to join, taking price and output as fixed.

b. only on how much to produce, taking the price of the good as fixed.

When price elasticity of demand is greater than 1, changes is price and changes in total expenditure always move in ____ directions. a. the same direction b. opposite directions

b. opposite directions

Income elasticity for normal goods is a. negative b. positive

b. positive

If marginal utility of the 3rd cup of coffee is 23 and the marginal utility of the 4th cup of coffee is 15, then a. the price of coffee must be relatively low b. there is evidence of the law of diminishing marginal utility c. it is optimal for the consumer to have 3 cups of coffee d. the price of coffee must be relatively high e. it is optimal for the consumer to have 4cups of coffee

b. there is evidence of the law of diminishing marginal utility

in the total economic surplus, producer surplus is located in the

bottom half

Suppose a 2% increase in the price of fresh corn lead to a 10% decrease in the quantity demanded of corn. The elasticity for fresh corn, with respect to price is... a. 1/2 b. 10 c. 5 d. 1/5 e.2

c. 5

Suppose a firm is collecting $1,250 in total revenues and the total costs of its variable factors or production are $1,000 at its current level of output. In the short run, one can predict that the firm will a. shutdown b. earn a profit c. continue to operate d. raise its price e. earn a loss

c. continue to operate

Purchasing goods such that the ratio of marginal utility to price is equal across all goods results in the a. greatest average utility b. greatest expenditure on goods c. greatest total utility d. lowest expenditure on goods e. expenditures for all goods being the same

c. greatest total utility.

Jenny sells lemonade by the street during the summer time. Several other kids also sell lemonade in Jenny's neighborhood. If the market is perfectly competitive and price is already at the equilibrium level, Jenny can increase her revenue if she a. decreases the price of lemonade and increases output b. increases both the price and output of lemonade c. keeps the price the same and increases the output d. increases the price and keeps the output the same e. increases the price of lemonade and decreases the output

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

In the short run, if the firm experiences an increase in the cost of a fixed factor of production it will most likely a. lower its price b. increase output c. leave its output decision unchanged d. raise its price e. decrease output

c. leave its output decision unchanged

If the cross-price elasticity is negative, the two goods are

complements

When the cross price elasticity of two goods is negative the two goods are?

complements

a rational seller will sell another unit if the

cost of making the next unit is less then the revunue gained by selling the next unit.

At the price of 25 cents each, 500 consumers demand 4 oranges each. At the price of 20 cents each, 750 consumers demand 5 oranges each. Therefore, the market demand curve for orange s will have a quantity of _____ oranges demanded at the price of 25cents each and a quantity of ______ oranges demanded at the price of 20 cents each. a. 1250;1500 b. 4;5 c. 500;750 d. 2000;3750 e. 12500; 15000

d. 2000;3750

For which of the following products is demand likely to be least price elastic? a. frozen food b. Diet Coke c. soft drinks d. groceries e. not enough information is provided to answer the question

d. groceries

Small budget items such as soap have ____ price elasticity of demand compared to big ticket items such as DVD players. a.unitary b.very high c.higher d.lower e.cross

d. lower

Chicken and pork could be used as substitutes for beef, therefore the emend for beed would be ____ than if there were fewer substitutes a. more inelastic b. unitary elastic c. perfectly inelastic d. more elastic

d. more elastic

A rational seller will sell another unit if a. The price that could be charged is greater than the equilibrium price b. the quantity demanded of the sellers output is greater than zero. c. the profit earned from the sale of the next unit than the profit earned on the sale of the last unit d. the cost of making the next unit is less than the revenues gained by selling the next unit.

d. the cost of making the next unit is less than the revenues gained by selling the next unit

As the price of computers fall, the quantity demanded of computes increases. This is an application of a. production possibility expansion b. law of supply c. price controls in the computer market d. the law of demand e. needs versus wants

d. the law of demand

If the price elasticity of demand for cell phone service is 3, that means if the price increases by 1% quantity demanded decreases by a. .33% b. 1% c. 1.33% d. .67% e. 3%

e. 3%

If income elasticity for a particular good has a negative sign, a. the good is a normal good. b. the good is a luxury good. c. quantity demanded will not change if income changes d. as income increases, consumers will purchase more of the good. e. as income increases consumers will tend to purchase less of the good.

e. as income increases, consumers will tend to purchase less of the good.

the efficient outcome can be found using the

equilibrium point

to find the value of the consumer surplus you must

find the area of the top half of the total economic surplus triangle

Given that Chris' marginal utility from his 1st taco is 15 and his marginal utility for the 2nd taco is 12, one can infer that Chris

has total utility of 2 tacos equal to 27

we can compute the quantity demanded for the market at any price by using _________

horizontal addition ( the quantity demanded for the market is the sum of the individual quantities demanded at a specific price)

compared to the first come, first serve allocation scheme airlines used in the past, the voluntary compensation scheme now in place

improves efficiency for all travelers.

suppose 30 employee hours can produce 50 units of output. assuming the law of diminishing marginal returns is present, to produce 100 units of output will require

more then 30 additional employee hours

the concept of effiency is illustrated by the statement - at equillibrium, all _______ ______ _______ have taken place

mutually beneficial transactions

Pat's total utility after eating 99 Reese's Peanut Butter Cups was greater than his total utility after eating his hundreth. therefore, Pat's marginal utility for the 100th peanut butter cup was

negative

The cross-price elasticity of demand is calculated as:

percent change in product Q divided by percent change in product P %change Q / %change P

suppose that a 5 percent increase in the price of good Y causes a 10 percent increase in the quantity demanded of good X. The coefficient of cross elasticity of demand is

positive and therefore these goods are substitutes

suppose that a firm is located along a river. the firm uses water from the river to cool its machinery and returns the water to the river several degrees warmer, which has led to a decline in the fish population downstream of the firm. The damage to the downstream fish is a _____________

relevant cost of production

When the cross price elasticity for two goods is positive the two goods are?

substitues

if demand is perfectly price inelastic then

the burden of tax falls entirely on the buyer

one implication of the shape of the demand curve that faces a perfectly competitive firm is that if

the firm increases its price above the market price it will earn 0 revenue

as the price of computers falls, the quantity demanded of computers increases. This is an application of

the law of demand

it takes a considerable amount of time to increase the production of beef. This implies that

the short run supply curve for beef is less elastic then the long run supply curve for beef

The consumer surplus that exists at market equilibrium is the combined value of all the consumer's individual surpluses, which is the difference between

their respective reservation prices and the common market price. this area is computed as 1/2 (base) x (height)

in the total economic surplus, consumer surplus is located in the

top half

in the short run if a firm chooses to opperate and produce output it must be the case that

total revenues are greater then or equal to the cost of variable factors of production.

if a firm aquires a necessary input from several different sources, each of which charges a different price, it should

use the cheapest source of inputs first

Substitution effect

when the price of a good goes up, substitutes for the good become more attractive