Microeconomics Final Exam
Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market?
exactly $2.50
What represents the firm's long-run condition for exiting a market?
exit if P < ATC
The "invisible hand" refers to
the marketplace guiding the self-interests of market participants into promoting general economic well-being
The short-run supply curve for a firm in a perfectly competitive market is
the portion of its marginal cost curve that lies above its average variable cost
Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of one chair is
1/5 table of Mike and 1/3 table for Sandy
If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a
40 percent decrease in the quantity demanded
Average total cost (ATC) is calculated as follows:
ATC = (total cost)/(quantity of output).
Which of the following is a characteristic of natural monopoly? Fixed costs are typically a small portion of total costs Average total cost declines over large regions of output The product sold is a natural resource such as diamonds or water All of the above are correct
Average total cost declines over large regions of output
Which of the following is NOT a characteristic of a perfectly competitive market? Firms are price takers Firms have difficulty entering and exiting the market There are many sellers in the market Goods offered for sale are largely the same
Firms have difficulty entering and exiting the market
Which of the following statements best expresses a firm's profit-maximizing decision rule? If marginal revenue is greater than marginal cost, the firm should increase its output If marginal revenue less than marginal cost, the firm should shut down in the short run If marginal revenue equals marginal cost, the firm should produce exactly one more unit of output All of the above are correct
If marginal revenue is greater than marginal cost, the firm should increase its output
Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts?
It increases
If Korea is capable of producing either shoes or soccer balls or some combination of the two, then
Korea's opportunity cost of shoes is the inverse of its opportunity cost of soccer balls
Which of the following statements about models is correct? The more details a model includes, the better the model Models assume away irrelevant details Models cannot be used to explain how the economy functions Models cannot be used to make predictions
Models assume away irrelevant details
What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you?
Price will rise, and the effect on quantity is ambiguous
What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea (a substitute for coffee) fell?
Quantity would fall, and the effect on price would be ambiguous
Which of the following changes would NOT shift the demand curve for a good or service? a change in income a change in the price of a good or service a change in expectations about the future price of the good or service a change in the price of a good or service
a change in the price of a good or service
The "invisible hand" is
a concept developed by Adam Smith to describe the virtues of free markets.
When demand is inelastic, a decrease in price will cause
a decrease in total revenue
When demand for a good is relatively inelastic, a decrease in supply will result in
a relatively large change in equilibrium price and a relatively small change in equilibrium quantity
One of the defining characteristics of a perfectly competitive market is
a similar product
The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the
amount of the other good that must be given up
The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is
an implicit cost
A rightward shift of a supply curve is called
an increase in supply
If a good is normal, then an increase in income will result in
an increase in the demand for the good
Suppose good X has a negative income elasticity of demand. This implies that good X is
an inferior good
If the demand for a product decreases, ceteris paribus, then we would expect equilibrium price
and equilibrium quantity to both decrease
A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,
average fixed cost is 50 cents
At the profit-maximizing output, a monopoly's marginal cost will
be less than the price per unit of its product
Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic vases, but Regan is better at producing both goods. In this case, trade could
benefit both Jayson and Regan
In a market economy, supply and demand determine
both the quantity of each good produced and the price at which it is sold
Monopolies use their market power to
charge a price that is higher than marginal cost
If the cross-price elasticity of two goods is negative, then the two goods are
compliments
Private markets fail to account for externalities because
decisionmakers in the market fail to include the costs or benefits of their behavior to third parties
The exit of existing firms from a competitive market will
decrease market supply and increase market price
Economists view positive statements as
descriptive, making a claim about how the world is
If a monopolist can practice perfect price discrimination, the monopolist will
eliminate consumer surplus, eliminate deadweight loss, and maximize profits
Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good?
equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous
Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will
experience losses but will continue to produce rubber bands
Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors while Mexico has a comparative advantage in auto parts. Also suppose the US has an absolute advantage in the production of both semiconductors and auto parts. The US should
export semiconductors to Mexico and import auto parts from Mexico
A competitive market is in long run equilibrium. If demand decreases, we can be certain that price will
fall in the short run. All, some, or no forms will shut down in the short run, and some of then will exit the industry in the long-run. Price will then rise to reach the new long-run equilibrium
In perfectly competitive markets,
firms produce identical products, np individual buyer can influence the market price, and no individual seller can influence the market price
For a competitive market,
if a seller charges more than the going price, buyers will go elsewhere to make their purchases.
Wiladee used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is counted as part of the tailoring firm's
implicit costs
If marginal cost is below average total cost, then average total cost
is falling
For a self-sufficient producer, the production possibilities frontier
is the same as the consumption possibilities frontier
In the short run, a firm operating in a competitive industry will shut down if price is
less than average variable cost
Which of the following is the best example of a variable cost? monthly wage payments for hired labor annual property tax punishments for a building monthly rent payments for a warehouse annual insurance payments for a warehouse
monthly wage payments for hired labor
When externalities exist, buyers and sellers
neglect the external effects of their actions, and the market equilibrium is not efficient.
A congested side street in your neighborhood is
not excludable and rival in consumption
Because public goods are
not excludable, people have an incentive to be free riders.
The deadweight loss associated with a monopoly occurs because the monopolist
produces an output level less than the socially optimal level
If there is an increase in market demand in a perfectly competitive market, then in the short run
profits will rise
Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the
quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases
explicit costs
require an outlay of money by the firm
The phenomenon of scarcity stems from the fact that
resources are limited
An increase in quantity demanded
results in a movement downward and to the right along a demand curve
Resources are
scarce for households and scarce for economies
A marginal change is a
small, incremental adjustment
Ashley bakes bread that she sells at the local farmer's market. If she purchases a new convection oven that reduces the costs of baking bread, the
supply can Ashley's bread will increase
Consumer surplus is
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and
the available factors of production technology
If a price ceiling is not binding, then
the equilibrium price is above the price ceiling
If education produces positive externalities, we would expect
the government to subsidize education
A production possibilities frontier is a straight line when
the rate of tradeoff between the two goods being produced is constant
In the long run, a profit-maximizing firm will choose to exit a market when
total revenue is less than total cost
Profit is defined as
total revenue minus total cost
We can say that the allocation of resources is efficient if
total surplus is maximized
In the short run, a firm incurs fixed cost
whether it produces output or not
In the short run, a firm incurs fixed costs
whether it produces output or not
In the long run, each firm is a competitive industry earns
zero economic profits