possible final questions

Implicit costs are

opportunity costs of self-employed resources.

A firm can sell as much as it wants at a constant price. Demand is thus

perfectly elastic.

If quantity demanded is completely unresponsive to price changes, demand is

perfectly inelastic.

We would expect the cross elasticity of demand between Pepsi and Coke to be

positive, indicating substitute goods.

The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is

price

The law of demand states that, other things equal,

price and quantity demanded are inversely related.

In deciding whether to study for an economics quiz or go to a concert, one is confronted by the idea(s) of

scarcity and opportunity costs

In deciding whether to study for an economics quiz or go to a concert, one is confronted by the idea(s) of

scarcity and opportunity costs.

Total utility may be determined by

summing the marginal utilities of each unit consumed.

An increase in demand will increase equilibrium price to a greater extent

the less elastic the supply curve.

A production possibilities curve shows

the maximum amounts of two goods that can be produced, assuming the full use of available resources.

At the output level defining allocative efficiency,

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

The representative firm in a purely competitive industry

will earn zero economic profit in the long run.

Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price

will increase, but equilibrium quantity will be unchanged.

If the marginal utility from consuming the fifth unit of a product is 6 and the total utility from all five units is 162, then the total utility from consuming four units must be

156. Total utility from consuming multiple units of a product is the sum of the marginal utilities of consuming each unit. If, for example, total utility from consuming five units is 162, and the utility from consuming the fifth unit is 6, then the total utility of the first four units must be 156 (= 162 − 6).

Which of the following is not characteristic of the demand for a commodity that is elastic? The relative change in quantity demanded is greater than the relative change in price. Buyers are relatively sensitive to price changes. Total revenue increases if price is increased. The elasticity coefficient is greater than one.

Total revenue increases if price is increased.

A recurring theme in economics is that people

have unlimited economic wants but limited resources.

An industry where a change in the number of firms does not affect the prices of the resources used in the industry will have a long-run supply curve that is

horizontal

Suppose that MUx/Px exceeds MUy/Py. To maximize utility, the consumer who is spending all her money income should buy

more of X and/or less of Y.

Assuming no change in product demand, a pure monopolist

must lower price to increase sales.

Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. We can conclude that the government is correcting for

negative externalities in diagram (a) and positive externalities in diagram (b).

We would expect the cross elasticity of demand between dress shirts and ties to be

negative, indicating complementary goods.

At long-run equilibrium in monopolistic competition, there is

neither allocative nor productive efficiency.

a. Rearrange the income and saving data into an ascending order of income and graph them on the accompanying grid. Income per Year 15000 0 10000 5000 20000 Saving per Year 1000 -500 500 0 1500 Rearranged Income per Year: Rearranged Saving per Year: Yinercept slope:

$ 0. −$ 500 5,000 0 10,000. 500 15,000. 1,000 20,000. 1,500

Suppose that a pure monopolist can sell 7 units of output at $9 per unit and 8 units at $8.50 per unit. For the monopolist to profitably produce and sell the eighth unit of output, its marginal cost must be anywhere at or below

$5.00

Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. Resources are overallocated: Tammy installs a very nice front garden, raising the property values of all the other houses on her block: Market demand curves are too far to the left (too low) Resources are underallocated: Water pollution from a factory forces neighbors to buy water purifiers

. Negative externality: Resources are overallocated to products that impose negative externalities on third parties. This happens because the firms imposing negative externalities on third parties fail to take into account the costs that would be needed to either prevent the negative externalities or compensate those who suffer from them. Not taking those costs into account renders the firms' profits artificially high, which leads them to overproduce. As they do so, resources are overallocated to the production of their products and taken away from the production of other products that would have produced greater net benefits for society. In terms of a supply and demand diagram, the negative externalities lower the polluting firms' MC curves and shift the market supply curve to the right. This results in an equilibrium quantity in excess of the optimal output level that would prevail if the firms' MC curves correctly accounted for the negative externalities.b. Positive externality: Tammy's garden provides a positive externality for her neighbors because while her main intent was to make herself happy by improving the look of her own property, she has also provided a free benefit to her neighbors. They receive higher property values without having to pay Tammy anything for them.c. Positive externality: Positive externalities cause market demand curves to be too far to the left (too low) relative to total-benefit demand curves. The problem is that when there are positive externalities, the people receiving the positive externalities do not have to pay for the benefits they receive. Thus, their willingness to pay for those benefits is not captured by the market demand curve. This causes the market demand curve to end up too far to the left, leading to a market equilibrium quantity that is less than the optimal output. And because output is less than optimal, resources that should have flowed to producing more of the good in question flow instead to the production of other products that are less valued by consumers.d. Positive externality: Resources are underallocated to products that impose positive externalities on third parties. The problem is that when there are positive externalities, the people receiving the positive externalities do not have to pay producers for the benefits that they are receiving. This lowers producer profits and causes them to produce less than the socially optimal output. Because output is below the optimal level, resources that should have flowed to producing more of the goods in question flow instead to the production of other products that are less valued by consumers. In terms of a supply and demand diagram, the positive externality means that the demand curve is too far to the left (too low) relative to the total-benefit demand curve that includes the willingness to pay of the people receiving the positive externalities. With the demand curve shifted to the left in this way, the market equilibrium output ends up lower than the optimal output.e. Negative externality: The factory's water pollution imposes a negative externality on its neighbors because the factory does not take into account the costs that it imposes on them.

Suppose that as the price of Y falls from $10 to $7, the quantity of Y demanded increases from 600 to 800. Then the absolute value of the price elasticity (using the midpoint formula) is approximately

0.81. the price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded (QD) divided by the percentage change in price (P). Economists use the midpoint formula to calculate over a range of prices and quantities, so that Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]. If, for example, a price decrease from $10 to $7 causes an increase in quantity demanded from 600 to 800 , then Ed = 0.81 = [(200)/(1,400/2)] / [(3)/(17/2)].

A monopolist sells 6 units of a product per day at a unit price of $15. If it lowers the price to $14, its total revenue increases by $22. This implies that its sales quantity increases by

2 units per day. Marginal revenue is the change in total revenue from selling an additional unit. To calculate marginal revenue, it is first necessary to calculate total revenue (= price × quantity) at each price point. In this problem, an initial and new price, an initial quantity, and marginal revenue is given, allowing one to determine total revenue when price falls. From there one can solve for the new quantity and the change in sales. If, for example, a monopolist can sell 6 units for $15 each, their total revenue is $90. If marginal revenue is given as $22 when the price drops to $14 the new sales quantity is 8 (=22 − 14). Since the original quantity was 6, the increase in sales quantity was 2 (= 8 − 6).

A purely competitive firm currently producing 30 units of output earns marginal revenues of $12 from each extra unit of output it sells. If it sells 30 units, then its total revenues would be

360

The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three cans of Pepsi is 38 units of utility. The marginal utility of the third Pepsi is

8 units of utility. Marginal utility measures the change in total utility from consuming an additional unit. If, for example, Craig received 18 units of utility from the first Pepsi and 12 units from the second Pepsi, his total utility for two cans of Pepsi would be 30 units. If the third Pepsi raises total utility to 38, then the marginal utility of the third Pepsi is 8 (= 38 − 30).

Ariya likes to play golf. The number of times per year that she plays depends on both the price of playing a round of golf as well as Ariya's income and the cost of other types of entertainment—in particular, how much it costs to go see a movie instead of playing golf. The three demand schedules in the table below show how many rounds of golf per year Ariya will demand at each price under three different scenarios. In scenario D1, Ariya's income is $70,000 per year and movies cost $13 each. In scenario D2, Ariya's income is also $70,000 per year, but the price of seeing a movie rises to $15. And in scenario D3, Ariya's income goes up to $90,000 per year, while movies cost $15. Scenario. D1. D2. D3. Income per year$70,000. $70,000 $90,000 Price of movie ticket$13. $15. $15 Price of Golf. Quantity Demanded $50. 15. 10. 15 $35. 25. 15. 30 $20. 40 20 50 Using the data under D1 and D2, calculate the cross elasticity of Ariya's demand for golf at all three prices. (To do this, apply the midpoints approach to the cross elasticity of demand.) At $50, cross elasticity = At $35, cross elasticity = At $20, cross elasticity = Is the cross elasticity the same at all three prices? Using the data under D2 and D3, calculate the income elasticity of Ariya's demand for golf at all three prices. (To do this, apply the midpoints approach to the income elasticity of demand.) At $50, income elasticity of demand = At $35, income elasticity of demand = At $20, income elasticity of demand =

Ec= (Q2−Q1)/((Q2+Q1)2)/(P2−P1)/((P2+P1)2) Using our first ordered pair, (15,$13), as (Q1,P1) and our second ordered pair, (10,$15), as (Q2,P2); we get −2.80 as our cross elasticity.We do the same exercise for $35. Here we have the ordered pairs (25,$13) and (15,$15), for a cross elasticity of −3.50. Finally, we have the ordered pairs of (40,$13) and (20,$15) at a price of $20 for a game of golf, and get a cross elasticity of −4.67. . To calculate the income elasticity, we use a similar approach. Here we divide the percentage change in quantity demanded by the percentage change in income. We do this at every price for the good. For our golf example, we have the following income elasticities: EI= (Q2−Q1)/((Q2+Q1)2)/ (I2−I1)/((I2+I1)2) Using our first ordered pair, (10,$70,000), as (Q1,I1) and our second ordered pair, (15,$90,000), as (Q2,I2); we get 1.60 as our income elasticity.We do the same exercise for $35. Here we have the ordered pairs (15,$70,000) and (30,$90,000), for an income elasticity of 2.67. Finally, we have the ordered pairs of (20,$70,000) and (50,$90,000) at a price of $20 for a game of golf, and get an income elasticity of 3.43.

You are a newspaper publisher. You are in the middle of a one-year factory rental contract that requires you to pay $500,000 per month, and you have contractual salary obligations of $1,000,000 per month that you can't get out of. You also have a marginal printing cost of $0.35 per paper as well as a marginal delivery cost of $0.10 per paper. a. If sales fall by 20 percent from 1,000,000 newspapers per month to 800,000 newspapers per month, what happens to the AFC per newspaper? AFC per newspaper rises or increases frm $ to $ b. What happens to the MC per newspaper? c. What happens to the minimum amount that you must charge to break even?

Now assuming sales fall by 20 percent to 800,000 newspapers sold, the new AFC is $1.88. This equals the total fixed cost of $1.50 million divided by the new number of newspapers sold, 800,000 (= $1.50 million/800,000). Thus, the AFC increases from $1.50 to $1.88 after the decrease in sales. b. The marginal printing and marginal delivery costs are still the same; therefore, marginal costs do not change. c. To break even before the decline in sales, the company needed to charge enough to cover the AFC, $1.50, and the AVC, $0.45, which is the sum of the printing cost and delivery cost per newspaper. Thus, the company needed to charge $1.95 per newspaper. To break even after the decline in sales, the company needs to charge enough to cover the AFC, $1.88, and the AVC, $0.45, which is the sum of the printing cost and delivery cost per newspaper (note this does not change because the cost is per newspaper). Thus, the company needs to charge $2.33 per newspaper.

In a purely competitive industry, an optimal allocation of scarce resources occurs when

P = MC.

Allocative inefficiency happens in a monopoly because at the profit-maximizing output level,

P > MC.

In which of the following instances will total revenue decline? Price rises and supply is elastic. Price falls and demand is elastic. Price rises and demand is inelastic. Price rises and demand is elastic.

Price rises and demand is elastic.

Which of the following is assumed in constructing a typical production possibilities curve?

Production technology is fixed.

Refer to the diagram. If actual production and consumption occur at Q2,

Refer to the diagram. If actual production and consumption occur at Q2,

There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $21,000 per mile to set up. a. How much would it cost to fence a single property whose area is one square mile if that property also happens to be perfectly square, with sides that are each one mile long? b. How much would it cost to fence exactly four such properties, which together would contain four square miles of area? c. Now consider how much it would cost to fence in four square miles of ranch land if, instead, it comes as a single large square that is two miles long on each side. d. Which is more costly—fencing in the four, one-square-mile properties or the single four-square-mile property? multiple choice The single four-square-mile property or Four, one-square-mile propertied

The answer is 4 × $21,000, one length of fence for each side of the property, or $84,000. b. The four squares below represent our four properties. Each of these costs $84,000 to fence. Thus, the cost of fencing these four properties equals $336,000 (= 4 × $84,000). c. Here, we only need to fence the outside perimeter in the diagram below. First, recognize that each side of the square below is twice as long as the problem above (separate properties), which implies it is going to cost (2 × $21,000) to fence each side (2 miles long). There are four sides, so the total cost of fencing this area is $168,000 (= 8 × $21,000). . This implies that it is cheaper to fence a property of four square miles than four properties of one square mile. The cost savings come from the fact that we do not need to fence off the inner sides of the square miles (dashed lines).

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

a + b.

Suppose the income elasticity of demand for toys is −0.5. This means that a 12 percent increase in income will decrease the purchase of toys by 6 percent. a 12 percent increase in income will decrease the purchase of toys by 24 percent. a 12 percent increase in income will increase the purchase of toys by 6 percent. toys are a normal good.

a 12 percent increase in income will decrease the purchase of toys by 6 percent. The income elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in income. A negative income elasticity indicates that income and quantity demanded are inversely related, and that the product is an inferior good. If, for example, the income elasticity is −0.5 and income increases by 12 percent, then consumer purchases will decrease by 6 percent (−0.5 = X/12; X = −0.5 × 12 = −6).

In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by

a change in buyer tastes.

Which of the following would not shift the demand curve for beef?

a reduction in the price of cattle feed

What effect will each of the following have on the supply of auto tires? A technological advance in the methods of producing tires A decline in the number of firms in the tire industry c. An increase in the price of rubber used in the production of tires: d. The expectation that the equilibrium price of auto tires will be lower in the future than it is now A decline in the price of large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires): The levying of a per-unit tax on each auto tire sold: g. The granting of a 50-cent-per-unit subsidy for each auto tire produced:

a. A technological advance in the methods of producing tires: Supply increases. b. A decline in the number of firms in the tire industry: Supply decreases c. An increase in the price of rubber used in the production of tires: Supply decreases. d. The expectation that the equilibrium price of auto tires will be lower in the future than it is now: Supply increases e. A decline in the price of large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires):Increase The levying of a per-unit tax on each auto tire sold: Supply decreases The granting of a 50-cent-per-unit subsidy for each auto tire produced: Supply increases

Erin grows pecans. The number of bushels (B) that she can produce depends on the number of inches of rainfall (R) that her orchards get. The relationship is given by the following equation: B = 3,000 + 800R. Match each part of this equation with the correct term. a. B: b. 3,000: c. 800: d. R:

a. B is the dependent variable. b. 3,000 is the vertical intercept. c. 800 is the slope.d. R is the independent variable.

For a purely competitive seller, price equals: average revenue. marginal revenue. total revenue divided by output. all of these.

all of these

Which of the following is a characteristic of pure monopoly?

barriers to entry

A person should consume more of something when its marginal

benefit exceeds its marginal cost.

Economics is a social science that studies how individuals, institutions, and society may

best use resources to maximize satisfaction of economic wants.

After long-run adjustments, a purely competitive market achieves

both productive and allocative efficiency.

When tickets are "scalped," then in this market transaction

both the buyer and seller benefit.

A price-discriminating monopolist will follow a system where

buyers with inelastic demand are charged higher prices than buyers with elastic demand.

Which of the following is a distinguishing feature of a command system?

central planning

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.

Product differentiation in monopolistic competition involves a trade-off between

consumer choice and productive efficiency.

A large increase in the supply of smart TVs occurs simultaneously with a smaller decrease in its demand. As a result, the equilibrium price will

decrease and the equilibrium quantity will increase.

A decrease in demand and an increase in supply will

decrease price and affect the equilibrium quantity in an indeterminate way.

In markets where the supply curve is vertical, changes in

demand will not cause the equilibrium quantity to change.

Which set of characteristics below best describes the basic features of monopolistic competition?

easy entry, many firms, and differentiated products

A monopoly is most likely to emerge and be sustained when

economies of scale are large relative to market demand.

If the price-elasticity coefficient for a good is 1.75, the demand for that good is described as

elastic

The price elasticity of demand of a straight-line demand curve is

elastic in high-price ranges and inelastic in low-price ranges.

Which of the following is not a typical characteristic of a market system?

government ownership of most property resources

In the resource market,

households sell resources to businesses.

In the United States cartels are

in violation of the antitrust laws.

If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will

increase the amount demanded by more than 10 percent.

If the price elasticity of demand for a product is 1.5, then a price cut from $3.00 to $2.70 will increase the quantity demanded by about 1.5 percent. decrease the quantity demanded by about 1.5 percent. increase the quantity demanded by about 15 percent. increase the quantity demanded by about 30 percent.

increase the quantity demanded by about 15 percent. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity is 1.5 and the absolute value of the percentage change in price is 10 percent [= (2.70 − 3.00)/3.00], then the percentage change in quantity demanded (X) is 15 percent [1.5 = X / 10; X = 15].

Suppose the income elasticity of demand for jewelry is 2. Other things equal, a 10 percent increase in consumer income will

increase the quantity of jewelry purchased by 20 percent. The income elasticity of demand for a product equals the percentage change in quantity demanded of the good divided by the percentage change in income. If, for example, income elasticity is 2 and income rises by 10 percent, the quantity of jewelry purchased will increase 20 percent (2 = X/10; X = 2 × 10 = 20).

The invisible hand promotes society's interests because

individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.

Compared to the purely competitive industry, a pure monopoly

is able to use barriers to entry and maintain positive economic profits in the long run.

A dominant strategy is a player's move or action that

is better than any alternative option, regardless of what the other player does.

Game theory

is the analysis of how people (or firms) behave in strategic situations.

Consumer surplus

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

The monopolistically competitive seller's demand curve will become more elastic the

larger the number of competitors.

To maximize utility, a consumer should allocate money income so that the

marginal utility obtained from the last dollar spent on each product is the same.

Which idea is inconsistent with pure competition? price-taking behavior product differentiation freedom of entry or exit for firms a large number of buyers and sellers

product differentiation

Which of the following is a fundamental characteristic of the market system?

property rights

In which market model are the conditions of entry into the market easiest?

pure competition

In which of these continuums of degrees of competition (lowest to highest) is oligopoly properly placed?

pure monopoly, oligopoly, monopolistic competition, pure competition

The price elasticity of demand is a measure of the

responsiveness of buyers of a good to changes in its price.

In which industry is monopolistic competition most likely to be found?

retail trade

Economies of scale are indicated by

the declining segment of the long-run average total cost curve.

When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes

the income effect.

Economic cost can best be defined as

the income the firm must provide to resource suppliers to attract resources from alternative uses.

The opportunity cost of doing or getting something is defined as

the value of the best alternative that is given up in order to do or get something.

Competition means that

there are independently acting buyers and sellers in each market.

The theory of consumer behavior assumes that consumers attempt to maximize

total utility.

What combination of changes would most likely decrease the equilibrium price?

when supply increases and demand decreases