BEC 2 Flashcards
Allen buys only beer and pizza. When the price of beer is $2.00 per bottle and the price of pizza is $10.00, Allen maximizes his total utility (satisfaction) by buying 5 beers and 4 pizzas. If the marginal utility of the 5th beer is 100 utils, which one of the following would be the marginal utility of the 4th pizza?
40 utils.
100 utils.
200 utils.
500 utils.
500 utils.
When total utility is maximized, the marginal utility (MU) of the last dollar spent on each and every item acquired must be the same. Thus, total utility is maximized when: MU of beers/price of beers = MU of pizza/price of pizza. Using the values given: 100 utils/$2.00 = MU of pizza/$10.00. The equation for beers = 100/$2 = 50 utils per dollar. The MU of pizza also must be 50 utils per dollar. Therefore, 50 = MU of pizza/$10 = 500 utils.
Because of the existence of economies of scale, business firms may find that
Each additional unit of labor is less efficient than the previous unit.
As more labor is added to a factory, increases in output will diminish in the short run.
Increasing the size of a factory will result in lower average costs.
Increasing the size of a factory will result in lower total costs.
Increasing the size of a factory will result in lower average costs.
In the long run firms may experience increasing returns because they operate more efficiently. With growth comes specialization of labor and related production efficiencies related to the law of diminishing returns. This phenomenon is called economies of scale. This statement accurately describes this concept.
In the long run, if all input factors to a production process are increased by 100%, but total output increases by only 75%, this indicates
Increasing returns to scale.
Constant returns to scale.
Decreasing returns to scale.
Diminishing returns.
Decreasing returns to scale.
Since output increases in lesser proportion (75%) than inputs (100%), there are decreasing returns to scale; the returns from increasing the scale of operations in the long-run are less than proportionate to the inputs incurred in increasing the scale of operations.
This is a long-run concept in which all inputs are considered variable and primarily result from problems (communication, coordination, etc.) associated with managing very large-scale operations.
In a perfectly competitive market, in the short run, if the selling price of a commodity is greater than a firm’s average total cost of producing the commodity, which of the following is the best level of output for the firm?
Marginal cost (MC) = Average total cost (ATC).
Total revenue (TR) = Total cost (TC).
Marginal revenue (MR) = Marginal cost (MC).
Marginal revenue (MR) = Average total cost (ATC).
Marginal revenue (MR) = Marginal cost (MC).
When MR = MC, the amount received from the last unit sold (MR) equals the incremental (marginal) cost (MC) of providing that unit. At any quantity below that level, an additional unit would provide more revenue than cost (MR greater than MC). At any quantity above the level of MR = MC, an additional unit would cost more than the revenue it would generate (MC is greater than MR).
Thus, only at MR = MC is output at the best level for the firm. Provided the price (which also is MR) at which each unit sells is greater than average total cost (ATC), this quantity also will result in maximum profit. However, if price (MR) is not greater than ATC, the results for the firm would be:
MR = ATC: Firm will break even. MR is less than ATC, but greater than AVC (average variable cost): Firm is covering variable cost and contributing to fixed cost, but not making a profit. MR is less than AVC: Firm is not covering variable cost; the loss increases with every unit produced. Firm should shut down.
In a perfect monopoly market structure, which of the following is characteristic of a natural monopoly?
A firm has control of an essential input to the production process.
A firm has increasing returns to scale.
A firm owns a secret formula.
A firm has a government-granted exclusive franchise.
A firm has increasing returns to scale.
A natural monopoly results from conditions in which there are increasing returns to scale, such that a single firm can produce at a lower cost than two or more firms. Typically, fixed costs are extremely high, making it inefficient for a second firm to enter the market.
Which of the following statements is correct regarding the variety and price of products produced under monopolistic competition as compared to production under perfect competition?
The monopolistically competitive industry produces a greater variety of products at a lower cost per unit.
The monopolistically competitive industry produces a greater variety of products at a higher cost per unit.
The monopolistically competitive industry produces a smaller variety of products at a lower cost per unit.
The monopolistically competitive industry produces a smaller variety of products at a higher cost per unit.
The monopolistically competitive industry produces a greater variety of products at a higher cost per unit.
CORRECT! Under monopolistic competition, there will be a greater variety of products produced at a higher unit cost than under perfect competition. Under perfect competition, there are a large number of buyers and sellers, each of which is too small to separately affect the price of the good or service, selling a homogeneous good or service, and entry into (or exit from) the market is easy. Since each firm must accept the price set by the market (be a “price taker”), a firm’s marginal revenue (MR) is equal to the price (P) it can charge. Optimum production output occurs where MR = marginal cost (MC) = P. If firms are making a profit at that level of output, more firms will enter the market, which will increase market supply and drive market price down so that each firm just breaks even. In a monopolistically competitive market, a large number of providers sell differentiated products or services for which there are close substitutes. Because there is product differentiation, the MR and demand (D) curves have downward slopes, with the MR below D. As in perfect competition, optimum output occurs where MR = MC. At that level of output (MR = MC), P will be greater than MC and greater than P under perfect competition. Therefore, a monopolistically competitive industry produces a greater variety of products at a higher cost per unit than would occur in perfect competition.
Price discrimination is accomplished most effectively in markets with which of the following characteristics?
Fairly distinct segments of customers.
High competition that generates many price changes.
Advanced technology capabilities that determine optimal pricing.
Excess capacity that meets high demand at different price levels.
Fairly distinct segments of customers.
CORRECT! As the term implies, price discrimination is a pricing strategy that charges customers in different market segments different prices for the same or largely the same product or service. When a market has distinct segments (i.e., buyers that are of fairly distinct types), suppliers are better able to charge different prices to different buyer types (market segments) for the same or essentially the same good or service. For example, it is common for pharmaceutical companies to charge different prices for the same drug to different geographic market segments. As a consequence, U.S. consumers pay almost twice what Europeans pay for the same drugs.
A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company’s situation?
Quantity increases proportionally more than the price declines.
Quantity increases proportionally less than the price declines.
Price increases proportionally more than the quantity declines.
Price increases proportionally less than the quantity declines.
Quantity increases proportionally more than the price declines.
Elasticity of demand measures the percentage change in the quantity of a commodity demanded as a result of a given percentage change in the price of a commodity. When demand is elastic (an elasticity coefficient < 1), the percentage change in quantity is greater than the percentage change in price. Therefore, for a given price decline, there will be a greater than proportional increase in quantity
Long Lake Golf Course has raised greens fees for a nine-hole game due to an increase in demand.
Previous Rate New rate Average games Old Average games New Regular weekday $10 $11 80 70 Senior citizen 6 8 150 82 Weekend 15 20 221 223
Which one of the following is correct?
The regular weekday and weekend demand is inelastic.
The regular weekday and weekend demand is elastic.
The senior citizen demand is elastic, and weekend demand is inelastic.
The regular weekday demand is inelastic, and weekend demand is elastic
The senior citizen demand is elastic, and weekend demand is inelastic.
The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. If the result is greater than one, demand is elastic; if it is less than one, it is inelastic; and if it is equal to one, it is unitary elastic. The regular weekday demand is elastic as calculated below.
(80 − 70) ÷ [(80 + 70) ÷ 2] = 1.4
($11 − $10) ÷ [($11 + $10) ÷ 2]
The weekend demand is inelastic as calculated below.
(223 − 221) ÷ [(223 + 221) ÷ 2] = 0.03
($20 − $15) ÷ [($20 + $15) ÷ 2]
The senior citizen demand is elastic as calculated below.
(150 − 82) ÷ [(150 + 82) ÷ 2] = 2.05
($8 − $6) ÷ [($8 + $6) ÷ 2]
Given the following data, what is the marginal propensity to consume?
Level of Disposable Income Level of Consumption
$40,000 $38,000
48,000 44,000
- 33
- 16
- 95
- 75
0.75
The marginal propensity to consume is calculated by dividing the change in consumption by the change in disposable income. Therefore, the marginal propensity to consume would be 0.75 [($44,000 − $38,000) / ($48,000 − $40,000)].
An increase in spending on imported goods would most likely cause which one of the following?
Shift aggregate supply to the right.
Shift aggregate demand to the right.
Shift aggregate supply to the left.
Shift aggregate demand to the left.
Shift aggregate demand to the left.
An increase in spending on imported goods would most likely shift the aggregate demand curve to the left–a reduction in demand. An increase in spending on imported goods would shift the demand curve to the left as demand for domestic goods is replaced by imports.
The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
$100 billion
$80 billion
$20 billion
$10 billion
$20 billion
In order to reach full employment, gross domestic product needs to increase by $.1 trillion (i.e., $1.3 trillion @ full employment - $1.2 trillion @ current = $.1 trillion shortfall). Because of the multiplier effect, additional government expenditures needed to increase gross domestic product by that amount is $20 billion. The formula is:
Multiplier Effect = Initial Change in Spending × (1/(1 - MPC))
Where: Initial Change in Spending = X, and substituting known values:
$.1T = X × [1/(1-.8)] [NOTE: .1T = 100B.]; therefore:
$100B = X × [1/.2] $100B = X × 5 X = $100B/5 X = $20B
A $20B increase in government expenditures would result in $100 billion increase in gross domestic product.
Which of the following effects is most likely to accompany an unexpected reduction in aggregate supply, assuming a conventional supply curve?
An increase in the price level.
A decrease in the price level.
A decrease in the rate of unemployment.
An increase in the gross domestic product (GDP).
An increase in the price level.
A reduction in aggregate supply will shift the supply curve to the left, resulting in a lower quantity of output at a higher price.
In any competitive market, an equal increase in both demand and supply can be expected to always
Increase both price and market-clearing quantity.
Decrease both price and market-clearing quantity.
Increase market-clearing quantity.
Increase price.
Increase market-clearing quantity.
In a competitive market, the market will always clear at the equilibrium price. If there is an equal increase in both demand and supply, the equilibrium price may increase, decrease, or remain the same. However, there will be more units sold.
The aggregate demand and aggregate supply curves intersect at a price and quantity that are
At (equal to) potential GDP.
Above potential GDP.
Below potential GDP.
Either at, above, or below potential GDP.
Either at, above, or below potential GDP.
Potential GDP is the maximum amount of various goods and services an economy can produce at a given time with available technology and full utilization of economic resources. The point at which the aggregate demand and aggregate supply curves intersect is equilibrium–the real output (and price level) for an economy. The real output may be at, above, or below potential GDP (output).
