Final Exam - Assignments Flashcards
In a market system scarce goods are allocated through the operation of
- what must be sacrificed in using a resource for its next best use.
- market prices that are determined by consumers and producers acting in their own self-interest.
Suppose a city block was going to be used for a parking lot. The opportunity cost would be
greater in New York City because the alternative uses of the block are more valuable.
A student will decide to attend class when
the marginal benefit of attending exceeds the marginal cost of attending.
Which of the following best describes the concept of utility and economic behavior?
Satisfaction from consuming goods or services.
Which of the following is not a key element of the scientific method?
Designing data
The scientific method is the technique used by economists to determine
economic principles.
Which of the following represents a positive economic statement?
The unemployment rate is 4.8 percent.
Which of the following represent a normative economic statement?
The government ought to lower taxes so people have more money.
A straight-line budget constraint shows the ___________ associated with obtaining more of either of the two goods.
opportunity cost
The budget line shows the various _________ of two goods that a consumer can purchase with a specific _________
combination, income
Economic resources are the
natural, human, and manufactured inputs used to produce goods and services.
Economists classify resources as
labor, land, real capital, and entrepreneurs.
Because economic resources are used to produce goods and services, they are called
factors of production or inputs
Why is money not considered to be a capital resource in economics?
Money is not considered a capital resource because money is
not productive
Why is entrepreneurial ability distinct from labor even though both are considered as a category of economic resource?
Because entrepreneurial ability is not directly engaged in production.
What are the major functions of the entrepreneur?
- Make routine pricing decisions
- Innovate
- Purchase capital
- Create market demand
- Take risks
- Make decisions
Innovate
Take risks
Make decisions
Specify the typical shapes of marginal-benefit and marginal-cost curves.
The marginal benefit curve is _____sloping.
The marginal cost curve is _____sloping.
downward, upward
With these curves, the optimal allocation of resources to a particular product will occur when ______.
MB = MC
If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product?
fewer
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
a. The unemployment rate in Canada was 6.8 percent in September 2014
Macroeconomics
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
b. A software firm discharged 15 workers last month and transferred the work to India
Microeconomics
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
c. An unexpected freeze in central Florida reduced the citrus crop production and caused the price of oranges to rise
Microeconomics
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
d. Canadian output, adjusted for inflation, decreased by 1.9 percent in 2013
Macroeconomics
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
e. Scotiabank lowered its interest rate on business loans by one-half of 1 percentage point last week
Microeconomics
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
f. The consumer price index rose by 0.9 percent from January 2013 to December 2013
Macroeconomics
Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease?
a. Your budget increases from $100 to $150 while the prices stay the same
b. Your budget remains $100, the price of books remains $25, but the price of movie tickets rises to $20
c. Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls to $15
a) increase
b) decrease
c) increase
Suppose that you are given a $100 budget at work that can be spent only on two items: staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of purchasing one stapler is:
4 pens
For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units.
a. 3,000 units at which MC = $10 and MB = $13
b. 11 units at which MC = $4 and MB = $3
c. 43,277 units at which MC = $99 and MB = $99
d. 82 units at which MC < MB
e. 5 units at which MB < MC
a) more
b) fewer
c) current number
d) more
e) fewer
How (if at all) do each of the following events affect the location of a country’s production possibilities curve?
a. The quality of education increases
b. The number of unemployed workers increases
c. A new technique improves the efficiency of extracting copper from ore
d. A devastating earthquake destroys numerous production facilities
a) curve shifts outward
b) no change
c) curve shifts outward
d) curve shifts inward
Potatoes cost Janice $1 per kilogram, and she has $5.00 that she could possibly spend on potatoes or other items. If she feels that the first kilogram of potatoes is worth $1.50, the second kilogram is worth $1.14, the third kilogram is worth $1.05, and all subsequent kilograms are worth $0.30, how many kilograms of potatoes will she purchase? What if she only had $2 to spend?
Janice will purchase __ with her original $5.00 of income.
Janice will purchase __ when her income is $2.00.
3, 2
Pham can work as many or as few hours as she wants at the college bookstore for $11 per hour. But due to her hectic schedule, she has just 18 hours per week that she can spend working at either the bookstore or at other potential jobs. One potential job, at a café, will pay her $12 per hour for up to 7 hours per week. She has another job offer at a garage that will pay her $10 an hour for up to 5 hours per week. And she has a potential job at a daycare center that will pay her $8.50 per hour for as many hours as she can work. If her goal is to maximize the amount of money she can make each week, how many hours will she work at the bookstore?
11 hours
Suppose you won $15 on a Lotto Canada ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each.
Goods A B C D E F
Candy Bars 0 4 8 12 16 20
Bags of Peanuts x x x x x x
a) What is the slope of the budget line?
b) What is the opportunity cost of one more candy bar?
c) What is the opportunity cost of one more bag of peanuts?
d) Do these opportunity costs rise, fall, or remain constant as each additional unit of the product is purchased?
e) Does the budget line tell you which of the available combinations of candy bars and bags of peanuts to buy?
f) Suppose that you had won $30 on your ticket, not $15. Has the number of available combinations increased or decreased?
10,8,6,4,2,0
a) -0.5
b) 0.5 bags of peanuts
c) 2 candy bars
d) remain constant
e) No; it only tells you what is possible.
f) increased
Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts):
Production Alternatives Type of production A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0
a) Upon what specific assumptions is this production possibilities curve based?
b) What is the cost incurred to produce more cars as the economy moves from point C to point D?
c) What is the cost incurred to produce more forklifts as the economy moves from point C to point B?
d) Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length?
e) If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 forklifts, what could you conclude about its use of its available resources?
f) Is production at a point outside the production possibilities curve currently possible?
g) Could a future advance in technology allow production beyond the current production possibilities curve?
h) Could international trade allow a country to consume beyond its current production possibilities curve?
a) Full employment, fixed supplies of resources, fixed technology, and two goods
b) 9 forklifts
c) 2 automobiles
d) shape
e) The economy is underutilizing its available resources
f) no
g) yes
h) yes
Suppose that the cost of cheese falls, so that the marginal cost of producing pizza decreases.
a) Will the MC curve shift up or down?
b) Will the optimal amount of pizza increase or decrease?
a) MC will shift down.
b) The optimal amount of pizza will increase.
From the following statements, state whether the economic relationship is an inverse or direct relationship.
a. Persistent high temperature in summer and the sale of cotton shirts.
direct
From the following statements, state whether the economic relationship is an inverse or direct relationship.
b. Interest on student loans and the level of enrollment at a college or university.
inverse
From the following statements, state whether the economic relationship is an inverse or direct relationship.
c. The popularity of a dancer and the price of his show tickets.
direct
Suppose that C = a + bY, where C = consumption, a = consumption at zero income, b = slope, and Y = income.
a. Are C and Y positively related or are they negatively related?
b. If graphed, would the curve for this equation slope upward or slope downward?
c. Are the variables C and Y inversely related or directly related?
d. What is the value of C if a = 10, b = 0.50, and Y = 200?
e. What is the value of Y if C = 100, a = 10, and b = 0.25?
a) positively related
b) upward
c) directly related
d) C=110
e) Y=360
In a command economy scarce goods are allocated by
a government-appointed planning board based on the board’s long-term priorities.
Self-interest helps achieve society’s economic goals because
as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost.
There are a wide variety of desired goods and services in a market system because
individual wants are diverse.
What is produced is ultimately determined by
consumers because if the goods offered are not what consumers want, consumers will not buy them.
The market system depends on private property ownership and the protection of private property rights to
provide an incentive to maintain property and allow for the orderly transfer of property ownership.
Property Rights encourage cooperation by
helping to ensure that only mutually agreeable economic transactions take place.
The use of capital goods in the production process
improves efficiency, increases output, and provides for growth.
“Division of labour” means that workers
specialize in tasks that take advantage of their individual abilities and skills.
When an economy relies on specialization,
trade enables individuals to obtain the goods in which they do not have a specialization.
Barter requires that you
find a person who has what you want and a person who needs what you have to offer.
The use of money
provides a common value that makes buying and selling transactions simpler than would be the case with barter.
Consider the statement: “We want money only to part with it.” When people express a desire to ‘have money,’ they really want
the goods and services that money can buy.
Consider the following statement: “The market system is a profit-and-loss system.” This statement is:
true, because producer decisions are motivated by the attempt to earn profits.
Consider the following statement: “Competition is the disciplinarian of the market economy.” This statement is:
true, because when producers face competition they are driven to provide goods and services at the lowest possible cost.
Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of
the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.
The emergence of the MP3 (iPod) technology is an example of “creative destruction” because
it has replaced compact discs as a technology used for the storage and transfer of music.
The phrase “invisible hand” means that
market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.
In the circular flow model
- factor markets provide for the exchange of labour and product markets provide for the exchange of goods and services
- businesses sell goods and buy labour; households buy goods and sell labour
- there is a flow of real goods and services and a flow of money.
True or false? Shielding employees and suppliers from business risk helps to improve economic outcomes.
True
The process of shielding employees allows owners of a business to
attract employees and suppliers.
True or false? Business owners take on all the risk and profits or losses.
True
Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output.
Resource Units Required
Resource Price per unit of resource ($) Technique 1 2 3
Labor 3 5 2 3
Land 4 2 4 2
Capital 2 2 4 5
Entrepreneurial ability 2 4 2 4
a) With the resource prices shown, which technique will the firm choose?
Why?
b) Will production using that technique entail profit or loss?
c) What will be the amount of that profit or loss?
d) Will the industry expand or contract?
e) Assume now that a new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique?
f) Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose?
g) Evaluate this statement: “The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as possible.” Does your answer to part c, above, bear out this contention?
a) Technique 2, This technique represents the least-cost combination
b) profit
c) $6
d) expand
e) yes
f) Technique 1
g) Yes
Identify each of the following quotes as being an example of either the coordination problem, the invisible hand, creative destruction, or the incentive problem.
“If you compare a list of today’s most powerful and profitable companies with a similar list from 30 years ago, you will see lots of new entries:”
creative destruction
Identify each of the following quotes as being an example of either the coordination problem, the invisible hand, creative destruction, or the incentive problem.
“Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets:”
incentive problem
Identify each of the following quotes as being an example of either the coordination problem, the invisible hand, creative destruction, or the incentive problem.
“Each day, central planners in the old Soviet Union were tasked with setting 27 million prices correctly:”
coordination problem
Identify each of the following quotes as being an example of either the coordination problem, the invisible hand, creative destruction, or the incentive problem.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest:”
invisible hand
Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She develops two possible entrepreneurial business opportunities. In one, she will quit her job to start a hand-made soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $500,000 and costs for the necessary land, labor, and capital of $435,000 per year. For the Wi-Fi opportunity, she anticipates costs for land, labor, and capital of $3,200,000 per year as compared to revenues of $3,260,000 per year.
a. Should she quit her current job to become an entrepreneur?
b. If she does quit her current job, which opportunity would she pursue?
a) yes
b) soap
With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 10 units of labor, 7 units of land, 2 units of capital, and 3 units of entrepreneurial ability, selling at prices of $20, $60, $60, and $20, respectively.
a) If the firm can sell these 400 loaves at $2 per unit, what is its total revenue?
b) What is its total cost?
c) What is the firm’s profit or loss?
d) Will it continue to produce banana bread?
e) If this firm’s situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good?
a) 800$
b) 800$
c) The generates neither an economic profit or loss of 0$
d) yes
e) Their will be no change in the flow of resources.
a. Suppose that businesses buy a total of $180 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $92 billion in wages, $26 billion in rent, and $36 billion in interest, how much are households paid for providing entrepreneurial ability?
b. If households spend $95 billion on goods and $85 billion on services, how much in revenues do businesses receive in the product market?
a) $26 billion for entrepreneurial ability
b) $180 billion
Which statement is consistent with the law of demand?
A reduction in market price will lead to an increase in quantity demanded.
Which of the following characteristics lead to a downward-sloping demand curve?
- Diminishing marginal utility
- Increasing marginal benefit
- Increasing opportunity costs
- An increase in purchasing power as market price decreases
- Diminishing preferences for a particular good
- A decline in the price of a related good
- diminishing marginal utility
- an increase in purchasing power as market price decreases
How is a market demand curve derived from individual demand curves?
Add up quantities demanded by all individual consumers for each price
What are the determinants of demand?
- Income
- Price of related goods
- A good’s own price
- Technology
- Tastes and preferences
- Factor prices
- Number of consumers
- income
- price of related goods
- a good’s own price
- tastes and preferences
- number of consumers
Indicate whether a change in the value of each of the following determinants of demand leads to a movement along the demand curve or a shift in the demand curve.
i. Change in market price
ii. Change in income
iii. Change in consumer expectations
iv. Change in the price of a related good
v. Change in technology
vi. Change in factor prices
i. movement along demand curve
ii. shift in demand curve
iii. shift in demand curve
iv. shift in demand curve
v. no change
vi. no change
A graph shows Point A and B on the same demand curve. Another demand curve above the previous one shows a point C. Indicate if there is a change in quantity demanded or a change in demand?
a) A change from point A to B is?
b) A change from point A to point C is?
a) a change in quantity demanded
b) a change in demand
Which statement is consistent with the law of supply?
An increase in market price will lead to an increase in quantity supplied.
Which of the following characteristics leads to an upward-sloping supply curve?
- Increasing opportunity costs
- Increasing marginal costs
- Diminishing marginal utility
- A decrease in factor prices
- An increase in factor prices
- Increasing labor productivity
- increasing opportunity costs
- increasing marginal costs
How do you derive a market supply curve from individual supply curves?
Add up quantities supplied by all individual producers for each price
What are the determinants of supply?
- Income
- Price of related goods
- Technology
- Tastes and preferences
- Factor prices
- Number of producers
- technology
- factor prices
- number of producers
Indicate whether a change in the value of each of the following determinants of supply leads to a movement along the supply curve or a shift in the supply curve.
i. Change in market price
ii. Change in factor productivity
iii. Change in producer expectations
iv. Change in the price of other goods
v. Change in technology
vi. Change in factor prices
vii. Change in taxes
i. movement along the supply curve
ii. a shift in the supply curve
iii. a shift in the supply curve
iv. a shift in the supply curve
v. a shift in the supply curve
vi. a shift in the supply curve
vii. a shift in the supply curve
A graph shows Point A and B on the same supply curve. Another supply curve above the previous one shows a point C. Indicate if there is a change in quantity supplied or a change in supply?
a) A change from point A to B is?
b) A change from point A to point C is?
a) a change in quantity supplied
b) a change in supply
In 2001, an outbreak of foot-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the following?
a. The supply of cattle hides
b. Hide prices
c. The supply of leather goods
d. The price of leather goods
a) decrease
b) increase
c) decrease
d) increase
For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change?
Prices change in reaction to a mismatch between Qd and Qs.
Price floors and ceilings stifle the function of prices and distort resource allocation because
price restrictions result in a mis-allocation of resources, consumers value the good and the resources needed to produce it differently than what the market currently offers
What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Smart car?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will greatly come down in the near future.
e. The price of gasoline substantially drops.
a) increase
b) increase
c) increase
d) decrease
e) cannot be determined
True or False: A “change in quantity demanded” is a shift of the entire demand curve to the right or to the left.
false
What effect will each of the following have on the supply of auto tires?
a. A technological advance in the methods of producing tires
b. 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 currently
e. A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires)
f. 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) increase
b) decrease
c) decrease
d) increase
e) increase
f) decrease
g) increase
In which of the following statements are the terms supply and demand used correctly?
A. In the corn market, demand often exceeds supply and supply sometimes exceeds demand.
B. The price of corn rises and falls in response to changes in supply and demand.
Statement B
Suppose that in the market for computer memory chips, the equilibrium price is $50 per chip. If the current price is $55 per chip, then there will be ______ of memory chips.
a surplus
Critically evaluate: “In comparing the two equilibrium positions in the diagram below, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand”.
- A decrease in demand from D1 to D2 results _____
- This causes the price to ____
- This change in price results in ______ in quantity demanded along the D2 demand curve.
- This change in price results in ______ in quantity supplied.
- The new equilibrium has a _____ and a _____ when compared to the original equilibrium.
- Does this refute the law of demand?
- Why?
1) excess supply
2) fall
3) an increase
4) a decrease
5) lower price, lower quantity
6) no
7) because there was a change in demand
Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as “P?” and “Q?”, respectively.
a. On a hot day, both the demand for lemonade and the supply of lemonade increase.
Price: ?
Quantity: increase
Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as “P?” and “Q?”, respectively.
b. On a cold day, both the demand for ice cream and the supply of ice cream decrease.
Price: ?
Quantity: decrease
Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as “P?” and “Q?”, respectively.
c. When Hawaii’s Mt. Kilauea erupts violently, the demand on the part of tourists for
sightseeing flights increases but the supply of pilots willing to provide these
dangerous flights decreases.
Price: increase
Quantity: ?
Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as “P?” and “Q?”, respectively.
d. In a hot area of Arizona where they generate a lot of electricity with wind turbines, the demand for electricity falls on windy days as people switch off
their air conditioners and enjoy the breeze. But at the same time, the amount
of electricity supplied increases as the wind turbines spin faster.
Price: decrease
Quantity: ?
Suppose that the government establishes a price ceiling of $3.70 for wheat.
a. Why might the government establish this price ceiling?
b. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effect of this price floor?
a) to control food prices
b) it will create a surplus
A price ceiling will result in a shortage only if the ceiling price is _____ the equilibrium price.
less than
Bushels Price Bushels Surplus (+) or
Demanded Supplied Shortage (-)
85 $3.40 72 x
80 3.70 73 x
75 4.00 75 x
70 4.30 77 x
65 4.60 79 x
60 4.90 81 x
a. What is the equilibrium price in this market?
b. At what price is there neither a surplus nor a shortage?
c. Calculate the surplus or shortage at a price of $3.40 and at a price of $4.90.
d. How big a surplus or shortage will result if the price is 60 cents higher than the equilibrium price?
e. How big a surplus or shortage will result if the price is 30 cents lower than the equilibrium price?
-13, -7, 0, 7, 14, 21
a) $4
b) $4
c) When the price is $3.40, there is a shortage of 13 thousand bushels.
When the price is $4.90, there is a surplus of 21 thousand bushels.
d) 14 thousand bushels
e) -7 thousand bushels
How will each of the following changes in demand and or supply affect equilibrium price and equilibrium quantity in a competitive market? That is, do price and quantity rise, fall or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts?
a. Supply decreases and demand is constant.
b. Demand decreases and supply is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
h. Demand decreases and supply decreases.
a) price increases, quantity decreases
b) price decreases, quantity decreases
c) price decreases, quantity increases
d) price is indeterminant, quantity increases
e) price increases, quantity increases
f) price decreases, quantity is indeterminant
g) price increases, quantity is indeterminant
h) price is indeterminant, quantity decreases
Monthly Apartments Apartments
Rent Demanded Supplied
$2,750 10,000 15,000
2,250 12,500 12,500
1,750 15,000 10,000
1,250 17,500 7,500
750 20,000 5,000
a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?
b. If the municipal government can enforce a rent-control law that sets the maximum monthly rent at $1,750, will there be a surplus or a shortage? Of how many units? How many units will actually be rented each month?
c. Suppose that a new government wants to keep out the poor. It declares that the minimum allowable rent is $2,750 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? How many units will actually be rented each month?
d. Start at the original (correct) equilibrium price and quantity in part (a). Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $1,750 per month? To $1,250 per month? To $750 per month?
a) Market equilibrium rental price: $2,250 per month
Market equilibrium quantity:
12,500 apartments.
b) shortage of 5,000 apartments per month, 10,000 apartments will be rented
c) surplus of 5,000 apartments per month, 10,000 apartments will be rented
d) Fall to $1,750 per month: 2,500 units.
Fall to $1,250 per month: 5,000 units.
Fall to $750 per month: 7,500 units.
If you compute the price elasticity of demand using a quantity of tickets from 1 to 8 and using a quantity of tickets from 1,000 to 8,000, the value of the price elasticity of demand is
the same because the percentage change in quantity will remain the same.
Product Price ($) Quantity Demanded 6 0 5 1 4 2 3 3 2 4 1 5 0 6
Use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes.
a) Moving from $5 to $4: Ed =
b) Moving from $4 to $3: Ed =
c) Moving from $3 to $2: Ed =
d) Moving from $2 to $1: Ed =
e) What can you conclude about the relationship between the slope of the above demand curve and its elasticity?
f) Explain in a nontechnical way why demand is elastic in the upper left segment of the demand curve and inelastic in the lower right segment.
- When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic
- When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic
- When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand elastic
- When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand inelastic
a) 3.00
b) 1.40
c) 0.71
d) 0.33
e) The demand curve above has a constant slope of -1, but elasticity decreases as we move down the curve.
f)
- When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic
- When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic
Price Quantity Total Revenue 5 1 x 4 2 x 3 3 x 2 4 x 1 5 x
Price and total revenue move in opposite directions, when the demand is elastic.
5, 8, 9, 8, 5
elastic
How would the following changes in price affect total revenue, that is, would total revenue increase, decrease, or remain unchanged?
a. Price falls and demand is inelastic.
b. Price rises and demand is elastic.
c. Price rises and supply is elastic.
d. Price rises and supply is inelastic.
e. Price rises and demand is inelastic.
f. Price falls and demand is elastic.
g. Price falls and demand is unit-elastic.
a) total revenue decreases
b) total revenue decreases
c) total revenue increases
d) total revenue increases
e) total revenue increases
f) total revenue increases
g) total revenue remains unchanged
Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, can you tell whether demand is elastic, inelastic, or unit-elastic over this price range?
Demand is unit-elastic over this range.
Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $15 per basketball and $600 when the price is set at $10 per basketball. Without using the midpoint formula, can you tell whether demand is elastic, inelastic, or unit-elastic over this price range?
Demand is unit elastic over this range.
Danny “Dimes” Donahue is a neighbourhood’s 9-year old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300.
a. Is demand elastic or inelastic over this price range?
b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny’s total revenue?
a) demand is elastic
b) Cutting the price from $1 to $0.50 will increase Danny’s total revenue.
Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. This research indicates that the cross elasticity of the two products is:
negative because beer and marijuana are complements.
a. What is the tax incidence of a sales tax when demand is highly inelastic?
b. When demand is elastic?
a) primarily on consumers
b) primarily on producers
What are the major determinants of price elasticity of demand?
- Substitutability
- Proportion of income
- Luxuries versus necessities
- Time
- Excise taxes
- Availability of complementary and substitute goods
- Inferior goods and normal goods
- Substitutability
- Proportion of income
- Luxuries versus necessities
- Time
Use those determinants and your own reasoning in judging whether demand for each of the following products is elastic or inelastic:
a. Bottled water
b. Toothpaste
c. Crest toothpaste
d. Ketchup
e. Diamond bracelets
f. Microsoft’s Windows operating system\
a) elastic
b) inelastic
c) elastic
d) inelastic
e) elastic
f) inelastic
Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4.
a) What can you conclude about how products A and B are related?
b) What can you conclude about how products C and D are related?
a) A and B are substitutes
b) C and D are complements
Currently, at a price of $2.00 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $2.00 to $4.00 is unit-elastic (Es = 1). In the long run, a price increase from $2.00 to $4.00 has an elasticity of supply of 1.5. (Hint: Apply the midpoints approach to the elasticity of supply.)
a. How many popsicles will be sold each day in the short run if the price rises to $4.00 each?
b. How many popsicles will be sold per day in the long run if the price rises to $4.00 each?
a) 200.00 per day
b) 300.00 per day
Lorena likes to play golf. How many times per year she plays depends on two things: (1) the price of playing a round of golf, and (2) Lorena’s income and the cost of other types of entertainment—in particular, how much it costs to see a movie instead of playing golf.
The three demand schedules in the table below show how many rounds of golf per year Lorena will demand at each price under three different scenarios.
Scenario: D1 D2 D3 Income per year: $60,000 $60,000 $80,000 Movie Ticket Price: $11 $13 $13 Rounds of Golf: Quantity Demanded Price = $50 15 10 15 Price = $35 25 15 30 Price = $20 40 20 50
a) Cross elasticity of Lorena’s demand at the price of $50?
b) Cross elasticity of Lorena’s demand at the price of $35?
c) Cross elasticity of Lorena’s demand at the price of $20?
d) Is the cross elasticity the same at all three prices?
e) Are movies and golf substitute goods, complementary goods, or independent goods?
f) Income elasticity of Lorena’s demand at the price of $50?
g) Income elasticity of Lorena’s demand at the price of $35?
h) Income elasticity of Lorena’s demand at the price of $20?
i) Is the income elasticity the same at all three prices?
j) Is golf an inferior good or a normal good?
a) -2.40
b) -3.00
c) -4.00
d) No
e) complementary goods
f) 1.40
g) 2.33
h) 3.00
i) No
j) normal good
True or false. The law of diminishing marginal utility predicts the consumption behavior of addicts quite well.
false
Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $1 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:
reallocate spending from magazines to newspapers.
Other things held equal, demand curves slope downward because:
a decrease in a product’s price raises MU per dollar and makes consumers wish to purchase more units.
Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _______ and Jermaine will _______ .
rise; substitute lettuce for cucumber
Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is the same as her income _______.
increasing
Units Consumed Total Utility Marginal Utility 0 0 na 1 10 10 2 x 8 3 25 x 4 30 x 5 x 3 6 34 x
At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate?
How do you know?
total utility: 18, 33
Marginal utility: 7, 5, 1
a decreasing rate because marginal utility is declining
Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these two products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively.
Mrs. Wilson should buy? Is she buying the utility buying combination?
- more milk and less bread.
- not buying the utility-maximizing combination of bread and milk since the marginal utility per penny spent on bread is 0.80 and the marginal utility per penny spent on milk is 0.875.
The theory of consumer choice accounts for time
because time can be used to earn money.
Consider the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”
This statement recognizes that
time can be used to earn money.
a. “Before economic growth, there were too few goods; after growth, there is too little time.” This statement implies that economic growth creates
b. “It is irrational for an individual to take the time to be completely rational in economic decision making.” This statement recognizes that
c. “Telling Santa what you want for Christmas makes sense in terms of utility maximization.” This statement recognizes that
a) a tradeoff between the use of time to make more goods and the use of time to relax and enjoy the goods one already has.
b) it would take a great deal of time to consider all the factors for every decision
c) the benefit of making the request will likely exceed the cost
In the last decade or so there has been a dramatic expansion of small retail convenience stores stores (such as Mac’s, 7-Eleven, Becker’s, etc.) although their prices are generally much higher than those in the large supermarkets.
The success of convenience stores can be partially explained by
the time consumers save when purchasing goods there.
Many apartment-complex owners are installing water meters for each individual apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up the water expense as part of the rent. Where individual meters have been installed, water usage has declined 10 to 40 percent.
This decline in water usage
would be expected since people have to pay the cost of their own use.
Suppose there is an increase in the price of product B, with no change in the price of product A.
In this case,
the income effect would cause the marginal utility per dollar of B and the consumption of B to fall.
Answer the following true or false questions:
a) Every point on an indifference curve shows some combination of two products that gives different utility to a consumer.
b) Indifference curves are downward sloping because both products yield utility to the consumer.
c) to keep total utility constant, some amount of the other commodity must be given up to precisely offset the gain in total utility.
d) Total utility increases as the consumer moves to indifference curves farther from the origin.
a) false
b) true
c) true
d) true
Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of coffee and three chocolate bars. If the first bundle gives Ted a total utility of 18 utils while the second bundle gives Ted a total utility of 19 utils, could the two bundles be on the same indifference curve?
no
Bill spends his money on flowers and cookies so as to maximize his total utility. The initial prices of both flowers and cookies were $2. At that price, Bill buys three flowers and two cookies. When the price of flowers is lowered to $1, Bill buys eight flowers and one cookie. Which of the following statements about Bill’s reaction to the price change is NOT true?
- Bill moved to a higher indifference curve after the price of flowers fell.
- Bill’s demand curve for flowers shifted to the right.
- Bill’s budget line shifted outward when the price of flowers fell.
- Bill’s attainable set was smaller before the price of flowers fell.
- Bill’s demand curve for flowers shifted to the right.
- Bill’s budget line shifted outward when the price of flowers fell.
a) Repetitions Total Utility Marginal Utility 1 50 x 2 90 x 3 120 x 4 80 x 5 20 x 6 -60 x b) Once Mylie’s total utility begins to decrease, does each additional singing of the song hurt more than the previous one or less than the previous one?
a) Marginal utility: 50, 40, 30, -40, -60, -80
b) more than the previous one
John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils.
a) find the marginal utility
b) Does John show diminishing marginal utility for Coke, or does he show increasing marginal utility for Coke?
c) Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend the money to purchase the first can of Coke, would he spend the money to purchase the second can of Coke, too?
d) What about the third can?
e) If John’s marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke?
a) 10, 15, 25
b) increasing
c) yes
d) yes
e) yes
Suppose that Omar’s marginal utility for cups of coffee is constant at 2.5 utils per cup no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is, declining by 1 util per additional doughnut). In addition, suppose that coffee costs $1 per cup, doughnuts cost $1 each, and Omar has a budget that he can spend only on doughnuts, coffee, or both. How big would that budget have to be before he would spend a dollar buying a first cup of coffee?
$9
Units of X MUx Units of Y MUy 1 23 1 18 2 16 2 16 3 12 3 14 4 8 4 10 5 4 5 8 6 2 6 4
a. If your income is $18.00 and the prices of X and Y are $4.00 and $2.00, respectively, what quantities of each will you purchase to maximize utility?
b. What total utility will you realize?
c. Assume that, other things remaining unchanged, the price of X falls to $2.00. What quantities of X and Y will you now purchase?
d. Using the two prices and quantities for X, derive a demand schedule (a table showing prices and quantities demanded) for X.
a) X = 2 units, Y = 5 units
b) 105
c) X = 4 units, Y = 5 units
d) price = $4, quantity demanded = 2
price = $2, quantity demanded = 4
Assume that the data in the accompanying table give an indifference curve for Mr. Chen.
Units of A Units of B
16 6
12 8
8 12
4 24
a) Assuming that the prices of A and B are $1.50 and $1, respectively, and that Mr. Chen has $24 to spend what combination of A and B will Mr. Chen purchase?
b) Does your answer meet the MRS = PB/PA rule for equilibrium?
a) A=8 units B=12 units
b) yes
Show the substitution and income effects of a decrease in the price of gasoline. Assume gasoline is a normal good. How would your result change if gasoline were an inferior good?
The income effect would be negative.
Graphically illustrate a doubling of income without price changes in the indifference curve model. Given this change in income, the consumer will buy relatively less of good A and more of good B. What can you conclude about the relative coefficients of the income elasticity of demand for goods A and B?
Good B is more income-elastic than good A
Explicit costs are payments the firm makes for
inputs such as wages and salaries to its employees, whereas implicit costs are non-expenditure costs that occur through the use of self owned resources such as foregone income.
The explicit costs of going to college include
tuition costs and the cost of books, whereas the implicit costs include foregone income.
How do you calculate accounting profit?
Accounting profit equals sales revenue minus explicit costs.
A normal profit is considered a cost because
this is the amount required to ensure continued supply of the product.
Labour Total Marginal Average Input Product Product Product 0 0 na na 1 15 x x 2 34 x x 3 51 x x 4 65 x x 5 74 x x 6 80 x x 7 83 x x 8 82 x x
Marginal product: 15, 19, 17, 14, 9, 6, 3, -1
Average product: 15, 17, 17, 16.25, 14.8, 13.33, 11.86, 10.25
Classify the following as fixed or variable costs:
a. Advertising expenditures
b. Fuel
c. Interest on company-issued bonds
d. Shipping charges
e. Payments for raw materials
f. Real estate taxes
g. Executive salaries
h. Insurance premiums
i. Wage payments
j. Depreciation and obsolescence charges
k. Sales taxes
l. Rental payments on leased office machinery
a. variable cost
b. variable cost
c. fixed cost
d. variable cost
e. variable cost
f. fixed cost
g. fixed cost
h. fixed cost
i. variable cost
j. fixed cost
k. variable cost
l. fixed cost
Which of the following statements is true regarding the fixed and variable costs associated with owning and operating an automobile?
Fixed costs include insurance and variable costs include gasoline.
You are considering whether to drive your car or fly 2000 kilometers to Florida for spring break. In making your decision you should consider
the variable cost of the trip, the opportunity cost of time, and the need for transportation in Florida.
Long-run average total cost falls as the firm realizes ______ and later rises when the firm experiences _________.
economies of scale, diseconomies of scale
The minimum efficient scale is the
smallest level of output needed to attain all economies of scale and minimum long-run average total cost.
If the long-run average total cost drops quickly to its minimum point and then rises abruptly, the industry will likely be
composed of many small firms.
Linda sold 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda’s accounting profit is _____________ , while her economic profit is ______________.
$300; negative $100
Which of the following are short-run and which are long-run adjustments?
a. Wendy’s builds a new restaurant:
b. Scotiabank hires 200 more production workers:
c. A farmer increases the amount of fertilizer used on his corn crop:
d. An Alcan aluminum plant adds a third shift of workers:
a) long-run adjustments
b) short-run adjustments
c) short-run adjustments
d) short-run adjustments
Total product: 0 1 2 3 4 5 6 7 8 9 10
TVC: 0 45 85 120 150 185 225 270 325 390 465
Find total fixed cost, total cost, average fixed cost, average variable cost, average total cost, marginal cost.
Total fixed cost: 60, 60, 60, 60….
Total cost: 60, 105, 145, 180, 210, 245, 285, 330, 385, 450, 525
Average fixed cost: -, 60, 30, 20, 15, 12, 10, 8.57, 7.5, 6.67, 6
Average variable cost: -, 45, 42.5, 40, 37.5, 37, 37.5, 38.57, 40.63, 43.33, 46.5
Average total cost: -, 105, 72.5, 60, 52.5, 49, 47.5, 47.14, 48.13, 50, 52.5
Marginal cost: -, 45, 40, 35, 30, 35, 40, 45, 55, 65, 75
Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift.
a. A reduction in business property taxes:
b. An increase in the nominal wages of production workers:
c. A decrease in the price of electricity:
d. An increase in insurance rates on plant and equipment:
e. An increase in transportation costs:
a) MC=no change, AVC=no change, AFC=shift down, ATC=shift down
b) MC=shift up, AVC=shift up, AFC=no change, ATC=shift up
c) MC=shift down, AVC=shift down, AFC=no change, ATC=shift down
d) MC=no change, AVC=no change, AFC=shift up, ATC=shift up
e) MC=shift up, AVC=shift up, AFC=no change, ATC=shift up
True or false. The U shape of the long-run ATC curve is the result of diminishing returns.
false
Gomez runs a small pottery firm. He hires one helper at $13,000 per year, pays annual rent of $5,500 for his shop, and spends $21,500 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $5,500 per year if alternatively invested. He has been offered $19,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $2,500 per year. Total annual revenue from pottery sales is $75,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm.
a. Accounting profit $ 35,000.00
b. Economic profit $ 8,000.00
Imagine you have some workers and some handheld computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers sharing a computer can together inventory 150 items per hour. Three workers sharing a computer can together inventory 200 items per hour. And four or more workers sharing a computer can together inventory 210 items per hour. Computers cost $125 each and you must pay each worker $30 per hour.
a. If you assign one worker per computer, what is the cost of inventorying a single item with one worker?
b. If you assign two workers per computer, what is the cost of inventorying a single item?
c. If you assign three workers per computer, what is the cost of inventorying a single item?
d. If you assign four workers per computer, what is the cost of inventorying a single item?
e. How many workers per computer should you assign if you wish to minimize the cost of inventorying a single item?
a) $1.55 per item
b) $1.23 per item
c) $1.08 per item
d) $1.17 per item
e) 3.00 workers per computer
You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $600,000 per month, and you have contractual labour obligations of $1,250,000 per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.1 per paper.
a. If sales fall by 20 percent from 1,000,000 papers per month to 800,000 papers per month, what happens to the average fixed cost per paper and to the marginal cost per paper?
b. What happens to the minimum amount that you must charge to break even on these costs?
a) Average fixed cost per paper rises from $ 1.85 per paper to $ 2.31 per paper. Marginal cost per paper does not change.
b) The amount increases from $ 2.20 per paper to $ 2.66 per paper.
Select the basic characteristics of the following:
Pure competition
- Very large number of firms
- One firm
- No control over price
- Many obstacles to entry
- No nonprice competition
- Very large number of firms
- No control over price
- No nonprice competition
Select the basic characteristics of the following:
Pure monopoly
- One firm
- Few firms
- Unique product
- Easy entry
- Much control over price
- One firm
- Unique product
- Much control over price
Select the basic characteristics of the following:
Monopolistic competition
- Differentiated products
- Many firms
- Unique product
- Difficult entry
- Some price control
- Differentiated products
- Many firms
- Some price control
Select the basic characteristics of the following:
Oligopoly
- Few firms
- Standardized products
- Many obstacles to entry
- No control over price
- One firm
- Few firms
- Standardized products
- Many obstacles to entry
Under which of these market classifications does each of the following most accurately fit? Pure competition, Pure monopoly, Monopolistic competition, Oligopoly?
a. A supermarket in your hometown
b. The steel industry
c. A Saskatchewan wheat farm
d. The chartered bank in which you or your family has an account
e. The automobile industry
a) oligopoly
b) oligopoly
c) pure competition
d) monopolistic competition
e) oligopoly
We study pure competition because it
produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.
Consider the statement: “Even if a firm is losing money, it may be better to stay in business in the short run.”
a) This statement is
b) The firm should produce in the short run so long as the price
a) true if the loss is less than the fixed cost.
b) exceeds the average variable cost.
a) Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?
b) A firm with no fixed cost
a) No, the firm will want to shut down.
b) is really in the long run.
a. The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the
b. When an industry is purely competitive, price can be substituted for marginal revenue in the MR=MC rule because
a) last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.
b) the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so the MR is constant and equal to the price
Answer the following true or false questions below:
a) A firm will produce if P < AVC.
b) When P > AVC, the firm will produce in the short run at the quantity where P(=MR) is equal to its increasing MC.
c) The MC curve above the AVC curve is the firm’s short-run supply curve.
a) false
b) true
c) true
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
a horizontal line at 2 cents per paper clip.
Product Quantity Total Marginal Price Demanded Revenue Revenue 2 0 x - 2 1 x x 2 2 x x 2 3 x x 2 4 x x 2 5 x x
a. What can you conclude about the structure of the industry in which this firm is operating?
Total revenue: 0, 2, 4, 6, 8, 10
Marginal revenue: -, 2, 2, 2, 2, 2
a) the industry is purely competitive
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
TR exceeds TC by as much as possible.
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:
MR = MC
A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production.
loss, shut down
Consider a profit-maximizing firm in a competitive industry. Under which of the following situations would the firm choose to produce where MR = MC?
P > minimum ATC.
P < minimum AVC.
Minimum AVC < P < minimum ATC.
P > minimum ATC.
Minimum AVC < P < minimum ATC.
A purely competitive firm finds that the market price for its product is $20.00. It has a fixed cost of $100.00 and a variable cost of $17.50 per unit for the first 50 units and then $27.50 per unit for all successive units.
a) Does price equal or exceed average variable cost for the first 50 units?
b) What is the average variable cost for the first 50 units?
c) Does price equal or exceed average variable cost for the first 100 units?
d) What is the average variable cost for the first 100 units?
e) What is the marginal cost per unit for the first 50 units?
f) What is the marginal cost for units 51 and higher?
g) For each of the first 50 units, does MR exceed MC?
h) What about for units 51 and higher?
i) What output level will yield the largest possible profit for this purely competitive firm?
a) yes
b) $17.50
c) no
d) $22.50
e) $17.50
f) $27.50
g) yes
h) no
i) 50 units
Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.
a) What is her AFC per poster (not per thousand!) if she prints 1,000 posters?
b) What if she prints 2,000 posters?
c) What if she prints 10,000 posters?
d) What is her ATC per poster if she prints 1,000?
e) What if she prints 2,000?
f) What if she prints 10,000?
g) If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately?
a) $0.25
b) $0.125
c) $0.025
d) $1.25
e) $1.025
f) $0.805
g) no
In the long run in a purely competitive industry,
entry and exit of firms can occur.
Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because
when profits are zero, the firm is earning sufficient revenue to cover the opportunity cost.
a. Entry and exit help to improve resource allocation because
b. Entry and exit in a purely competitive industry occur in the
a) losses result in exit and release resources to flow to markets where there are profits.
b) long run, so that long-run economic profits are zero
a. The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because if
b. Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because price
c. In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving
d. The equality of P and MC means the firm is achieving
a) marginal revenue and marginal cost are equal, any other output level will result in reduced profit.
b) is constant regardless of the quantity demanded
c) productive efficiency
d) allocative efficiency since the industry is producing the amount of product that equates society’s valuation of that product and the price of the product
The basic model of pure competition reviewed in this chapter finds that in the long run all firms in a perfectly competitive industry will earn normal profits.
If all firms only earn a normal profit in the long run, firms will develop new products or lower-cost production methods because they can
innovate and possibly earn an economic profit in the short run.
Consider the following statement: “Ninety percent of new products fail within two years—so you shouldn’t be so eager to innovate.”
This statement is
false because a firm could capture enough expected economic profit in the short run to cover the initial investment.
When discussing pure competition, the term long run refers to a period of time long enough to allow:
Firms already in an industry to either expand or contract their capacities.
Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect it to be in the long run?
$1.25
Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be:
downward sloping
In a diagram, the demand curve increases in the industry.
a) What happens to the MR line?
b) Given this change in demand, the representative firm will produce ______ output at a _______ price.
c) Long-run equilibrium will be restored by ____ shifting ______ such that in the long run, market (industry) price will _______.
a) MR line increases
b) more, higher
c) supply, out, decrease
Suppose that firms in a perfectly competitive industry, producing cashews discover that P exceeds MC.
a. Is their combined output of cashews too little, too much, or just right to achieve allocative efficiency?
b. In the long run, what will happen to the supply of cashews and the price of cashews?
a) too little
b) supply will increase and the price of cashews will decrease
A firm in a perfectly competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders.
a. What is its percentage rate of return?
b. Is the firm earning an economic profit? If so, how large?
c. Will this industry see entry or exit?
d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?
a) 11%
b) yes, 6%
c) entry
d) 5%
A firm in a perfectly competitive industry is currently producing 1,400 units per day at a total cost of $600. If the firm produced 1,200 units per day, its total cost would be $400, and if it produced 900 units per day, its total cost would be $375.
a. What are the firm’s ATC at these three levels of production?
At 1,400 units per day, ATC =
At 1,200 units per day, ATC =
At 900 units per day, ATC =
b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?
c. From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?
d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be?
a) $0.43 $0.33 $0.42 b) no c) $0.33 d) 3.30 cents per unit
There are 300 farms in the perfectly competitive local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $42 for every $600 invested.
a. What is the percentage rate of return for these 298 dairies?
b. The other two dairies have a cost structure that generates profits of $48 for every $400 invested. What is their percentage rate of return?
c. Assuming that the normal rate of profit in the economy is 10 percent, and firms cannot copy each other’s technology, will there be entry or exit?
d. Will the change in the number of firms affect the two that earn $48 for every $400 invested?
e. What will be the rate of return earned by most firms in the industry in long-run equilibrium?
f. If firms can copy each other’s technology, what will be the rate of return eventually earned by all firms?
a) 7%
b) 12%
c) exit
d) no
e) 10%
f) 10%
“No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then monopoly does not exist.” A monopoly is more likely to persist if the cross price elasticity of demand is
positive and less than 1.
Which of the following is not a major barrier to entry into an industry?
Diminishing marginal returns
True or false? Unfair competition is a barrier with no social justification.
True
The demand curve faced by a monopolistic seller vs purely competitive firm
- is downward sloping, whereas that facing the purely competitive firm is perfectly elastic
- purely competitive firm is perfectly elastic because the purely competitive firm may sell all that it wishes at the equilibrium price
- purely competitive firm is perfectly elastic because the purely competitive firm may sell all that it wishes at the equilibrium price
Assume that a monopolist and a perfectly competitive firm have the same unit costs. In this case, determine what is true with respect to (a) price, (b) output, and (c) profits.
- PMonopoly > PCompetition
- PMonopoly < PCompetition
- PMonopoly = PCompetition
- QMonopoly > QCompetition
- QMonopoly < QCompetition
- QMonopoly = QCompetition
- ProfitMonopoly > ProfitCompetition
- ProfitMonopoly < ProfitCompetition
- ProfitMonopoly = ProfitCompetition
a. Which of the combinations above are accurate?
b. Assume that a pure monopolist and a perfectly competitive firm have the same unit costs. In this case, resources will be allocated
c. Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because the
d. The costs of a purely competitive firm and a monopoly could be different because
e. If a monopoly can experience economies of scale
a) 1, 5, and 7
b) inefficiently because the monopolist does not produce at the point of minimum ATC and does not equate price and MC
c) pure competitor is small with no market power
d) the monopoly might experience economies of scale not available to the competitive firm
e) the monopolist can reduce the price below a pure competitor and improve resource allocation
Indicate whether each statement is true or false:
a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.
b. The monopolist seeks the output that will yield the greatest per-unit profit.
c. An excess of price over marginal cost is the market’s way of signaling the need for more production of a good.
d. The more profitable a firm, the greater its monopoly power.
e. The monopolist has a pricing policy; the competitive producer does not.
f. With respect to resource allocation, the interests of the seller and of society coincide in a perfectly competitive market but conflict in a monopolized market.
a) false
b) false
c) true
d) cannot be determined
e) true
f) true
Assume a monopolistic publisher agrees to pay an author 15 percent of the total revenue from text sales. Which will prefer a lower price?
The author would prefer a lower price than the publisher.
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. U.S. pharmaceutical companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States because reimportation would
make it much more difficult to maintain the differing prices.
It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. This proposal
does not consider that the output of the natural monopolist would still be at the suboptimal level where P > MC.
Which of the following could explain why a firm is a monopoly?
- economies of scale
- inelastic demand
- patents
- downsloping market demand.
- government licenses
- economies of scale
- patents
- government licenses
The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:
downward sloping
Price (P) Quantity Total Revenue Marginal Revenue $7.00 0 x — 6.50 1 x x 6.00 2 x x 5.50 3 x x 5.00 4 x x 4.50 5 x x 4.00 6 x x 3.50 7 x x 3.00 8 x x 2.50 9 x x
Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? (Assume the firm can only produce whole units.)
Total Revenue Marginal Revenue $0.00 — $6.50 $6.50 $12.00 $5.50 $16.50 $4.50 $20.00 $3.50 $22.50 $2.50 $24.00 $1.50 $24.50 $0.50 $24.00 $-0.50 $22.50 $-1.50
7 units
How often do perfectly competitive firms engage in price discrimination?
never
Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has:
the lower elasticity of demand
The price that equals marginal cost of production is socially optimal because:
it achieves allocative efficiency
The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:
may be so low that the regulated monopoly can’t break even.
Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $30 million per year and a variable cost of $1 per bag no matter how many bags are produced.
a) If this firm kept on increasing its output level, would ATC per bag ever increase?
b) Is this a decreasing-cost industry?
c) If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge?
d) At that price, what would be the size of the firm’s profit or loss?
e) Would the firm want to exit the industry?
f) You find out that if you set the price at $2 per bag, consumers will demand 30 million bags. How big will the firm’s profit or loss be at that price?
g) If consumers instead demanded 40 million bags at a price of $2 per bag, how big would the firm’s profit or loss be?
h) Suppose that demand is perfectly inelastic at 40 million bags, so that consumers demand 40 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.
a) no
b) yes
c) $1 per bag
d) At that price, the firm’s loss equals $30 million.
e) yes
f) 0
g) At that price, the firm’s profit equals $10 million.
h) $1.75 per bag
The difference between monopolistic competition and perfect competition is that in comparison to perfect competition, monopolistic competition has
fewer firms, product differentiation, some price control, and relatively easy but not barrier-free entry
The difference between monopolistic competition and monopoly is that in comparison to monopolistic competition, monopoly has
one firm, a unique product, price control, and entry barriers
Product differentiation
provides an advantage in the market
Firms will enter a monopolistically competitive industry when there are
economic profits. This will shift demand to the left, reducing the market share and the economic profit.
Compare the elasticity of a monopolistic competitor’s demand with that of a perfect competitor and a monopolist.
A monopolist’s demand curve is less elastic than a monopolistic competitor’s which is less elastic than a perfect competitor’s.
Contrast the two market structures in terms of productive and allocative efficiency.
a) perfect competition
b) monopolistic competition
a)
allocative efficiency: P=MC, efficient
productive effeciency: P=minimum ATC, efficient
b)
allocative efficiency: P>MC, inefficient
productive efficiency: P>minimum ATC, inefficient
“Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point.”
This statement recognizes that products of monopolistically competitive firms
may give them some monopoly power, given strong consumer preferences for their product. However, consumers will substitute away if prices become too high relative to similar products offered in the market.
“Competition in quality and service may be just as effective as price competition in giving buyers more for their money.”
This statement is true
if consumers value quality and service more than a lower price.
Monopolistically competitive firms frequently prefer nonprice to price competition because
price competition can lead to lower economic profit or even loss.
In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance and efficiency of such industries.
In monopolistically competitive industries
economic profits might be diminished and there will be productive inefficiency.
“In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.”
This statement is
true since P > MC, but the availability of close substitutes pushes the price of the average firm down until it equals ATC.
The most common reason that oligopolies exist is
economies of scale
Which of the following are products or services of oligopolists that you regularly purchase or own?
Automobiles, personal computers, and gasoline
Oligopoly differs from monopolistic competition in that oligopoly
has few firms, whereas monopolistic competition has more firms.
Using the payoff matrix below, X and Y are
interdependent because their profits depend not just on their own price, but also on the other firm’s price.
Refer to the matrix below. Price collusion is mutually profitable because each firm would achieve
higher profits.
There might be a temptation to cheat on the collusive agreement because each firm could
increase its profit even more by secretly charging less than the agreed upon price.
Price collusion occurs in oligopolistic industries because
price competition can lower revenue for all firms.
Assess the economic desirability of collusive pricing.
Collusive pricing is economically desirable from the oligopoly’s viewpoint because it results in monopoly profits.
Price leadership is legal in the Canada whereas price fixing is not.
This is because price leadership is
not an agreement, whereas price fixing is.
Advertising is an important aspect of monopolistic competition and oligopoly because
brand distinction encourages consumer loyalty, increasing profits.
Advertising promotes efficiency and benefits consumers by
providing information about new products, increasing sales and output, and lowering average total cost.
True or false? Persuasive advertising can be excessive, creating a barrier to entering the industry
True
Which of the following best describes the efficiency of monopolistically competitive firms?
Neither allocatively efficient nor productively efficient
Which of the following apply to oligopoly industries?
- a few large producers
- many small producers
- strategic behavior
- price taking
- a few large producers
- strategic behaviour
Consider an oligopoly industry whose firms have identical demand and cost conditions. If the firms decide to collude, then they will want to collectively produce the amount of output that would be produced by:
a pure monopolist
Some analysts consider oligopolies to be potentially less efficient than monopoly firms because at least monopoly firms tend to be regulated. Identify arguments in favor of a more benign view of oligopolies include:
- Oligopolies are self-regulating.
- Oligopolies may engage in limit pricing to keep out potential entrants.
- Oligopolistic industries may promote technological progress.
- Oligopolies can be kept in line by foreign competition.
- Oligopolies may engage in limit pricing to keep out potential entrants.
- Oligopolistic industries may promote technological progress.
- Oligopolies can be kept in line by foreign competition.
Suppose that a monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal.
a. What is the size of this firm’s profit or loss?
b. Will there be entry or exit?
c. Will this restaurant’s demand curve shift left or right?
d. Assume that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. What is the size of the firm’s profit? $0 correct.
e. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. Is the deadweight loss for this firm greater than or less than $60?
a) $460
b) entry
c) left
d) $0
e) less than
