Final Exam - Assignments

Question 1

In a market system scarce goods are allocated through the operation of

Answer 1

• 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.

Question 2

Suppose a city block was going to be used for a parking lot. The opportunity cost would be

Answer 2

greater in New York City because the alternative uses of the block are more valuable.

Question 3

A student will decide to attend class when

Answer 3

the marginal benefit of attending exceeds the marginal cost of attending.

Question 4

Which of the following best describes the concept of utility and economic behavior?

Answer 4

Satisfaction from consuming goods or services.

Question 5

Which of the following is not a key element of the scientific method?

Answer 5

Designing data

Question 6

The scientific method is the technique used by economists to determine

Answer 6

economic principles.

Question 7

Which of the following represents a positive economic statement?

Answer 7

The unemployment rate is 4.8 percent.

Question 8

Which of the following represent a normative economic statement?

Answer 8

The government ought to lower taxes so people have more money.

Question 9

A straight-line budget constraint shows the ___________ associated with obtaining more of either of the two goods.

Answer 9

opportunity cost

Question 10

The budget line shows the various _________ of two goods that a consumer can purchase with a specific _________

Answer 10

combination, income

Question 11

Economic resources are the

Answer 11

natural, human, and manufactured inputs used to produce goods and services.

Question 12

Economists classify resources as

Answer 12

labor, land, real capital, and entrepreneurs.

Question 13

Because economic resources are used to produce goods and services, they are called

Answer 13

factors of production or inputs

Question 14

Why is money not considered to be a capital resource in economics?

Money is not considered a capital resource because money is

Answer 14

not productive

Question 15

Why is entrepreneurial ability distinct from labor even though both are considered as a category of economic resource?

Answer 15

Because entrepreneurial ability is not directly engaged in production.

Question 16

What are the major functions of the entrepreneur?

• Make routine pricing decisions
• Innovate
• Purchase capital
• Create market demand
• Take risks
• Make decisions

Answer 16

Innovate
Take risks
Make decisions

Question 17

Specify the typical shapes of marginal-benefit and marginal-cost curves.

The marginal benefit curve is _____sloping.

The marginal cost curve is _____sloping.

Answer 17

downward, upward

Question 18

With these curves, the optimal allocation of resources to a particular product will occur when ______.

Answer 18

MB = MC

Question 19

If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product?

Answer 19

fewer

Question 20

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

Answer 20

Macroeconomics

Question 21

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

Answer 21

Microeconomics

Question 22

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

Answer 22

Microeconomics

Question 23

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

Answer 23

Macroeconomics

Question 24

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

Answer 24

Microeconomics

Question 25

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

Answer 25

Macroeconomics

Question 26

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

Answer 26

a) increase
b) decrease
c) increase

Question 27

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:

Answer 27

4 pens

Question 28

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

Answer 28

a) more
b) fewer
c) current number
d) more
e) fewer

Question 29

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

Answer 29

a) curve shifts outward
b) no change
c) curve shifts outward
d) curve shifts inward

Question 30

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.

Answer 30

3, 2

Question 31

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?

Answer 31

11 hours

Question 32

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?

Answer 32

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

Question 33

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?

Answer 33

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

Question 34

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?

Answer 34

a) MC will shift down.

b) The optimal amount of pizza will increase.

Question 35

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.

Answer 35

direct

Question 36

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.

Answer 36

inverse

Question 37

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.

Answer 37

direct

Question 38

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?

Answer 38

a) positively related
b) upward
c) directly related
d) C=110
e) Y=360

Question 39

In a command economy scarce goods are allocated by

Answer 39

a government-appointed planning board based on the board’s long-term priorities.

Question 40

Self-interest helps achieve society’s economic goals because

Answer 40

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.

Question 41

There are a wide variety of desired goods and services in a market system because

Answer 41

individual wants are diverse.

Question 42

What is produced is ultimately determined by

Answer 42

consumers because if the goods offered are not what consumers want, consumers will not buy them.

Question 43

The market system depends on private property ownership and the protection of private property rights to

Answer 43

provide an incentive to maintain property and allow for the orderly transfer of property ownership.

Question 44

Property Rights encourage cooperation by

Answer 44

helping to ensure that only mutually agreeable economic transactions take place.

Question 45

The use of capital goods in the production process

Answer 45

improves efficiency, increases output, and provides for growth.

Question 46

“Division of labour” means that workers

Answer 46

specialize in tasks that take advantage of their individual abilities and skills.

Question 47

When an economy relies on specialization,

Answer 47

trade enables individuals to obtain the goods in which they do not have a specialization.

Question 48

Barter requires that you

Answer 48

find a person who has what you want and a person who needs what you have to offer.

Question 49

The use of money

Answer 49

provides a common value that makes buying and selling transactions simpler than would be the case with barter.

Question 50

Consider the statement: “We want money only to part with it.” When people express a desire to ‘have money,’ they really want

Answer 50

the goods and services that money can buy.

Question 51

Consider the following statement: “The market system is a profit-and-loss system.” This statement is:

Answer 51

true, because producer decisions are motivated by the attempt to earn profits.

Question 52

Consider the following statement: “Competition is the disciplinarian of the market economy.” This statement is:

Answer 52

true, because when producers face competition they are driven to provide goods and services at the lowest possible cost.

Question 53

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

Answer 53

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.

Question 54

The emergence of the MP3 (iPod) technology is an example of “creative destruction” because

Answer 54

it has replaced compact discs as a technology used for the storage and transfer of music.

Question 55

The phrase “invisible hand” means that

Answer 55

market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.

Question 56

In the circular flow model

Answer 56

• 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.

Question 57

True or false? Shielding employees and suppliers from business risk helps to improve economic outcomes.

Answer 57

True

Question 58

The process of shielding employees allows owners of a business to

Answer 58

attract employees and suppliers.

Question 59

True or false? Business owners take on all the risk and profits or losses.

Answer 59

True

Question 60

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?

Answer 60

a) Technique 2, This technique represents the least-cost combination
b) profit
c) $6
d) expand
e) yes
f) Technique 1
g) Yes

Question 61

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:”

Answer 61

creative destruction

Question 62

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:”

Answer 62

incentive problem

Question 63

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:”

Answer 63

coordination problem

Question 64

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:”

Answer 64

invisible hand

Question 65

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?

Answer 65

a) yes

b) soap

Question 66

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?

Answer 66

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.

Question 67

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?

Answer 67

a) $26 billion for entrepreneurial ability

b) $180 billion

Question 68

Which statement is consistent with the law of demand?

Answer 68

A reduction in market price will lead to an increase in quantity demanded.

Question 69

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

Answer 69

• diminishing marginal utility

- an increase in purchasing power as market price decreases

Question 70

How is a market demand curve derived from individual demand curves?

Answer 70

Add up quantities demanded by all individual consumers for each price

Question 71

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

Answer 71

• income
• price of related goods
• a good’s own price
• tastes and preferences
• number of consumers

Question 72

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

Answer 72

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

Question 73

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?

Answer 73

a) a change in quantity demanded

b) a change in demand

Question 74

Which statement is consistent with the law of supply?

Answer 74

An increase in market price will lead to an increase in quantity supplied.

Question 75

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

Answer 75

• increasing opportunity costs

- increasing marginal costs

Question 76

How do you derive a market supply curve from individual supply curves?

Answer 76

Add up quantities supplied by all individual producers for each price

Question 77

What are the determinants of supply?

• Income
• Price of related goods
• Technology
• Tastes and preferences
• Factor prices
• Number of producers

Answer 77

• technology
• factor prices
• number of producers

Question 78

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

Answer 78

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

Question 79

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?

Answer 79

a) a change in quantity supplied

b) a change in supply

Question 80

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

Answer 80

a) decrease
b) increase
c) decrease
d) increase

Question 81

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?

Answer 81

Prices change in reaction to a mismatch between Qd and Qs.

Question 82

Price floors and ceilings stifle the function of prices and distort resource allocation because

Answer 82

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

Question 83

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.

Answer 83

a) increase
b) increase
c) increase
d) decrease
e) cannot be determined

Question 84

True or False: A “change in quantity demanded” is a shift of the entire demand curve to the right or to the left.

Answer 84

false

Question 85

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

Answer 85

a) increase
b) decrease
c) decrease
d) increase
e) increase
f) decrease
g) increase

Question 86

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.

Answer 86

Statement B

Question 87

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.

Answer 87

a surplus

Question 88

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”.

1. A decrease in demand from D1 to D2 results _____
2. This causes the price to ____
3. This change in price results in ______ in quantity demanded along the D2 demand curve.
4. This change in price results in ______ in quantity supplied.
5. The new equilibrium has a _____ and a _____ when compared to the original equilibrium.
6. Does this refute the law of demand?
7. Why?

Answer 88

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

Question 89

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.

Answer 89

Price: ?
Quantity: increase

Question 90

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.

Answer 90

Price: ?
Quantity: decrease

Question 91

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.

Answer 91

Price: increase
Quantity: ?

Question 92

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.

Answer 92

Price: decrease
Quantity: ?

Question 93

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?

Answer 93

a) to control food prices

b) it will create a surplus

Question 94

A price ceiling will result in a shortage only if the ceiling price is _____ the equilibrium price.

Answer 94

less than

Question 95

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?

Answer 95

-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

Question 96

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.

Answer 96

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

Question 97

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?

Answer 97

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.

Question 98

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

Answer 98

the same because the percentage change in quantity will remain the same.

Question 99

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

Answer 99

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

Question 100

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.

Answer 100

5, 8, 9, 8, 5

elastic

Question 101

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.

Answer 101

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

Question 102

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?

Answer 102

Demand is unit-elastic over this range.

Question 103

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?

Answer 103

Demand is unit elastic over this range.

Question 104

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?

Answer 104

a) demand is elastic

b) Cutting the price from $1 to $0.50 will increase Danny’s total revenue.

Question 105

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:

Answer 105

negative because beer and marijuana are complements.

Question 106

a. What is the tax incidence of a sales tax when demand is highly inelastic?
b. When demand is elastic?

Answer 106

a) primarily on consumers

b) primarily on producers

Question 107

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

Answer 107

• Substitutability
• Proportion of income
• Luxuries versus necessities
• Time

Question 108

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\

Answer 108

a) elastic
b) inelastic
c) elastic
d) inelastic
e) elastic
f) inelastic

Question 109

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?

Answer 109

a) A and B are substitutes

b) C and D are complements

Question 110

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?

Answer 110

a) 200.00 per day

b) 300.00 per day

Question 111

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?

Answer 111

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

Question 112

True or false. The law of diminishing marginal utility predicts the consumption behavior of addicts quite well.

Answer 112

false

Question 113

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:

Answer 113

reallocate spending from magazines to newspapers.

Question 114

Other things held equal, demand curves slope downward because:

Answer 114

a decrease in a product’s price raises MU per dollar and makes consumers wish to purchase more units.

Question 115

Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _______ and Jermaine will _______ .

Answer 115

rise; substitute lettuce for cucumber

Question 116

Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is the same as her income _______.

Answer 116

increasing

Question 117

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?

Answer 117

total utility: 18, 33
Marginal utility: 7, 5, 1

a decreasing rate because marginal utility is declining

Question 118

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?

Answer 118

• 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.

Question 119

The theory of consumer choice accounts for time

Answer 119

because time can be used to earn money.

Question 120

Consider the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”

This statement recognizes that

Answer 120

time can be used to earn money.

Question 121

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

Answer 121

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

Question 122

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

Answer 122

the time consumers save when purchasing goods there.

Question 123

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

Answer 123

would be expected since people have to pay the cost of their own use.

Question 124

Suppose there is an increase in the price of product B, with no change in the price of product A.

In this case,

Answer 124

the income effect would cause the marginal utility per dollar of B and the consumption of B to fall.

Question 125

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.

Answer 125

a) false
b) true
c) true
d) true

Question 126

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?

Answer 126

no

Question 127

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.

Answer 127

• Bill’s demand curve for flowers shifted to the right.

- Bill’s budget line shifted outward when the price of flowers fell.

Question 128

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?

Answer 128

a) Marginal utility: 50, 40, 30, -40, -60, -80

b) more than the previous one

Question 129

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?

Answer 129

a) 10, 15, 25
b) increasing
c) yes
d) yes
e) yes

Question 130

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?

Answer 130

$9

Question 131

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.

Answer 131

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

Question 132

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?

Answer 132

a) A=8 units B=12 units

b) yes

Question 133

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?

Answer 133

The income effect would be negative.

Question 134

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?

Answer 134

Good B is more income-elastic than good A

Question 135

Explicit costs are payments the firm makes for

Answer 135

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.

Question 136

The explicit costs of going to college include

Answer 136

tuition costs and the cost of books, whereas the implicit costs include foregone income.

Question 137

How do you calculate accounting profit?

Answer 137

Accounting profit equals sales revenue minus explicit costs.

Question 138

A normal profit is considered a cost because

Answer 138

this is the amount required to ensure continued supply of the product.

Question 139

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

Answer 139

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

Question 140

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

Answer 140

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

Question 141

Which of the following statements is true regarding the fixed and variable costs associated with owning and operating an automobile?

Answer 141

Fixed costs include insurance and variable costs include gasoline.

Question 142

You are considering whether to drive your car or fly 2000 kilometers to Florida for spring break. In making your decision you should consider

Answer 142

the variable cost of the trip, the opportunity cost of time, and the need for transportation in Florida.

Question 143

Long-run average total cost falls as the firm realizes ______ and later rises when the firm experiences _________.

Answer 143

economies of scale, diseconomies of scale

Question 144

The minimum efficient scale is the

Answer 144

smallest level of output needed to attain all economies of scale and minimum long-run average total cost.

Question 145

If the long-run average total cost drops quickly to its minimum point and then rises abruptly, the industry will likely be

Answer 145

composed of many small firms.

Question 146

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 ______________.

Answer 146

$300; negative $100

Question 147

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:

Answer 147

a) long-run adjustments
b) short-run adjustments
c) short-run adjustments
d) short-run adjustments

Question 148

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.

Answer 148

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

Question 149

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:

Answer 149

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

Question 150

True or false. The U shape of the long-run ATC curve is the result of diminishing returns.

Answer 150

false

Question 151

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.

Answer 151

a. Accounting profit $ 35,000.00

b. Economic profit $ 8,000.00

Question 152

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?

Answer 152

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

Question 153

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?

Answer 153

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.

Question 154

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

Answer 154

• Very large number of firms
• No control over price
• No nonprice competition

Question 155

Select the basic characteristics of the following:

Pure monopoly

• One firm
• Few firms
• Unique product
• Easy entry
• Much control over price

Answer 155

• One firm
• Unique product
• Much control over price

Question 156

Select the basic characteristics of the following:

Monopolistic competition

• Differentiated products
• Many firms
• Unique product
• Difficult entry
• Some price control

Answer 156

• Differentiated products
• Many firms
• Some price control

Question 157

Select the basic characteristics of the following:

Oligopoly

• Few firms
• Standardized products
• Many obstacles to entry
• No control over price
• One firm

Answer 157

• Few firms
• Standardized products
• Many obstacles to entry

Question 158

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

Answer 158

a) oligopoly
b) oligopoly
c) pure competition
d) monopolistic competition
e) oligopoly

Question 159

We study pure competition because it

Answer 159

produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.

Question 160

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

Answer 160

a) true if the loss is less than the fixed cost.

b) exceeds the average variable cost.

Question 161

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

Answer 161

a) No, the firm will want to shut down.

b) is really in the long run.

Question 162

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

Answer 162

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

Question 163

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.

Answer 163

a) false
b) true
c) true

Question 164

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:

Answer 164

a horizontal line at 2 cents per paper clip.

Question 165

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?

Answer 165

Total revenue: 0, 2, 4, 6, 8, 10
Marginal revenue: -, 2, 2, 2, 2, 2

a) the industry is purely competitive

Question 166

A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:

Answer 166

TR exceeds TC by as much as possible.

Question 167

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:

Answer 167

MR = MC

Question 168

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.

Answer 168

loss, shut down

Question 169

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.

Answer 169

P > minimum ATC.

Minimum AVC < P < minimum ATC.

Question 170

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?

Answer 170

a) yes
b) $17.50
c) no
d) $22.50
e) $17.50
f) $27.50
g) yes
h) no
i) 50 units

Question 171

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?

Answer 171

a) $0.25
b) $0.125
c) $0.025
d) $1.25
e) $1.025
f) $0.805
g) no

Question 172

In the long run in a purely competitive industry,

Answer 172

entry and exit of firms can occur.

Question 173

Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because

Answer 173

when profits are zero, the firm is earning sufficient revenue to cover the opportunity cost.

Question 174

a. Entry and exit help to improve resource allocation because
b. Entry and exit in a purely competitive industry occur in the

Answer 174

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

Question 175

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

Answer 175

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

Question 176

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

Answer 176

innovate and possibly earn an economic profit in the short run.

Question 177

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

Answer 177

false because a firm could capture enough expected economic profit in the short run to cover the initial investment.

Question 178

When discussing pure competition, the term long run refers to a period of time long enough to allow:

Answer 178

Firms already in an industry to either expand or contract their capacities.

Question 179

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?

Answer 179

$1.25

Question 180

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:

Answer 180

downward sloping

Question 181

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 _______.

Answer 181

a) MR line increases
b) more, higher
c) supply, out, decrease

Question 182

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?

Answer 182

a) too little

b) supply will increase and the price of cashews will decrease

Question 183

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?

Answer 183

a) 11%
b) yes, 6%
c) entry
d) 5%

Question 184

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?

Answer 184

a) $0.43
$0.33
$0.42
b) no
c) $0.33
d) 3.30 cents per unit

Question 185

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?

Answer 185

a) 7%
b) 12%
c) exit
d) no
e) 10%
f) 10%

Question 186

“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

Answer 186

positive and less than 1.

Question 187

Which of the following is not a major barrier to entry into an industry?

Answer 187

Diminishing marginal returns

Question 188

True or false? Unfair competition is a barrier with no social justification.

Answer 188

True

Question 189

The demand curve faced by a monopolistic seller vs purely competitive firm

Answer 189

• 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

Question 190

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.

1. PMonopoly > PCompetition
2. PMonopoly < PCompetition
3. PMonopoly = PCompetition
4. QMonopoly > QCompetition
5. QMonopoly < QCompetition
6. QMonopoly = QCompetition
7. ProfitMonopoly > ProfitCompetition
8. ProfitMonopoly < ProfitCompetition
9. 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

Answer 190

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

Question 191

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.

Answer 191

a) false
b) false
c) true
d) cannot be determined
e) true
f) true

Question 192

Assume a monopolistic publisher agrees to pay an author 15 percent of the total revenue from text sales. Which will prefer a lower price?

Answer 192

The author would prefer a lower price than the publisher.

Question 193

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

Answer 193

make it much more difficult to maintain the differing prices.

Question 194

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

Answer 194

does not consider that the output of the natural monopolist would still be at the suboptimal level where P > MC.

Question 195

Which of the following could explain why a firm is a monopoly?

• economies of scale
• inelastic demand
• patents
• downsloping market demand.
• government licenses

Answer 195

• economies of scale
• patents
• government licenses

Question 196

The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:

Answer 196

downward sloping

Question 197

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.)

Answer 197

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

Question 198

How often do perfectly competitive firms engage in price discrimination?

Answer 198

never

Question 199

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:

Answer 199

the lower elasticity of demand

Question 200

The price that equals marginal cost of production is socially optimal because:

Answer 200

it achieves allocative efficiency

Question 201

The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:

Answer 201

may be so low that the regulated monopoly can’t break even.

Question 202

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.

Answer 202

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

Question 203

The difference between monopolistic competition and perfect competition is that in comparison to perfect competition, monopolistic competition has

Answer 203

fewer firms, product differentiation, some price control, and relatively easy but not barrier-free entry

Question 204

The difference between monopolistic competition and monopoly is that in comparison to monopolistic competition, monopoly has

Answer 204

one firm, a unique product, price control, and entry barriers

Question 205

Product differentiation

Answer 205

provides an advantage in the market

Question 206

Firms will enter a monopolistically competitive industry when there are

Answer 206

economic profits. This will shift demand to the left, reducing the market share and the economic profit.

Question 207

Compare the elasticity of a monopolistic competitor’s demand with that of a perfect competitor and a monopolist.

Answer 207

A monopolist’s demand curve is less elastic than a monopolistic competitor’s which is less elastic than a perfect competitor’s.

Question 208

Contrast the two market structures in terms of productive and allocative efficiency.

a) perfect competition
b) monopolistic competition

Answer 208

a)
allocative efficiency: P=MC, efficient
productive effeciency: P=minimum ATC, efficient
b)
allocative efficiency: P>MC, inefficient
productive efficiency: P>minimum ATC, inefficient

Question 209

“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

Answer 209

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.

Question 210

“Competition in quality and service may be just as effective as price competition in giving buyers more for their money.”

This statement is true

Answer 210

if consumers value quality and service more than a lower price.

Question 211

Monopolistically competitive firms frequently prefer nonprice to price competition because

Answer 211

price competition can lead to lower economic profit or even loss.

Question 212

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

Answer 212

economic profits might be diminished and there will be productive inefficiency.

Question 213

“In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.”

This statement is

Answer 213

true since P > MC, but the availability of close substitutes pushes the price of the average firm down until it equals ATC.

Question 214

The most common reason that oligopolies exist is

Answer 214

economies of scale

Question 215

Which of the following are products or services of oligopolists that you regularly purchase or own?

Answer 215

Automobiles, personal computers, and gasoline

Question 216

Oligopoly differs from monopolistic competition in that oligopoly

Answer 216

has few firms, whereas monopolistic competition has more firms.

Question 217

Using the payoff matrix below, X and Y are

Answer 217

interdependent because their profits depend not just on their own price, but also on the other firm’s price.

Question 218

Refer to the matrix below. Price collusion is mutually profitable because each firm would achieve

Answer 218

higher profits.

Question 219

There might be a temptation to cheat on the collusive agreement because each firm could

Answer 219

increase its profit even more by secretly charging less than the agreed upon price.

Question 220

Price collusion occurs in oligopolistic industries because

Answer 220

price competition can lower revenue for all firms.

Question 221

Assess the economic desirability of collusive pricing.

Answer 221

Collusive pricing is economically desirable from the oligopoly’s viewpoint because it results in monopoly profits.

Question 222

Price leadership is legal in the Canada whereas price fixing is not.
This is because price leadership is

Answer 222

not an agreement, whereas price fixing is.

Question 223

Advertising is an important aspect of monopolistic competition and oligopoly because

Answer 223

brand distinction encourages consumer loyalty, increasing profits.

Question 224

Advertising promotes efficiency and benefits consumers by

Answer 224

providing information about new products, increasing sales and output, and lowering average total cost.

Question 225

True or false? Persuasive advertising can be excessive, creating a barrier to entering the industry

Answer 225

True

Question 226

Which of the following best describes the efficiency of monopolistically competitive firms?

Answer 226

Neither allocatively efficient nor productively efficient

Question 227

Which of the following apply to oligopoly industries?

• a few large producers
• many small producers
• strategic behavior
• price taking

Answer 227

• a few large producers

- strategic behaviour

Question 228

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:

Answer 228

a pure monopolist

Question 229

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.

Answer 229

• 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.

Question 230

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?

Answer 230

a) $460
b) entry
c) left
d) $0
e) less than