question
The economic principle that producers are willing to produce more output when price is higher is depicted by the:
answer
The upward slope of the supply curve
*The "law of supply" says that firms will supply a greater quantity at a higher price (other things held constant). This implies a positive or upward sloping supply curve.
*The "law of supply" says that firms will supply a greater quantity at a higher price (other things held constant). This implies a positive or upward sloping supply curve.
question
Which of the following events would cause a movement upward and to the left along the demand curve for olives?
answer
The price of olives rises.
*Movement along a curve can only be created through price change of the product. All other exogenous changes create a shift of the curve.
*Movement along a curve can only be created through price change of the product. All other exogenous changes create a shift of the curve.
question
Technological advances will cause the supply curve to:
answer
Shift to the right
*Technological changes (EXOGENOUS CHANGE) make it possible to produce a given output at a lower cost and increase supply.
*Technological changes (EXOGENOUS CHANGE) make it possible to produce a given output at a lower cost and increase supply.
question
If both members and non-members are allowed to purchase tickets to this year's celebrity golf tournament, then what will be the equilibrium price?
Given demand/supply schedules
Given demand/supply schedules
answer
Equilibrium price found when Qty D1 + Qty D2 = Qty Supplied
question
Suppose market demand and supply are given by Qd = 100 - 2P and Qs = 5 + 3P
The equilibrium quantity is:
The equilibrium quantity is:
answer
62
*Set Qd = Qs
100 - 2P = 5 + 3P
--> P = 19
Q = 5 + 3 (19) =62
*Set Qd = Qs
100 - 2P = 5 + 3P
--> P = 19
Q = 5 + 3 (19) =62
question
Suppose market demand and supply are given by Qd = 100 -2P and Qs = 5 + 3P.
If a price ceiling of $15 is imposed,
If a price ceiling of $15 is imposed,
answer
There will be a shortage of 20 units
Qd = 100 - 2P = 100 - 2*15 = 100 - 30 = 70.
Qs = 5 + 3P = 5 + 3*15 = 5 + 45 = 50.
Shortage = Qd - Qs = 70 -50 = 20.
Qd = 100 - 2P = 100 - 2*15 = 100 - 30 = 70.
Qs = 5 + 3P = 5 + 3*15 = 5 + 45 = 50.
Shortage = Qd - Qs = 70 -50 = 20.
question
During the last few decades in the United States, health officials have argued that eating too much beef might be harmful to human health. As a result, there has been a significant decrease in the amount of beef produced. Which of the following best explains the decrease in production?
answer
Individual consumers, concerned about their own health, decreased their demand for beef, which lowered the equilibrium price of beef, making it less attractive to produce.
*Government intervention will create social welfare loss (DWL). It will be better if consumers made the choice and a new equilibrium with reduced demand and reduced qty emerges.
*Government intervention will create social welfare loss (DWL). It will be better if consumers made the choice and a new equilibrium with reduced demand and reduced qty emerges.
question
What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?
answer
Price would fall, and the effect on quantity would be ambiguous.
*We need to know what happens to equilibrium price and quantity of coffee.
If the wages of coffee-bean pickers fell, for the same budget, more coffee can be produced (money for wages goes towards production).
Hence, with higher supply, qty rises and price falls.
If price of tea fell, more tea is consumed and demand for coffee reduces leading to lower price and lower qty.
Conclusion: Price falls. Qty ambiguous!
*We need to know what happens to equilibrium price and quantity of coffee.
If the wages of coffee-bean pickers fell, for the same budget, more coffee can be produced (money for wages goes towards production).
Hence, with higher supply, qty rises and price falls.
If price of tea fell, more tea is consumed and demand for coffee reduces leading to lower price and lower qty.
Conclusion: Price falls. Qty ambiguous!
question
If macaroni and cheese is an inferior good, what would happen to the equilibrium price and quantity of macaroni and cheese if consumers' incomes rise?
answer
Both the equilibrium price and quantity would decrease.
question
What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you?
answer
Price will rise, and the effect on quantity is ambiguous.
*We are in the peanut butter market.
If the price of peanuts went up, costs of peanuts increase, supply will fall.
If the price of jelly fell, more peanut butter will be demanded (complements).
Fewer firms decided to produce peanut butter which will lower supply
Health officials announced that eating peanut butter was good which increases demand.
Conclusion: Demand increases, supply falls. Shortage. Price increases, Qty ambiguous.
*We are in the peanut butter market.
If the price of peanuts went up, costs of peanuts increase, supply will fall.
If the price of jelly fell, more peanut butter will be demanded (complements).
Fewer firms decided to produce peanut butter which will lower supply
Health officials announced that eating peanut butter was good which increases demand.
Conclusion: Demand increases, supply falls. Shortage. Price increases, Qty ambiguous.
question
If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of
answer
the availability of close substitutes in determining the price elasticity of demand.
*Pecans and walnuts are substitutes and consumers have the flexibility of choosing, thereby creating a more elastic demand.
But if the price of salt rises, people would have difficulty purchasing something to use in its place. Hence, inflexibility of the product makes it inelastic demand.
*Pecans and walnuts are substitutes and consumers have the flexibility of choosing, thereby creating a more elastic demand.
But if the price of salt rises, people would have difficulty purchasing something to use in its place. Hence, inflexibility of the product makes it inelastic demand.
question
If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a
answer
5 percent increase in the quantity demanded.
*price of elasticity of demand = (% change in Q) / (% change in P)
0.25 = x / 20
x = 5%
*price of elasticity of demand = (% change in Q) / (% change in P)
0.25 = x / 20
x = 5%
question
The flatter the demand curve through a given point, the
answer
greater the price elasticity of demand at that point.
*Flat = elastic
Steep = inelastic
*Flat = elastic
Steep = inelastic
question
Which of the following is likely to have the most price elastic demand?
answer
ice cream
*Elastic = increases in price have an effect on demand
Inelastic = increases in price does not change demand because there are few substitutes.
*Elastic = increases in price have an effect on demand
Inelastic = increases in price does not change demand because there are few substitutes.
question
Ryan says that he would buy one cup of coffee every day regardless of the price. If he is telling the truth, Ryan's
answer
demand for coffee is perfectly inelastic.
*Ryan says that he would buy one cup of coffee every day regardless of the price. He is completely inflexible about his demand. Perfectly inelastic.
Inflexible = Inelastic
*Ryan says that he would buy one cup of coffee every day regardless of the price. He is completely inflexible about his demand. Perfectly inelastic.
Inflexible = Inelastic
question
If the demand for textbooks is inelastic, then a decrease in the price of textbooks will
answer
decrease total revenue of textbook sellers.
*In the inelastic zone of the demand, TR is further reduced as price falls.
*In the inelastic zone of the demand, TR is further reduced as price falls.
question
Melvin's Magnets earned $200 in total revenue last month when it sold 100 souvenir magnets. This month it earned $300 in total revenue when it sold 60 souvenir magnets. The price elasticity of demand for Marvin's Magnets this month is
answer
1.11
*TR= Q x P
Last month: TR = 200. Q= 100 --> P=2
This month: TR = 300. Q= 60 --> P=5
Assuming linear demand: (Change in Q/Change in P)= 40/3
The price elasticity of demand for Marvin's Magnets this month:
e= (Change Q/Change P) x (PxQ) = (40/3) x (5/60)= 200/180 = 1.11
5/60 = P/Q of THIS MONTH
*TR= Q x P
Last month: TR = 200. Q= 100 --> P=2
This month: TR = 300. Q= 60 --> P=5
Assuming linear demand: (Change in Q/Change in P)= 40/3
The price elasticity of demand for Marvin's Magnets this month:
e= (Change Q/Change P) x (PxQ) = (40/3) x (5/60)= 200/180 = 1.11
5/60 = P/Q of THIS MONTH
question
The demand for good X is estimated to be Qxd = 10, 000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, the cross-price elasticity between goods X and Y is:
answer
0.008
*Qxd = 10, 000 - 4 (50) + 5(100) + 2 (25000) + 1000 = 61,300
The cross-price elasticity between goods X and Y is: eCP = (Change Qx / Change Py) x (Py/Qx)
eCP = 5 x (100/61,300)= 0 .008
eCP > 0 --> X and Y are substitutes.
*Qxd = 10, 000 - 4 (50) + 5(100) + 2 (25000) + 1000 = 61,300
The cross-price elasticity between goods X and Y is: eCP = (Change Qx / Change Py) x (Py/Qx)
eCP = 5 x (100/61,300)= 0 .008
eCP > 0 --> X and Y are substitutes.
question
In economics the short run is:
answer
A time period when there are fixed factors of production
*Short-run is a period of time when some factors of production are fixed. This could be a few weeks or many years depending on the type of industry.
*Short-run is a period of time when some factors of production are fixed. This could be a few weeks or many years depending on the type of industry.
question
Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use:
answer
More labor and less capital
(MPL/w) = 8/4 = 2
(MPK/r) = 2/2 = 1
Rate of return of L > Rate of return of C, so costs are NOT minimized. They must equal each other to be minimized: increase L and decrease C.
(MPL/w) = 8/4 = 2
(MPK/r) = 2/2 = 1
Rate of return of L > Rate of return of C, so costs are NOT minimized. They must equal each other to be minimized: increase L and decrease C.
question
For the short-run total cost function C(Q) = 100 + 2Q + 3Q2, the marginal cost of producing 2 units of output is:
answer
14
MC = (Q)' = (0 + 2 + 6Q) = (2 + 6(2)) = 14
MC = (Q)' = (0 + 2 + 6Q) = (2 + 6(2)) = 14
question
For a short-run total cost function C(Q) = 100 + 10Q + Q2, the average variable cost of producing 20 units of output is:
answer
30
TC = FC + VC
AVC = (VC/Q) = (10Q + Q^2)/Q = (10 + Q) = 10 + 20 = 30
TC = FC + VC
AVC = (VC/Q) = (10Q + Q^2)/Q = (10 + Q) = 10 + 20 = 30
question
A carpenter hammers nails each day at work. The average number of nails hammered over the first three hours is 50, and the marginal product of the fourth and fifth hours of work is 40 and 20 nails, respectively. The total output after five hours work is _____ nails.
answer
210
3(50) + 40 + 20 = 210
In the first three hours: output is 150. Adding the marginal product for the 4th and 5th hour we get 210.
3(50) + 40 + 20 = 210
In the first three hours: output is 150. Adding the marginal product for the 4th and 5th hour we get 210.
question
What is implied when the total cost of producing Q1 and Q2 together is less than the total cost of producing Q1 and Q2 separately?
answer
Ecomomies of scope
*Separate > Together
*Separate > Together
question
Larger firms can produce a product at a lower long-run average cost than small firms when:
answer
Economies of scale exist
*Chain stores vs. Small businesses (Firms with monopoly power)
- "When there are economies of scale, increasing the size of the operations decreases the minimum average cost."
- AC is falling (IDEAL) --> TC rises less than proportionally to increase in output
*Diseconomies of scale: No private firm operations
AC is rising --> TC rises more proportionally
*Chain stores vs. Small businesses (Firms with monopoly power)
- "When there are economies of scale, increasing the size of the operations decreases the minimum average cost."
- AC is falling (IDEAL) --> TC rises less than proportionally to increase in output
*Diseconomies of scale: No private firm operations
AC is rising --> TC rises more proportionally
question
Grace is a self-employed artist. She can make 20 pieces of pottery per week. She is considering hiring her sister Kate to work for her. Both she and Kate can make 35 pieces of pottery per week. What is Kate's marginal product?
answer
15 pieces of pottery
35(MPL together) - 20 (MPL Grace) = 15 (MPL Kate)
35(MPL together) - 20 (MPL Grace) = 15 (MPL Kate)
question
As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters
answer
diminishing marginal product.
*Fixed capital leads to capacity constraints. Adding Labor reduces productivity.
*Fixed capital leads to capacity constraints. Adding Labor reduces productivity.
question
Suppose the production function is Q = min{K, 2L}. What is Average Product of Labor when 4 units of labor and 9 units of capital are employed?
answer
2
Q = min{K, 2L} where K=9, L=4 .
Q= min (9, 8) = 8
APL = Q/L = 8/4 =2
Q = min{K, 2L} where K=9, L=4 .
Q= min (9, 8) = 8
APL = Q/L = 8/4 =2
question
The following table shows the production function for a particular business. The numbers represent the various labor and output combinations the firm may choose for its output on a daily basis.
Table
Suppose this firm charges a price of $5 per unit of output and pays workers a wage equal to $160 per day. How many workers (MPL) should this firm hire to maximize its profit?
Table
Suppose this firm charges a price of $5 per unit of output and pays workers a wage equal to $160 per day. How many workers (MPL) should this firm hire to maximize its profit?
answer
4
(1) Find MPL in the above data.
(2) The hiring decision is based on: VMPL = w = (P × MPL)
(3) Now, P = 5, w = 160
(4) MPL = (w/P) = 160/5 = 32.
(5) MPK from 4th to 5th worker = 30
(6) 32 > 30
(7) 4th worker maximizes profit.
(1) Find MPL in the above data.
(2) The hiring decision is based on: VMPL = w = (P × MPL)
(3) Now, P = 5, w = 160
(4) MPL = (w/P) = 160/5 = 32.
(5) MPK from 4th to 5th worker = 30
(6) 32 > 30
(7) 4th worker maximizes profit.
question
Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal
answer
110
ATC = AFC + AVC
ATC = (300,000/10,000) + 80 = 110
ATC = AFC + AVC
ATC = (300,000/10,000) + 80 = 110
question
A firm has a fixed cost of $700 in its first year of operation. When the firm produces 99 units of output, its total costs are $4,000. The marginal cost of producing the 100th unit of output is $200. What is the total cost of producing 100 units?
answer
4200
*Don't include FC because it's a one and done cost.
4000 + 200 = 4200
*Don't include FC because it's a one and done cost.
4000 + 200 = 4200
question
Suppose a firm that uses labor and capital as the only inputs in production is currently on the long-run path. The marginal product of labor and capital at this least cost combination are 60 units and 80 units respectively and the wage rate of labor is $6. Calculate the rental cost of capital borne by the firm.
answer
$8
*Cross multiply
(MPL/w) = (MPK/r)
(60/6) = (80/r)
r = 8
*OR (MPL/MPK) = (w/r)
*Cross multiply
(MPL/w) = (MPK/r)
(60/6) = (80/r)
r = 8
*OR (MPL/MPK) = (w/r)
question
On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?
answer
The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
*Diminishing marginal product
4400 bushels - 3000 = 1400
MPK of 4th worker must be less than 1400 bushels.
*Diminishing marginal product
4400 bushels - 3000 = 1400
MPK of 4th worker must be less than 1400 bushels.
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