question
Elastic
answer
Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one.
question
Income elasticity of demand
answer
The percentage change in quantity demanded of a good or service divided by the percentage change in income.
question
Inelastic
answer
Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one
question
Minimum Wage
answer
A legal minimum for wages (the price of one hour of labor) for most categories of workers.
question
Necessity
answer
A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities.
question
Price Ceiling
answer
A legal maximum price. An effective price ceiling is a legal maximum price that is below the equilibrium price. Examples include laws limiting apartment rents in some cities.
question
Price elasticity of demand
answer
The percentage change in quantity demanded of a good or service divided by the percentage change in price.
question
Price elasticity of supply
answer
The percentage change in quantity supplied divided by the percentage change in the price of the good or service.
question
Price floor
answer
A legal minimum price. An effective price floor is a legal minimum price that is above the equilibrium. An example is the federal minimum wage, currently $7.25 per hour.
question
Rent control
answer
A policy which sets a legal maximum rent that can be charged for some apartments in some major cities.
question
Subsidies
answer
Payments from governments to producers or consumers of specific goods and services.
question
substitutes
answer
Goods or services that consumers consider as serving similar purposes.
question
taxes
answer
Mandatory payments to governments from consumers and producers.
question
Is the demand for a container of salt likely to be inelastic or elastic? Why? Select all that apply.
answer
Inelastic because salt is a necessary dietary component; Inelastic because for most people salt is a very small part of their budget
question
A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?
answer
Increase fares
question
Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4.Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2.Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR faces a _________ elastic demand than exists in Situation B.
answer
More; less
question
If the government taxes car producers, that will happen in the market for cars?
answer
The supply curve will shift to the left.
question
When the federal government subsidizes higher education in the form of Pell grants to students, it results in
answer
An increase in the demand for higher education
question
When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:
answer
An increase in the supply of higher education
question
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?
answer
An increase in demand, but no change in quantity supplied.
question
If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?
answer
More
question
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
answer
Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.
question
A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one.
answer
A greater
question
You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?
answer
I do not know because I cannot tell how much costs would change in relationship to revenues.
question
When will a minimum wage be an effective price control? When it is a _________.
answer
minimum "price" that is above equilibrium price
question
An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.
answer
increase; decrease
question
If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?
answer
Demand will increase by 3.2%
question
If the income elasticity of a good is 0.8, what do we know about the good?
answer
It is a normal good.
question
If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax?
answer
Bottles of alcohol, such as whiskey and gin
question
Who is likely to be in favor of a price ceiling on a good?
answer
The consumers of the good who can still purchase it after the ceiling is imposed
question
A government may impose a price ceiling if which of the following is true?
answer
Consumers can persuade legislators that lower prices are needed
question
Consider a tax on producers. Under which of the following circumstances would the tax cause the least effect on economic efficiency?
answer
If the supply of the product is inelastic.
question
Consider a tax on individuals. Under which of the following circumstances would the tax cause the least effect on economic efficiency?
answer
If the demand for the product is inelastic.
question
A tax on producers would result in the...(supply/demand)
curve moving to the ...(right/left).
A tax on consumers would result in the ...(supply/demand)
curve moving to the ...(right/left).
curve moving to the ...(right/left).
A tax on consumers would result in the ...(supply/demand)
curve moving to the ...(right/left).
answer
supply
left
demand
right
left
demand
right
question
Assume that the municipality decides to place a tax on individual incomes. Suppose that the tax is a fixed sum for everyone regardless of income. Explain how you might describe the fairness of the tax. Select all that apply.
answer
regressive
Would tax a larger percentage of smaller incomes.
Would tax a larger percentage of smaller incomes.
question
The marginal utility from drinking one more glass of water is likely to be ______________ the marginal utility from going to one more movie.
answer
less than
question
Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 60 and the marginal utility of the last book is 30. The price of a movie is $12 and the price of a book is $4. In order to maximize her utility, what should Anna do?
answer
Decrease her consumption of movies and increase her consumption of books
question
A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods - hamburgers and football games?
answer
Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie.
question
If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________.
answer
marginal utility; fall; marginal utility; rise
question
Assuming a fixed budget, when the price good X increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all other goods will _________.
answer
decrease, but the marginal utility of good X will increase.
question
If a good is provided for free, it is likely to have a marginal utility that is relatively ______________ and be ______________ the marginal utility that could be gained from consuming some other good which must be paid for.
answer
low; less than
question
If the price of a normal good increases, the income effect ______________ the quantity demanded of that good.
answer
decreases
question
If the price of a normal good decreases, the substitution effect ______________ the quantity demanded of that good.
answer
increases
question
If the price of a good changes, why does an income effect exist?
answer
The price change causes a change in real income
question
Assuming a good is a normal good, a decrease in price will lead to a substitution effect that does what?
answer
Along with the income effect, increases quantity
question
Fred just ate a hamburger and received total utility of 15 from consuming it. If he eats another one, which of the following will be true?
answer
His total utility will likely increase
question
Grace likes eating pizza and going to the movies. If she has $120 to spend in a month, and pizza and movies each cost $10, she decides to eat 5 pizzas and see 7 movies. If the price of movies increases to $12 what is likely to happen?
answer
The substitution effect would predict that she consumes more pizzas and fewer movies; the income effect would predict that she would consume fewer of both
question
If the price of a hot dog is $2 and your willingness to pay is $3, then your consumer surplus is _____.
answer
$1
question
Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ratio of his marginal utility of pizza to marginal utility of video games is ¼. If he wants to maximize his utility, what should he do?
answer
Buy fewer pizzas and more video games
question
consumer surplus
answer
The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.
question
diminishing marginal utility
answer
As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish.
question
marginal analysis
answer
A consumer will maximize his or her total well-being if the last dollar spent on each good provide the same marginal (additional) utility.
question
marginal utility
answer
The change in total utility or satisfaction resulting from consuming one more unit of a good or service.
question
real income
answer
Income adjusted for price changes. A measure of the amount of goods and services one can purchase.
question
total utility
answer
The total amount of satisfaction enjoyed from consuming a specific amount of a good or service.
question
utility
answer
The satisfaction gained from consuming a good or service.
question
If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases and the consumer adjusts consumption accordingly? The marginal utility will __________.
answer
increase, because the consumer will decrease her consumption of the good.
question
Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes falls from $70 to $50?
answer
$30
At a price of $70, only Gail will buy the shoes and the consumer surplus is $19 ($89-$70). At a price of $50, both will buy the shoes and total consumer surplus is $39 + $10 = $49. Therefore, the gain in consumer surplus is $49-$19 or $30.
At a price of $70, only Gail will buy the shoes and the consumer surplus is $19 ($89-$70). At a price of $50, both will buy the shoes and total consumer surplus is $39 + $10 = $49. Therefore, the gain in consumer surplus is $49-$19 or $30.
question
Which of the following would cause an increase in consumer surplus in the market for cars?
answer
The price of steel decreases.
question
Assume that Jill is consuming at the utility-maximizing point. If the utility from the last soda she consumes is 40 and its price is $2, and the utility from the last bucket of popcorn is 20, then we know that the price of the bucket of popcorn is ____.
answer
$1
question
Assume that Jill is NOT consuming at the utility-maximizing level. The marginal utility of soda is 40 and its price is $2, but the marginal utility of popcorn is now 30, and its price is $1. What should Jill do to maximize her utility?
answer
Consume less soda and more popcorn
question
If the price of a good falls and, because of the income effect, consumption of the good also decreases, we know that the good is __________.
answer
an inferior good
question
The reason the demand curve slopes downward is that for most goods which of the following is true?
answer
The income effect of a price change is less than the substitution effect, and the substitution effect of a price increase always causes reductions in consumption.
question
When the waiter comes to take their order, he tells them they are running a special on spanakopita (spinach pies), and they are the same price as the Greek salads (before the price change they were more expensive). Instead of a Greek salad, they decide to order a spinach pie. What must be true about the marginal utility of spinach pie relative to Greek salads?
answer
marginal utility of spinach pie is greater than Greek salads
question
They are starving and finish the order of tzatziki dip really quickly. They decide to place another order of tzatziki, but they realize they don't like it as much this time. What is the economic term to describe what happened to their decreased enjoyment of the tzatziki?
answer
diminishing marginal utility
question
They need a cab home but have no idea how much it will cost (Uber is not allowed in Athens). They discuss it and agree that between the two of them, they would be willing to pay 40 euros for a taxi. After a few minutes, they are able to flag down a cab. When they get back to their hotel, the cab driver tells them it will be 12 euro. How much is their consumer surplus?
answer
28.0
40 - 12 = 28
40 - 12 = 28
question
Jessica and Sarah have picked out groceries at the market knowing the prices. They are buying tomatoes and feta cheese. They then find out that the price of feta cheese is twice what it was before. Walk through the change in their preferences.
answer
Before the price change‚ the marginal utility per dollar of all goods in their basket are the same.
With the price change‚ the marginal utility of each good has not changed‚ but now the marginal utility per dollar of feta cheese is less than tomatoes.
They decide to put some of the feta cheese back.
This increases the marginal utility of the feta cheese they have.
They decide to buy a couple more tomatoes instead‚ which decreases their marginal utility of tomatoes.
They settle on a new basket of goods where they have more tomatoes and less feta than before‚ but where the new marginal utility per dollar of feta is equal to the new marginal utility per dollar of tomatoes.
With the price change‚ the marginal utility of each good has not changed‚ but now the marginal utility per dollar of feta cheese is less than tomatoes.
They decide to put some of the feta cheese back.
This increases the marginal utility of the feta cheese they have.
They decide to buy a couple more tomatoes instead‚ which decreases their marginal utility of tomatoes.
They settle on a new basket of goods where they have more tomatoes and less feta than before‚ but where the new marginal utility per dollar of feta is equal to the new marginal utility per dollar of tomatoes.
question
accounting profit
answer
Total revenue minus explicit costs. Accounting profit that could be earned elsewhere is not counted as cost.
question
average cost
answer
Total cost divided by total product
question
average product
answer
The total product divided by the number of units of a particular input used.
question
economic profit
answer
Total revenues minus all costs, including explicit and implicit costs. Economic profit equals accounting profit minus normal profit (the accounting profit foregone).
question
explicit cost
answer
The cost that a business pays by writing a check or paying cash.
question
factors of production
answer
The resources used to produce goods and services, often divided into three categories: labor, all the physical and mental inputs of people; capital, the machines, tools, buildings, and inventories; and land, the actual land used, including raw materials from land.
question
implicit cost
answer
The cost that a business bears by being in its business and not in another business. It is the profit that could be earned elsewhere. It is the opportunity cost.
question
law of diminishing marginal returns
answer
The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.
question
long run
answer
A time period long enough that all inputs can be changed.
question
marginal cost
answer
The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).
question
marginal product
answer
The change in output or product that results from increasing a variable input by one unit while all other variables are held constant. It can be calculated by dividing the change in output by the change in labor used. (ΔTP/ΔL)
question
production function
answer
A function showing the maximum output for each specific combination of inputs, given technology.
question
short run
answer
A period in which at least one input or factor of production is fixed
question
technological change
answer
A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of the creation of new products, the redesign of old products, or the creation of new methods of manufacturing.
question
total cost
answer
The sum of total fixed cost and total variable cost.
question
total fixed costs
answer
The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes.
question
total product
answer
The total amount of output produced.
question
total variable costs
answer
For a given level of output, the costs (prices multiplied by the amounts of inputs) of the inputs that can be changed. These are the costs that vary as output changes.
question
A production function can best be described as which of the following?
answer
The relationship between the quantity of inputs and quantity of outputs produced in a given amount of time
question
Marcus has four employees. The four employees produce 55 floral arrangements in a day. Marcus hires a fifth employee. The five employees produce 60 floral arrangements in a day. The fifth employee's marginal product is __________.
answer
5 floral arrangements in a day
question
The production of 12,000 candy bars per day requires 60 workers. The average product of each worker is ______________candy bars per day.
answer
200
question
Consider two students, each earning 1300 on the quantitative and verbal portions of the SAT. The average SAT score for our group of two is 1300, of course. (1300 + 1300)/2. Suppose we add one more student to the group and calculate the new average. What will the new average be if the third student has an SAT that is equal to 1300?
answer
1300
(1,300 + 1,300 + 1,300) / 3 = 1,300
(1,300 + 1,300 + 1,300) / 3 = 1,300
question
What is the average score if the third student has an SAT score equal to 1000?
answer
1,200
(1,300 + 1,300 + 1,000) / 3 = 1,200
(1,300 + 1,300 + 1,000) / 3 = 1,200
question
Currently, Frank has 10 employees. The marginal product of the 10 worker is 25 units per week. The average product of the 10 workers is 20 units per week. If Frank hires one more worker, the marginal product of the 11 worker will be 24 units per week. The average product of labor will ______________.
answer
rise
question
If labor is the only variable input a firm owner uses and the wage rate is $200 per week, what is the firm owner's variable cost per week if she hires 12 workers?
answer
$2,400
$200*12=$2400
$200*12=$2400
question
At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. The variable cost of producing 1,000 units of output per week is equal to _____.
answer
$16,000
$28,500 - $12,500 = $16,000
$28,500 - $12,500 = $16,000
question
Alicia is currently spending $6,000 per week on total variable costs to produce 500 hats. To produce 505 hats per week, she would have to spend $6,100 per week. The marginal cost per hat is ______.
answer
$20
($6,100 - $6,000)/(505-500) = $100/5 = $20
($6,100 - $6,000)/(505-500) = $100/5 = $20
question
At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. If labor is the only variable input and the weekly wage is $1,600, how much labor is being used to produce 1,000 units of output?
answer
10.0
$28,500 - $12,500 = $16,000; $16,000/$1,600 = 10
$28,500 - $12,500 = $16,000; $16,000/$1,600 = 10
question
Juan wants to increase production at his confection shop. If he hires one more worker, he can increase output by 100 candies per week. A confection worker's weekly wage is $200. Juan's marginal cost of increasing output by 100 candies per week is ______.
answer
$2.00
Change in total cost/change in output =$200/100=$2
Change in total cost/change in output =$200/100=$2
question
In the short run, an increase in wages (the price of the variable input) will cause average cost to ______________ and marginal cost to ______________.
answer
increase;increase
question
In the short run, an increase in the price of one of the fixed inputs will cause average cost to ______________ and marginal cost to ______________.
answer
increase;not change
question
An increase in technology will cause the total product function to ______________ and average costs to ______________.
answer
increase;increase
question
Accountants tell a franchise owner that she earned $30,000 in profits last year. The owner knows that most of her business acquaintances earned at least $70,000 in profits in comparable franchises. Which of the following is true? Her firm earned an economic __________.
answer
Loss of $40,000
Economic profit equals accounting profit minus opportunity costs. Based on her friend's franchises, she could be earning $70,000 (her opportunity cost), but she is only earning $30,000.
Economic profit equals accounting profit minus opportunity costs. Based on her friend's franchises, she could be earning $70,000 (her opportunity cost), but she is only earning $30,000.
question
The law of diminishing marginal returns is the cause of ______________ marginal product and ______________marginal cost.
answer
decreasing; increasing
question
Will a change in fixed costs change average cost?
answer
yes
question
Will a change in fixed costs change marginal cost?
answer
no
question
With increasing marginal cost, if marginal cost is equal to average cost, average cost at this point must be ______________.
answer
at it's maximum point
question
Which of the following is a cause of diminishing marginal productivity?
answer
In the short run, capital gets more expensive as you add more capital to the production process.
question
Variable cost ______________ while fixed cost ______________ as output ______________ in the short run.
answer
rises; stays the same; increases
question
At 600 units of output, total fixed cost is equal to $1,000 and total variable cost is equal to $12,000. Total cost is equal to _______.
answer
13,000
question
At 2,000 units of output, the variable cost of production is $12,500 per week. Total cost of producing 2,000 units per week is $45,500. The fixed cost of producing 2,000 units of output per week is equal to ______.
answer
$33,000
$45,500 - $12,500 = $33,000
$45,500 - $12,500 = $33,000
question
Peter can produce 50 lunches per hour for $1,250. If he hires one more cook for $15 an hour, he can produce 55 lunches per hour. The marginal cost of expanding hourly lunch production from 50 to 55 is _____.
answer
$3.00
MC=Change in total cost/change in output=$15/(55-50) = $15/5 = $3
MC=Change in total cost/change in output=$15/(55-50) = $15/5 = $3
question
The fixed cost of producing surfboards is $5,000 per month. The variable cost for producing 15 surfboards is $36,000 per month. The average cost of producing 15 surfboards in a month is ______.
answer
$2,733.33
Total cost = $5,000 + $36,000 = $41,000. Average cost = $41,000/15 = $2,733.33.
Total cost = $5,000 + $36,000 = $41,000. Average cost = $41,000/15 = $2,733.33.
question
average cost equation
answer
Average cost = Total cost/ output.
question
When a firm earns zero economic profits, it does which of the following?
answer
Has a positive accounting profit
question
Using your intuition and the Original and New Output tables, we can say the following about the relationship between marginal product of labor (MPL) and marginal cost of output (MC): There is an relationship between MPL and MC. As MPL rises, MC will , and as MPL diminishes, MC will . If there is an overall increase in MPL, there will be an overall in MC.
answer
inverse, fall, rise, decrease.
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