question
The U.S. government is evaluating a project to build a new lighthouse in South Carolina. The cost will be $5 million. The estimated value of all the benefits (including nonmonetary benefits) of the lighthouse is $8 million. Describe how you would use the concept of opportunity cost to determine whether the lighthouse should be built?
answer
benefits should be compared to opportunity cost, or next best thing that can be done that's worth more than the 8:5 benefit:cost ratio
question
The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie.
The sunk cost, once the movie set sank, was _______.
The sunk cost, once the movie set sank, was _______.
answer
70mil, sunk costs are costs irrelevant to final decision, ex. room & board for college would already occur
question
Which of the following graphs shows the correct change in the production possibilities frontier curve if a new technology is invented that increases the productivity of watch manufacturing?
answer
frontier (curve) for watches increases as production possibility increases. PPF curve is potential outputs depending on inputs
question
Looking at the production of handbags and phones once again, if a firm has 6 workers with three workers producing handbags and three workers producing phones, what is the marginal cost of producing one additional phone if a worker changes from handbag production to phone production?
answer
Lose an amount of hand bags, gain an amount of phones, the ratio of handBag:phone = marginal cost of production
question
A pizza parlor can make 100 pizzas in an evening. They make 40 pepperoni pizzas and 60 extra cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an extra cheese pizza. This pizza parlor is what?
Technically efficient
allocatively efficient
economically efficient
Technically efficient
allocatively efficient
economically efficient
answer
Technically efficient, but not allocatively efficient nor economically efficient,
technically efficient is if all supply used, allocate is if desired demand is met. economic is both
technically efficient is if all supply used, allocate is if desired demand is met. economic is both
question
If the economy is producing at a point inside the production possibilities frontier, which of the following must be true?
answer
more of the goods can be produced, producing at ppf is economically efficient, outside is impossible
question
An increase in the price of the good
answer
A movement along a demand curve¸ no change in demand, less demand but demand itself isn't changed as only quantity demanded is changed
question
An increase in income for a normal good
answer
Shift the demand curve to the right and an increase in demand, more buying power more demand
normal good ex. phone
normal good ex. phone
question
A decrease in the price of a substitute good
answer
Shift the demand curve to the left and a decrease in demand. good has competition if it's price increases, less demand
question
Expectations of falling income in the near future
answer
Shift the demand curve to the left and a decrease in demand. (If the good is normal, aka follows demand)
question
Expectations of rising prices in the near future
answer
Shift the demand curve to the right and an increase in demand now. get it now or miss out
question
Since 1950, the labor force participation rate of women with young children has been increasing dramatically. In accordance with this trend, one would predict that there has been _______________.
answer
An increase in the demand for child care services. number of buyers change so overall demand changes not just Qd
question
An increase in the prices of inputs will cause the equilibrium price to ______________ and the equilibrium quantity to ______________.
answer
Increase; decrease.
An increase in the price of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium.
An increase in the price of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium.
question
If (1) the cost of manufacturing computers decreases and (2) at the same time the quality improves, making computers more useful for households, which of the following is most likely to happen?
answer
Equilibrium price may increase or decrease; equilibrium quantity will increase.
The cost reduction increases supply and the quality improvement increases demand.
more demand higher price, but more supply lower price. so price change depends on amount of change.
The cost reduction increases supply and the quality improvement increases demand.
more demand higher price, but more supply lower price. so price change depends on amount of change.
question
An increase in an inelastic demand will cause (a greater or lesser or same) change in the equilibrium quantity than the same increase in an elastic demand.
answer
greater change in equilibrium quantity.
equ Q is D vs. S intersection value
elasticity is how much demand is affected by a price change
elastic is a lot: diamonds
inelastic is a little: oil
Demand goes up. Price starts to increase. If demand is inelastic, price has to increase a lot to decrease quantity demanded enough to equal the quantity supplied. not responsive to change. Quantity demanded will be relatively close to the increase in demand.
If demand is elastic, price will begin to increase and quantity demanded will fall quickly and thus end up being closer to the original amount (overall equilibrium quantity unaffected)
equ Q is D vs. S intersection value
elasticity is how much demand is affected by a price change
elastic is a lot: diamonds
inelastic is a little: oil
Demand goes up. Price starts to increase. If demand is inelastic, price has to increase a lot to decrease quantity demanded enough to equal the quantity supplied. not responsive to change. Quantity demanded will be relatively close to the increase in demand.
If demand is elastic, price will begin to increase and quantity demanded will fall quickly and thus end up being closer to the original amount (overall equilibrium quantity unaffected)
question
Which of the following statements about the effects of rent control is true?
answer
A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.
price ceiling - product exchanged only at a max price causing shortage, demand is greater because of lower price than supply
price floor - minimum price causing a surplus, as there is more supply than demand
rent control causes more demand than supply if max price under equilibrium which results in shortage.
price ceiling - product exchanged only at a max price causing shortage, demand is greater because of lower price than supply
price floor - minimum price causing a surplus, as there is more supply than demand
rent control causes more demand than supply if max price under equilibrium which results in shortage.
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%
income inc. * elasticity = demand of good
greater the elasticity (diamond) more demand change
income inc. * elasticity = demand of good
greater the elasticity (diamond) more demand change
question
Assume you spend all of your income on two goods: peanuts and chips. Also assume that you are consuming the combination of peanuts and chips that maximize your utility. Which of the following statements is true?
answer
If the price of peanuts is equal to the price of chips, then the marginal utilities must also be equal.
marginal utility depends on price and amount of the thing.
marginal utility depends on price and amount of the thing.
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, total cost = fixed + variable
variable cost varies w/ output
variable cost varies w/ output
question
What is true about the long-run for a firm?
answer
All inputs can be changed
In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.
In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.
question
For a firm, the short-run is defined as being __________.
answer
A period of time in which at least one of the firm's inputs is unchangeable
question
If the long-run average cost curve is horizontal, it implies that the firm is experiencing _________.
answer
Constant returns to scale
This is the "middle" section of the long-run average cost curve (bottom of a short run curve), where doubling inputs will result in double outputs. Thus, the average costs don't change and the function is horizontal.
decreasing average cost curve is economies of scale, more you make, cheaper to make it
increasing is vice versa, so output:cost ratio is lower
This is the "middle" section of the long-run average cost curve (bottom of a short run curve), where doubling inputs will result in double outputs. Thus, the average costs don't change and the function is horizontal.
decreasing average cost curve is economies of scale, more you make, cheaper to make it
increasing is vice versa, so output:cost ratio is lower
question
Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change?
A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market.
A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market.
answer
Decrease; increase
constant cost industry - as industry size expands, cost do not change
With lower variable and marginal costs, firms will produce more, thus lowering the price with the higher supply.
constant cost industry - as industry size expands, cost do not change
With lower variable and marginal costs, firms will produce more, thus lowering the price with the higher supply.
question
Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change?
A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________.
A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________.
answer
Decrease; increase by more than in the short run
Keep in mind this is a long-run question! Also keep in mind here that we are talking about a cost change rather than a demand shift. This is why the price does not go back to the original level in the long run - the costs are still lower, so the price will still be lower. The quantity increases more in the long run because the lower costs mean higher profits, so more firms enter, increasing the quantity further.
Keep in mind this is a long-run question! Also keep in mind here that we are talking about a cost change rather than a demand shift. This is why the price does not go back to the original level in the long run - the costs are still lower, so the price will still be lower. The quantity increases more in the long run because the lower costs mean higher profits, so more firms enter, increasing the quantity further.
question
A profit-maximizing monopoly will produce where which of the following is true?
answer
Marginal revenue is less than the price, equal to the marginal cost, and is positive
question
If a monopoly faces a demand curve that is downward-sloping, then marginal revenue will be which of the following?
answer
Must be less than price
question
In the long run, a monopolistically competitive firm will produce where price _________.
answer
Equals average cost and is greater than the marginal cost
question
Tony's Gas Station and Robert's Gas Station are the only two gas stations in a small town of Westville. If Tony and Robert collude to earn more profits, which of the following would be true?
answer
Each limit the amount of gasoline available and raise prices
question
There are 100 competitive firms of the size represented by AC1, and AC2 represents the only firm if there were a monopoly. In the figure below, how much more will an unregulated monopoly charge compared to a perfectly competitive industry? ch.12.01/2
answer
Set MR2 equal to marginal cost (that is the intersection of those two curves on the graph) and find the highest price on the demand curve at that quantity. Here, quantity is 20b, and the price is $50. The competitive industry is driven down to the minimum of AC1, where MC1 intersects it at $35. Therefore, the monopoly charges $15 more.
question
There are 100 competitive firms of the size represented by AC1, and AC2 represents the only firm if there were a monopoly. In the figure below, what quantity will the monopoly produce?
answer
$20m Set marginal revenue equal to marginal cost (that is the intersection of those two curves on the graph) and find the quantity at that point on the quantity/x-axis.
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