question
Which of the following statements about the price elasticity of demand is correct?
answer
The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases.
Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.
Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.
Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.
Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.
question
Demand is said to be price elastic if
answer
buyers respond substantially to changes in the price of the good.
question
If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then the
answer
demand for the good is said to be inelastic.
question
Demand is elastic if the price elasticity of demand is
answer
greater than 1
question
Which of the following is not a determinant of the price elasticity of demand for a good?
answer
the steepness or flatness of the supply curve for the good
question
Goods with many close substitutes tend to have
answer
more elastic demands.
question
The demand for Godiva mint chocolates is likely quite elastic because
answer
there are many close substitutes.
this particular type of chocolate is viewed as a luxury by many chocolate lovers.
the market is narrowly defined.
this particular type of chocolate is viewed as a luxury by many chocolate lovers.
the market is narrowly defined.
question
Which of the following statements is correct?
answer
The demand for flat-screen computer monitors is more elastic than the demand for monitors in general.
The demand for grandfather clocks is more elastic than the demand for clocks in general.
The demand for cardboard is more elastic over a long period of time than over a short period of time.
The demand for grandfather clocks is more elastic than the demand for clocks in general.
The demand for cardboard is more elastic over a long period of time than over a short period of time.
question
Which of the following is likely to have the most price elastic demand?
answer
Tommy Hilfiger jeans
question
Which of the following is likely to have the most price elastic demand?
answer
lattés
question
Which of the following is likely to have the most price inelastic demand?
answer
toothpaste
question
There are very few, if any, good substitutes for motor oil. Therefore, the
answer
demand for motor oil would tend to be inelastic.
question
When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is
answer
inelastic
question
Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good?
answer
The quantity of the good demanded decreases by 0.2 percent.
question
When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about
answer
0.67
question
Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-1?
answer
A is a luxury and B is a necessity.
question
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by
answer
40%
question
Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the absolute value of the price elasticity of demand is
answer
2.8
question
Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to
answer
1.5
question
Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,
answer
the equilibrium quantity decreases, and the equilibrium price is unchanged.
question
The case of perfectly elastic demand is illustrated by a demand curve that is
answer
horizontal
question
Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,
answer
the equilibrium price increases, and the equilibrium quantity is unchanged.
question
A perfectly inelastic demand implies that buyers
answer
purchase the same amount as before when the price rises or falls.
question
Refer to Figure 5-2. As price falls from Pa to Pb, which demand curve represents the most elastic demand?
answer
D1
question
On a downward-sloping linear demand curve, total revenue reaches its maximum value at the
answer
midpoint of the demand curve.
question
When demand is inelastic, a decrease in price will cause
answer
a decrease in total revenue.
question
If a change in the price of a good results in no change in total revenue, then
answer
the demand for the good must be unit elastic.
question
In which of the following situations will total revenue increase?
answer
Price elasticity of demand is 1.2, and the price of the good decreases.
Price elasticity of demand is 0.5, and the price of the good increases.
Price elasticity of demand is 3.0, and the price of the good decreases.
Price elasticity of demand is 0.5, and the price of the good increases.
Price elasticity of demand is 3.0, and the price of the good decreases.
question
Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should
answer
decrease the price charged to vacationers and increase the price charged to business travelers.
question
Suppose the point (Q = 3,400, P = $20) is the midpoint on a certain downward-sloping, linear demand curve. Then
answer
the maximum value of total revenue is $68,000.
question
Suppose a market has the demand function Qd=20-0.5P. At which of the following prices will total revenue be maximized?
answer
$20
question
To determine whether a good is considered normal or inferior, one could examine the value of the
answer
income elasticity of demand for that good.
question
For which of the following goods is the income elasticity of demand likely lowest?
answer
housing
question
The income elasticity of demand for caviar tends to be
answer
high because buyers generally feel that they can do without it.
question
Refer to Table 5-7. Using the midpoint method, when income equals $7,500, what is the price elasticity of demand between $16 and $20?
answer
1.80
question
Suppose the income elasticity of demand is -0.5 for good X. This implies that a 5% decrease in income will cause the quantity demanded of good X to
answer
increase by 2.5%, and X is an inferior good.
question
Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be
answer
positive.
question
For which pairs of goods is the cross-price elasticity most likely to be positive?
answer
pens and pencils
question
Suppose that when the price of good X falls from $6 to $4, the quantity demanded of good Y rises from 30 units to 40 units. Using the midpoint method, the cross-price elasticity of demand is
answer
-0.71, and X and Y are complements.
question
Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to
answer
fall by 50 percent.
question
If the quantity supplied responds only slightly to changes in price, then
answer
supply is said to be inelastic.
question
A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?
answer
The number of firms in a market tends to be more variable over long periods of time than over short periods of time.
question
If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
answer
inelastic
question
Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct?
answer
The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.
question
If a 20% change in price results in a 15% change in quantity supplied, then the price elasticity of supply is about
answer
0.75, and supply is inelastic.
question
Refer to Table 5-9. Which of the three supply curves represents the least elastic supply?
answer
supply curve A
question
Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $16 and $40?
answer
1.0
question
If sellers do not adjust their quantity supplied at all in response to a change in price, the price elasticity of supply is
answer
zero, and the supply curve is vertical.
question
A decrease in supply will cause the largest increase in price when
answer
both supply and demand are inelastic.
question
The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if the
answer
demand for wheat is elastic.
question
Scenario 5-3The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.
answer
greater in the aged cheddar cheese market than in the bread market.
question
If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the
answer
demand for marijuana is inelastic.
question
If marijuana were legalized, it is likely that there would be an increase in the demand for marijuana. If demand for marijuana is inelastic and the supply of marijuana is perfectly elastic, this will result in
answer
the same price and higher total revenue from marijuana sales.
question
A legal maximum on the price at which a good can be sold is called a price
answer
ceiling
question
Which of the following is the most likely explanation for the imposition of a price ceiling on the market for milk?
answer
Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling.
question
If a price ceiling is not binding, then
answer
the equilibrium price is below the price ceiling.
question
Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?
answer
The number of firms selling laptop computers decreases.
question
If the government removes a binding price ceiling from a market, then the price paid by buyers will
answer
increase, and the quantity sold in the market will increase.
question
Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars?
answer
slow replacement of old rental cars with newer ones
question
Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result,
answer
a shortage of treadmills will develop.
question
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
answer
the quantity of physicals supplied decreases.
question
Refer to Figure 6-2. The price ceiling
answer
is binding.
question
Which of the following is the most likely explanation for the imposition of a price floor on the market for corn?
answer
Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor.
question
A binding price floor
(i)
causes a surplus.
(ii)
causes a shortage.
(iii)
is set at a price above the equilibrium price.
(iv)
is set at a price below the equilibrium price.
(i)
causes a surplus.
(ii)
causes a shortage.
(iii)
is set at a price above the equilibrium price.
(iv)
is set at a price below the equilibrium price.
answer
(i) and (iii) only
question
Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding?
answer
Farmers use improved, draught-resistant seeds, which lowers the cost of growing soybeans.
question
If a binding price floor is imposed on the video game market, then
answer
the quantity of video games demanded will decrease.
question
Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the
answer
quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases.
question
A binding price floor will reduce a firm's total revenue
answer
when demand is elastic.
question
An outcome that can result from either a price ceiling or a price floor is
answer
a nonbinding price control.
question
Refer to Figure 6-4. A government-imposed price of $6 in this market could be an example of a
(i)binding price ceiling.(ii)non-binding price ceiling.(iii)binding price floor.(iv)non-binding price floor.
(i)binding price ceiling.(ii)non-binding price ceiling.(iii)binding price floor.(iv)non-binding price floor.
answer
(i) and (iv) only
question
Refer to Figure 6-4. A government-imposed price of $16 in this market could be an example of a
(i)binding price ceiling.(ii)non-binding price ceiling.(iii)binding price floor.(iv)non-binding price floor.
(i)binding price ceiling.(ii)non-binding price ceiling.(iii)binding price floor.(iv)non-binding price floor.
answer
(ii) and (iii) only
question
Refer to Figure 6-16. In this market, a minimum wage of $2.75 is
answer
nonbinding and creates neither a labor shortage nor unemployment.
question
Refer to Table 6-1. Which of the following price ceilings would be binding in this market?
answer
$50
question
Refer to Table 6-1. Suppose the government imposes a price ceiling of $40 on this market. What will be the size of the shortage in this market?
answer
1200 units
question
Which of the following is not a rationing mechanism used by landlords in cities with rent control?
answer
price
question
Under rent control, bribery is a mechanism to
answer
bring the total price of an apartment (including the bribe) closer to the equilibrium price.
question
Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because
answer
with shortages and waiting lists, they have no incentive to maintain and improve their property.
question
Over time, housing shortages caused by rent control
answer
increase, because the demand for and supply of housing are more elastic in the long run.
question
The minimum wage is an example of a
answer
price floor.
question
If the minimum wage exceeds the equilibrium wage, then
answer
the quantity supplied of labor will exceed the quantity demanded.
question
A minimum wage that is set below a market's equilibrium wage will
answer
have no impact on employment.
question
The minimum wage has its greatest impact on the market for
answer
teenage labor.
question
Long lines
answer
are an inefficient rationing mechanism because they waste buyers' time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly.
question
Suppose that a binding rent control law is repealed in San Francisco. As a result, we would expect the total number of units rented in the city to
answer
increase
question
If the government removes a tax on a good, then the price paid by buyers will
answer
decrease, and the price received by sellers will increase.
question
A tax on the sellers of coffee mugs
answer
decreases the size of the coffee mug market.
question
A tax on the sellers of coffee will increase the price of coffee paid by buyers,
answer
decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
question
If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would
answer
increase by less than $1,000.
question
If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars would
answer
decrease by less than $500.
question
Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct?
answer
The effective price received by sellers is $0.40 per bottle less than it was before the tax.
question
If a tax is levied on the sellers of a product, then the demand curve will
answer
not shift
question
If a tax is levied on the sellers of a product, then there will be a(n)
answer
upward shift of the supply curve.
question
Suppose sellers of liquor are required to send $5.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $3.00 per bottle. Which of the following statements is correct?
answer
This tax causes the supply curve for liquor to shift upward by $5.00 at each quantity of liquor.
question
If the government levies a $5 tax per ticket on buyers of NFL game tickets, then the price paid by buyers of NFL game tickets would
answer
increase by less than $5.
question
When a tax is placed on the buyers of lemonade, the
answer
burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.
question
Which of the following statements is correct concerning the burden of a tax imposed on take-out food?
answer
Buyers and sellers share the burden of the tax.
question
Suppose the government imposes a 30-cent tax on the sellers of soft drinks. Which of the following is not correct? The tax would
answer
raise the equilibrium price by 30 cents.
question
Refer to Figure 6-18. The price that buyers pay after the tax is imposed is
answer
24
question
Refer to Figure 6-18. The effective price that sellers receive after the tax is imposed is
answer
10
question
Refer to Figure 6-18. The amount of the tax per unit is
answer
14
question
Refer to Figure 6-18. The per-unit burden of the tax on buyers is
answer
8
question
Refer to Figure 6-18. The per-unit burden of the tax on sellers is
answer
6
question
Which of the following causes a shortage of a good?
answer
a binding price ceiling
question
The quantity sold in a market will increase if the government
answer
decreases a binding price floor in that market.
question
The incidence of a tax falls more heavily on
answer
consumers than producers if demand is more inelastic than supply.
producers than consumers if supply is more inelastic than demand.
consumers than producers if supply is more elastic than demand.
producers than consumers if supply is more inelastic than demand.
consumers than producers if supply is more elastic than demand.
question
Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the
answer
buyers will bear a greater burden of the tax than the sellers.
question
The tax burden will fall most heavily on buyers of the good when the demand curve
answer
is relatively steep, and the supply curve is relatively flat.
question
Buyers of a good bear the larger share of the tax burden when the
(i)
supply is more elastic than the demand for the product.
(ii)
demand in more elastic than the supply for the product.
(iii)
tax is placed on the sellers of the product.
(iv)
tax is placed on the buyers of the product.
(i)
supply is more elastic than the demand for the product.
(ii)
demand in more elastic than the supply for the product.
(iii)
tax is placed on the sellers of the product.
(iv)
tax is placed on the buyers of the product.
answer
(i) only
question
Suppose that the demand for light bulbs is inelastic, and the supply of light bulbs is elastic. A tax of $2 per bulb levied on light bulbs will increase the price paid by buyers of light bulbs by
answer
between $1 and $2.
question
The burden of a luxury tax falls
answer
more on the middle class than on the rich.
question
A consumer's willingness to pay directly measures
answer
how much a buyer values a good.
question
When a buyer's willingness to pay for a good is equal to the price of the good, the
answer
buyer is indifferent between buying the good and not buying it.
question
Consumer surplus is equal to the
answer
Value to buyers - Amount paid by buyers.
question
On a graph, the area below a demand curve and above the price measures
answer
consumer surplus.
question
Refer to Table 7-1. If the price of the product is $130, then who would be willing to purchase the product?
answer
Calvin and Sam
question
Refer to Table 7-1. If the price of the product is $122, then the total consumer surplus is
answer
$41.
question
Refer to Table 7-2. If the price of Vanilla Coke is $6.90, who will purchase the good?
answer
David and Laura
question
Refer to Table 7-2. Which of the following is not true?
answer
At a price of $9.00, no buyer is willing to purchase Vanilla Coke.
At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one.
At a price of $4.00, total consumer surplus in the market will be $9.00.
At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one.
At a price of $4.00, total consumer surplus in the market will be $9.00.
question
Refer to Table 7-4. If tickets sell for $40 each, then what is the total consumer surplus in the market?
answer
$30.
question
Refer to Table 7-4. If you have two (essentially) identical tickets that you sell to the group in an auction, what will be the selling price for each ticket?
answer
$26
question
Refer to Table 7-5. If the market price of an orange is $0.70, then the market quantity of oranges demanded per day is
answer
6
question
Refer to Table 7-5. If the market price of an orange increases from $0.70 to $1.40, then consumer surplus
answer
decreases by $2.50.
question
Refer to Table 7-8. The price that Chad paid for a latte on the first day is
answer
$3.75.
question
Bob purchases a book, and his consumer surplus is $3. If Bob is willing to pay $8 for the book, then the price of the book must be
answer
$5
question
Chuck would be willing to pay $20 to attend a dog show, but he buys a ticket for $15. Chuck values the dog show at
answer
$20
question
Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,
answer
both Janine and Henry experience an increase in consumer surplus.
question
Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to
answer
both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices.
question
Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons?
answer
Consumer surplus decreases.
question
Which of the following will cause an increase in consumer surplus?
answer
a technological improvement in the production of the good
question
Which of the following will cause a decrease in consumer surplus?
answer
the imposition of a binding price floor in the market
question
Refer to Figure 7-8. If the government imposes a price floor of $100 in this market, then consumer surplus will decrease by
answer
$325
question
A seller's opportunity cost measures the
answer
value of everything she must give up to produce a good.
question
A seller is willing to sell a product only if the seller receives a price that is at least as great as the
answer
seller's cost of production.
question
Producer surplus is
answer
the amount a seller is paid minus the cost of production.
question
Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is
answer
$1.85.
question
Tom tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $155 per tuning. One particular week, Tom is willing to tune the first piano for $120, the second piano for $125, the third piano for $140, and the fourth piano for $160. Assume Tom is rational in deciding how many pianos to tune. His producer surplus is
answer
$80
question
Kristi and Rebecca sell lemonade on the corner for $0.50 per cup. It costs them $0.10 to make each cup. On a certain day, their producer surplus is $20. How many cups did Kristi and Rebecca sell?
answer
50
question
Refer to Table 7-10. If the market price is $1,000, the producer surplus in the market is
answer
$300
question
Refer to Table 7-10. If the market price is $1,200, the producer surplus in the market is
answer
$800
question
Refer to Table 7-10. Suppose each of the five sellers can supply at most one unit of the good. The market quantity supplied is exactly 4 if the price is
answer
$1,400.
question
Refer to Table 7-12. You wish to purchase 10 piano lessons, so you take bids from each of the sellers. You will not accept a bid below a seller's cost because you are concerned that the seller will not provide all 10 lessons. What bid will you accept?
answer
$199
question
Refer to Figure 7-11. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus to existing producers?
answer
$2,500
question
Refer to Figure 7-11. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?
answer
$625
question
Producer surplus is the area
answer
below the price and above the supply curve.
question
Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts?
answer
It increases.
question
Which of the following will cause an increase in producer surplus?
answer
the price of a substitute increases
question
ABC Company incurs a cost of 50 cents to produce a dozen eggs, while XYZ Company incurs a cost of 70 cents to produce a dozen eggs. Which of the following price increases would cause both companies to experience an increase in producer surplus?
answer
The price of a dozen eggs increases from 55 cents to 75 cents.
question
Economists typically measure efficiency using
answer
total surplus.
question
Total surplus in a market is equal to
answer
value to buyers - costs of sellers.
question
Total surplus is represented by the area
answer
between the demand and supply curves up to the point of equilibrium.
question
Efficiency in a market is achieved when
answer
the sum of producer surplus and consumer surplus is maximized.
question
Which of the following statements is not correct about a market in equilibrium?
answer
Consumer surplus will be equal to producer surplus
question
Refer to Table 7-16. The equilibrium price is
answer
$4.00.
question
Refer to Table 7-16. Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is
answer
$48
question
Refer to Table 7-16. Both the demand curve and the supply curve are straight lines. At equilibrium, total surplus is
answer
$72
question
Refer to Table 7-16. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, total surplus will be
answer
$54
question
Refer to Figure 7-19. If the government imposes a price floor of $55 in this market, then total surplus will be
answer
$62.50 lower than it would be without the price floor.
question
Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus
answer
might increase or decrease.
question
Total surplus in a market will increase when the government
answer
Neither a nor b is correct.
question
A simultaneous increase in both the demand for MP3 players and the supply of MP3 players would imply that
answer
the value of MP3 players to consumers has increased, and the cost of producing MP3 players has decreased.
question
Refer to Figure 7-19. If the government imposes a price ceiling of $55 in this market, then total surplus will be
answer
$250.00.
question
Externalities tend to cause markets to be
answer
inefficient.
question
Altering incentives so that people take account of the external effects of their actions
answer
is called internalizing the externality.
can be done by imposing a corrective tax.
is the role of government in markets with externalities.
can be done by imposing a corrective tax.
is the role of government in markets with externalities.
question
All remedies for externalities share the goal of
answer
moving the allocation of resources toward the socially optimal equilibrium.
question
The difference between social cost and private cost is a measure of the
answer
cost of an externality.
question
Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are
answer
$1.60 and 42 units, respectively.
question
Refer to Table 10-1. What is the equilibrium quantity of output in the market?
answer
3 units
question
Refer to Table 10-1. What is the socially-optimal quantity of output in this market?
answer
2 units
question
Refer to Table 10-1. Which of the following statements is correct?
answer
Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed.
question
Which of the following illustrates the concept of a negative externality?
answer
A college student plays loud music on his new stereo system at 2:00 a.m.
question
When a negative externality exists in a market, the cost to producers
answer
will be less than the cost to society.
question
Negative externalities lead markets to produce
answer
greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.
question
Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?
answer
The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.
question
Which of the following is NOT an example of a negative externality?
answer
a decrease in your property value from neglecting your lawn and garden.
question
Refer to Figure 10-7. Which quantity represents the social optimum for this market?
answer
Q3
question
Refer to Figure 10-8. What is the equilibrium price in this market?
answer
$8
question
Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?
answer
10 units
question
Refer to Table 10-2. What is the equilibrium quantity of output in this market?
answer
4 units
question
Refer to Table 10-2. What is the socially-optimal level of output in this market?
answer
5 units
question
Which of the following is an example of a positive externality?
answer
a nice garden in front of your neighbor's house
question
A positive externality
answer
is a benefit to someone other than the producer and consumer of the good.
question
A benevolent social planner would prefer that the output of good x be decreased from its current level if, at the current level of output of good x,
answer
social value = private value = private cost < social cost.
question
Which of the following policies is the government most inclined to use when faced with a positive externality?
answer
subsidies
question
Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?
answer
At the current output level, the marginal social benefit exceeds the marginal private benefit.
The current output level is inefficiently low.
A per-shot subsidy could turn an inefficient situation into an efficient one.
The current output level is inefficiently low.
A per-shot subsidy could turn an inefficient situation into an efficient one.
question
Research into new technologies
answer
provides positive externalities because it creates knowledge others can use.
question
Refer to Table 10-3. The social value of the 4th unit of output that is produced is
answer
$26
question
Refer to Table 10-3. The socially optimal quantity of output is
answer
5 units
question
Refer to Table 10-3. What amount of subsidy per unit of output would move the market from the equilibrium level of output to the socially optimal level of output?
answer
$10
question
Refer to Scenario 10-1. From the given information, it is apparent that
answer
the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable.
question
Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were
answer
required to pay a tax of $0.45 per gallon of gasoline sold.
question
Refer to Figure 10-13. In order to reach the social optimum, the government could
answer
impose a tax of $8 per unit on plastics.
question
Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the
answer
market equilibrium has been reached.
question
A command-and-control policy is another term for a
answer
government regulation.
question
In some parts of the United States, sugar beets are grown and harvested. The process of producing usable sugar from the beets generates foul-smelling smoke. A government policy that limits the emission of smoke by sugar-beet-processing firms is an example of
answer
a command-and-control policy.
question
The tax on cigarettes is an example of
answer
a corrective tax.
question
Corrective taxes differ from most taxes in that corrective taxes
answer
do not cause deadweight losses.
question
Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?
answer
they are equal
question
Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
answer
The after-tax equilibrium quantity is less than the socially optimal quantity.
question
University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. Suppose that the federal government gives grants to these researchers equal to the their per-unit production externality. What is the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced?
answer
They are equal.
question
Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $11-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
answer
The equilibrium quantity is greater than the socially optimal quantity.
question
Which of the following is an advantage of tradable pollution permits?
answer
The initial allocation of permits to firms does not affect the efficiency of the market.
question
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?
answer
$4,500; $3,500
question
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,
answer
Firm A will spend $4,000.
question
Refer to Table 10-5. If the government wanted to eliminate exactly 11 units of pollution, which of the following fees per unit of pollution would achieve that goal?
answer
$87
question
Which of the following statements is not correct?
answer
Private parties are usually more successful in achieving efficient outcomes than government policies in the presence of externalities.
question
Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called
answer
transaction costs.
question
Transaction costs
answer
can keep private parties from solving externality problems.
question
In class action lawsuits, interested parties to the lawsuit are not required to pay attorney fees directly. This is an example of an attempt to
answer
reduce the transaction costs of finding a private solution to an externality.
question
A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome?
answer
The dentist gets a new drill; it does not matter who pays for it.
question
Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that
answer
The current situation is efficient.
question
Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to
answer
pay you at least $60 but less than $80 to live with the clutter.
question
Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution?
answer
Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15).
question
A city street is
answer
a common resource when it is congested, but it is a public good when it is not congested.
question
The provision of public goods gives rise to
answer
positive externalities, whereas the use of common resources gives rise to negative externalities.
question
Private decisions about consumption of common resources and production of public goods usually lead to an
answer
inefficient allocation of resources and external effects.
question
Goods that are excludable include both
answer
private goods and club goods.
question
Goods that are not excludable include both
answer
common resources and public goods.
question
Goods that are not excludable are usually
answer
free of charge.
question
A view of a spectacular sunset along a private beach is an example of a
answer
nonrival but excludable good.
question
Bob owns 5 acres of land. Bob sells the land to a real estate developer who builds a subdivision with 10 houses. The land is an example of a good that is
answer
both rival in consumption and excludable.
question
Goods that are not rival in consumption include both
answer
club goods and public goods.
question
Some goods can be either common resources or public goods depending on
answer
whether the good is rival in consumption.
question
If a road is congested, then use of that road by an additional person would lead to a
answer
negative externality.
question
Which of the following would be considered a private good?
answer
a swimming suit
question
Which of the following goods is nonrival in consumption and excludable?
answer
Disney World on a rainy, cool day
question
Under which of the following scenarios would a park be considered a public good?
answer
Visitors can enter the park free of charge and there are always plenty of empty picnic tables.
question
Pay-per-view broadcasts are
answer
club goods.
question
A streetlight is a
answer
public good
question
Refer to Figure 11-1. Which of the following statements is correct?
answer
A congested nontoll road is an example of the type of good represented by Box C.
question
Which of the following goods is the best example of a public good?
answer
music that is broadcast over the airwaves by a privately-owned FM radio station
question
Without government intervention, public goods tend to be
answer
underproduced and common resources tend to be overconsumed.
question
The U.S. military defends Jacob from foreign attackers. The fact that Jacob enjoys this protection does not detract from others Americans' enjoyment of it. For this reason, we say that national defense is
answer
not rival in consumption
question
On the Fourth of July, there is no fireworks display in the small town of Yankeeville, even though it would be efficient for such a display to be produced. Which of the following statements is correct?
answer
The lack of a fireworks display in Yankeeville arises because of an externality.
The lack of a fireworks display in Yankeeville is a case of market failure.
In deciding not to produce a fireworks display in Yankeeville, private individuals and private firms made decisions that were privately rational but socially inefficient.
The lack of a fireworks display in Yankeeville is a case of market failure.
In deciding not to produce a fireworks display in Yankeeville, private individuals and private firms made decisions that were privately rational but socially inefficient.
question
Mike Miller is the town manager of Medfield, a town with 50,000 residents. At a recent town meeting, several citizens proposed building a large public swimming pool in the center of town for all of the residents to enjoy. A survey of all 50,000 residents revealed that the pool would be worth $50 to each of them. Because the cost to build the swimming pool is only $1,000,000, Manager Miller arranges to have the pool built. Everyone in town enjoys the pool, but when Manager Miller asks for donations to pay for the pool, he only collects $250,000. Manager Miller soon realizes that
answer
most residents of the town are probably free-riders at the pool.
question
Refer to Table 11-1. Suppose the cost to build the park is $24 per acre. How many acres should the park be to maximize total surplus from the park in Springfield?
answer
3 acres
question
Refer to Table 11-1. Suppose the cost to build the park is $24 per acre and that the residents have agreed to split the cost of building the park equally. To maximize his own surplus, how many acres would Cedric like Springfield to build?
answer
0 acres
question
Refer to Table 11-4. Suppose the cost to plant each tree is $380 and the 4 homeowners have agreed to split all tree-planting costs equally. Which homeowner(s) would be opposed to planting any trees?
answer
only Davis
question
Which of the following statements is not correct?
answer
When African elephants were privatized, the survival of the species deteriorated.
question
Neither public goods nor common resources are
answer
excludable, but only public goods are not rival in consumption.
question
Four roommates share an off-campus house and equally share the cost of rent. Everyone says that she values a clean house, yet the house is usually dirty. To an economist, a clean house in this case represents
answer
a common resource problem.
question
Which of the following is not a way for the government to solve the problem of excessive use of common resources?
answer
turning the common resource into a public good
question
Which of the following is not a typical solution to the "Tragedy of the Commons?"
answer
turning the common resource into a club good
question
The Tragedy of the Commons occurs because
answer
social and private incentives differ.
question
On holiday weekends thousands of people picnic in state parks. Some picnic areas become so overcrowded the benefit or value of picnicking diminishes to zero. An overcrowded picnic area is an example of
answer
a Tragedy of the Commons.
question
A toll on a congested road is in essence
answer
a corrective tax.
question
The U.S. government protects fish, a common resource, by
answer
selling fishing licenses and regulating fish lengths.
question
Economists normally assume that the goal of a firm is to earn
(i)
profits as large as possible, even if it means reducing output.
(ii)
profits as large as possible, even if it means incurring a higher total cost.
(iii)
revenues as large as possible, even if it reduces profits.
(i)
profits as large as possible, even if it means reducing output.
(ii)
profits as large as possible, even if it means incurring a higher total cost.
(iii)
revenues as large as possible, even if it reduces profits.
answer
(i) and (ii) only
question
Total revenue equals
answer
price x quantity.
question
Which of the following can be added to profit to obtain total revenue?
answer
total cost
question
Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are
answer
$7,500.
question
Profit is defined as
answer
total revenue minus total cost.
question
Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be
answer
-$3,875.
question
A firm's opportunity costs of production are equal to its
answer
explicit costs + implicit costs
question
Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business?
answer
$170
question
Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Bubba gave up is counted as part of the shrimp business's
answer
implicit costs.
question
Explicit costs
answer
require an outlay of money by the firm.
question
An example of an explicit cost of production would be the
answer
lease payments for the land on which a firm's factory stands.
question
A difference between explicit and implicit costs is that
answer
implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
question
Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
answer
$4,000
question
Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000, and she spent $1,000 on materials and supplies. Which of the following statements is correct?
answer
Bev's economic profit is $3,700.
question
Economic profit
answer
will never exceed accounting profit.
question
Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business?
answer
$0
question
Which of the following expressions is correct?
answer
accounting profit = total revenue - explicit costs
question
Refer to Scenario 13-6. An economist would calculate Ziva's total cost for the day of farming to equal
answer
$380.
question
Refer to Scenario 13-6. Ziva's accounting profit from farming equals
answer
$170
question
Refer to Scenario 13-13. Christine used $5,000 from her personal savings account to buy pottery tools for her business. The savings account paid 1% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the annual economic profit of her cookie jar business?
answer
$29,950
question
Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian's savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. What are Sebastian's implicit costs from running his own business?
answer
$30,600
question
Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers
answer
labor to be variable and capital to be fixed.
question
The marginal product of labor can be defined as the change in
answer
output divided by the change in labor.
question
When a firm's only variable input is labor, then the slope of the production function measures the
answer
marginal product of labor.
question
Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 5, Q = 125) and (L = 6, Q = 152). Then the marginal product of the 6th worker is
answer
27 units of output.
question
Refer to Table 13-1. What is total output when 3 workers are hired?
answer
135
question
Refer to Table 13-2. At which number of workers does diminishing marginal product begin?
answer
2
question
When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing
answer
diminishing marginal product.
question
Refer to Table 13-5. Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what are the shapes of the production function and the total-cost curve?
answer
The production function is increasing at a decreasing rate, whereas the total-cost function is increasing at an increasing rate.
question
Refer to Scenario 13-15. Joan's total-cost curve is
answer
increasing at an increasing rate
question
If the total cost curve gets steeper as output increases, the firm is experiencing
answer
diminishing marginal product.
question
David's firm experiences diminishing marginal product for all ranges of inputs. The total cost curve associated with David's firm
answer
gets steeper as output increases.
question
Some costs do not vary with the quantity of output produced. Those costs are called
answer
fixed costs.
question
In the short run, a firm incurs fixed costs
answer
whether it produces output or not.
question
For a construction company that builds houses, which of the following costs would be a fixed cost?
answer
the $30,000 per year salary paid to the company's bookkeeper
question
Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 2 workers, the total cost of production is $100. When the firm hires 3 workers, the total cost of production is $120. In addition, assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. What is the firm's fixed cost?
answer
$60
question
If a firm produces nothing, which of the following costs will be zero?
answer
variable cost
question
When a firm is able to put idle equipment to use by hiring another worker,
answer
variable costs will rise
question
Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers?
answer
$76
question
The cost of producing the typical unit of output is the firm's
answer
average total cost.
question
Larry's Lunchcart is a small street vendor business. If Larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is
answer
$1.10.
question
At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the
answer
average total cost of 21 pairs of boots is $23.
question
Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced?
answer
$4
question
A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100,
answer
average variable cost is $3.
question
Bobby pays all his workers the same wage, and labor is his only variable cost. From this information we can conclude that Bobby's average variable cost decreases
answer
as output rises from 0 to 26, but rises after that.
question
Refer to Table 13-7. What is the value of L?
answer
$135
question
Refer to Table 13-11. The average variable cost of producing 4 posters is
answer
$2.50
question
Refer to Table 13-11. The total cost of producing 1 poster is
answer
$11
question
Refer to Table 13-12. One week, Eileen earns a profit of $125. If her revenue for the week is $1100, how many boxes of earrings did she produce?
answer
780
question
Refer to Table 13-14. What is the variable cost of producing 5 units of output?
answer
$100
question
Refer to Scenario 13-16. Barney's monthly total profit is
answer
$3,000
question
Refer to Scenario 13-18. Which of the following statements is (are) true?
(i)
Farmer Jack experiences decreasing marginal product.
(ii)
Farmer Jack's production function is nonlinear.
(iii)
Farmer Jack's total cost curve is linear.
(i)
Farmer Jack experiences decreasing marginal product.
(ii)
Farmer Jack's production function is nonlinear.
(iii)
Farmer Jack's total cost curve is linear.
answer
(i) and (ii) only
question
The amount by which total cost rises when the firm produces one additional unit of output is called
answer
marginal cost.
question
Marginal cost equals
answer
the slope of the total cost curve.
question
A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $3,500. When it produces 101 units of output, its total costs are $3,750. What is the marginal cost of producing the 101st unit of output?
answer
$250
question
A firm has a fixed cost of $200 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 $700. What is the total cost of producing 100 units?
answer
$4,700
question
Jennifer is a junior in college. Her current cumulative grade point average (GPA) is 3.5 out of a 4.0 scale. Jennifer is hoping that by the time she graduates, she can raise her cumulative GPA to a 3.7. Which of the following statements is correct?
answer
Jennifer must earn above a 3.7 GPA in her senior year in order to raise her cumulative GPA to a 3.7.
question
If marginal cost is rising,
answer
marginal product must be falling.
question
The average-fixed-cost curve
answer
is always decreasing.
question
The average-total-cost curve intersects
answer
marginal cost at the minimum of average total cost.
question
Which of the following statements is correct?
answer
If average total cost is rising, then marginal cost is greater than average total cost.
question
When marginal cost exceeds average total cost,
answer
average total cost must be rising.
question
Tony's Taco Truck has an average variable cost of $1.50 and a marginal cost of $2 when it produces 50 units of output (tacos). We can conclude that the average variable cost of producing 51 tacos is
answer
higher than $1.50.
question
Refer to Table 13-16. What is the fixed cost of producing 0 units of output?
answer
$24
question
A local playground equipment company plans to operate out of its current factory, which is estimated to last 30 years. All cost decisions it makes during the 30-year period
answer
are short-run decisions.
question
The total cost to the firm of producing zero units of output is
answer
its fixed cost in the short run and zero in the long run.
question
In the long run,
answer
inputs that were fixed in the short run become variable.
question
When comparing short-run average total cost with long-run average total cost at a given level of output,
answer
short-run average total cost is typically above long-run average total cost.
question
Refer to Table 13-16. Which firm is experiencing diseconomies of scale?
answer
Firm C only
question
A key characteristic of a competitive market is that
answer
producers sell nearly identical products.
question
Which of the following is a characteristic of a competitive market?
answer
Buyers and sellers are price takers.
question
A firm that has little ability to influence market prices operates in a
answer
competitive market.
question
In a competitive market, the actions of any single buyer or seller will
answer
have a negligible impact on the market price.
question
Which of the following industries is most likely to exhibit the characteristic of free entry?
answer
tennis shoes
question
When firms are said to be price takers, it implies that if a firm raises its price,
answer
buyers will go elsewhere.
question
Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
answer
remain unchanged.
question
Which of the following statements regarding a competitive market is not correct?
answer
Price exceeds marginal revenue
question
A seller in a competitive market can
answer
sell all he wants at the going price, so he has little reason to charge less.
question
Refer to Table 14-6. What is the total revenue from selling 7 units?
answer
$840
question
Which of the following statements is correct?
answer
Only for competitive firms does average revenue equal marginal revenue.
question
Suppose that a firm operating in perfectly competitive market sells 300 units of output at a price of $3 each. Which of the following statements is correct?
(i)
Marginal revenue equals $3.
(ii)
Average revenue equals $3.
(iii)
Total revenue equals $900.
(i)
Marginal revenue equals $3.
(ii)
Average revenue equals $3.
(iii)
Total revenue equals $900.
answer
(i), (ii), and (iii)
question
Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue
answer
does not change.
question
If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
answer
a one-unit increase in output will increase the firm's profit.
question
Comparing marginal revenue to marginal cost
(i)
reveals the contribution of the last unit of production to total profit.
(ii)
is helpful in making profit-maximizing production decisions.
(iii)
tells a firm whether its fixed costs are too high.
(i)
reveals the contribution of the last unit of production to total profit.
(ii)
is helpful in making profit-maximizing production decisions.
(iii)
tells a firm whether its fixed costs are too high.
answer
(i) and (ii) only
question
A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily
answer
increase the firm's average variable cost by $0.44.
question
If a competitive firm is selling 500 units of its product at a price of $8 per unit and earning a positive profit, then
answer
its total cost is less than $4,000.
question
A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its
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quantity of output is higher than it was previously.
average total cost is higher than it was previously.
marginal revenue is higher than it was previously.
average total cost is higher than it was previously.
marginal revenue is higher than it was previously.
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Refer to Table 14-7. If the firm is maximizing profit, how much profit is it earning?
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There is insufficient data to determine the firm's profit.
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Refer to Table 14-9. If the firm produces 3 units of output,
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total revenue is greater than variable cost.
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Refer to Table 14-10. At which level of production will the firm maximize profit?
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3 units
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Refer to Table 14-13. What is Diana's economic profit at the profit maximizing point?
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$278
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If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should
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increase its output.
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Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has earned $4,500 in monthly revenue. In the short run, Susan should
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continue to operate her business, but in the long run she will probably face competition from newly entering firms.
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If the firm's fixed cost of production is $3, and the market price is $10, how many units should the firm produce to maximize profit?
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3 units
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Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
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continue to operate in both the short run and long run.
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Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
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shut down in both the short run and long run.
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Scenario 14-4The information below applies to a competitive firm that sells its output for $40 per unit.• When the firm produces and sells 150 units of output, its average total cost is $24.50.• When the firm produces and sells 151 units of output, its average total cost is $24.55.
Refer to Scenario 14-4. When the firm produces 150 units of output, its total cost is
Refer to Scenario 14-4. When the firm produces 150 units of output, its total cost is
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$3,675.00.
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Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is
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$1,600.
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Suppose that a firm in a competitive market is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit?
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$250
question
In the short run, a firm operating in a competitive industry will shut down if price is
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less than average variable cost.
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The short-run supply curve for a firm in a perfectly competitive market is
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the portion of its marginal cost curve that lies above its average variable cost.
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What is the lowest price at which this firm might choose to operate?
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$3
question
Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. In the short run, Susan should
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continue to operate her business, but in the long run she should exit the industry.
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A firm that shuts down temporarily has to pay
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its fixed costs but not its variable costs.
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In the long run, a firm will enter a competitive industry if
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total revenue exceeds total cost.
the price exceeds average total cost.
the firm can earn economic profits.
the price exceeds average total cost.
the firm can earn economic profits.
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In the long run, a firm will exit a competitive industry if
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average total cost exceeds the price.
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The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
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total cost.
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Refer to Table 14-17. Based upon this information, if the firm is producing the profit maximizing output, how much profit does the firm make?
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$4
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The short-run market supply curve in a perfectly competitive industry
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shows the total quantity supplied by all firms at each possible price.
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In a market with 1,000 identical firms, the short-run market supply is the
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sum of the quantities supplied by each of the 1,000 individual firms at each price.
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In a perfectly competitive market, the market supply curve is
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the horizontal sum of all the individual firms' supply curves.
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In the short run for a particular market, there are 300 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. $30 is above every firm's average variable cost. One point on the market supply curve is
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quantity = 60,000; price = $30.
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In the short run, a market consists of 100 identical firms. The market price is $6, and the total cost to each firm of producing various levels of output is given in the table below. What will total quantity supplied be in the market?
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200 units
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When existing firms in a competitive market are profitable, an incentive exists for
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new firms to enter the market, even without government subsidies.
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When new firms have an incentive to enter a competitive market, their entry will
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drive down profits of existing firms in the market.
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When firms have an incentive to exit a competitive market, their exit will
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raise the profits of the firms that remain in the market.
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Phil sells duck calls in a perfectly competitive market. If duck calls sell for $10 each and average total cost per unit is $11 at the profit-maximizing output level, then in the long run
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some firms will exit from the market.
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Suppose that the organic-produce industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will
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cause the market supply to decline and the price of organic produce to rise.
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Scenario 14-4Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?
Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?
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-$25,000
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In a perfectly competitive market, the process of entry and exit will end when
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economic profits are zero.
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In a competitive market with free entry and exit, if all firms have the same cost structure, then
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all firms will operate at their efficient scale in the long run.
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In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she
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will earn zero economic profits but positive accounting profits.
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A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will
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fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium.
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