question
What is the change in total cost equal to in the marginal cost equation?
answer
Marginal cost multiplied by change in quantity.
question
Fixed costs equal:
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Total costs minus variable costs
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Economic profit is distinct from accounting profit because
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Economic profit incorporates both explicit and implicit costs.
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Total costs include:
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Variable costs plus fixed costs
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Marginal costs consider
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The increase in total cost arising from an extra unit of production.
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What response best describes the relationship between marginal costs and total costs?
answer
Whenever marginal cost is less than average total cost, average total cost is falling.
question
Which statement is true about productivity?
answer
The value of marginal product of labor equals wage in a competitive firm.
question
A production function expresses the relationship between:
answer
Quantity of resource inputs and product/service outputs.
question
Opportunity costs include:
answer
The income the entrepreneur could have earned working for an employer.
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Economists and decision makers study and then make decisions or judgments based on (select best answer):
answer
Marginal analysis.
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The primary reason that the marginal cost curve declines and then increases is:
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Firms experience increasing marginal product, then diminishing marginal product.
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When do marginal costs eventually rise?
answer
With the quantity of output.
question
Consider the following example: A perfectly competitive firm finds that at current production levels marginal cost is greater than marginal revenue. What action should this firm take in order to pursue the maximization of profit?
answer
Decrease the target output.
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A competitive firm is characterized by:
answer
Trading of identical products.
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Competitive firms experience marginal revenue that is:
answer
Equal to price.
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In the short-run, a competitive firm would continue to produce under the following circumstance:
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Total revenue exceeds total variable costs.
question
What fundamental shape does a demand curve take in a competitive market?
answer
Horizontal.
question
For a perfectly competitive firm which condition is true?
answer
The demand curve is the same as the marginal revenue curve.
question
Which condition is true for perfectly competitive firms in the long-run?
answer
They will exit the market if total revenue is less than total costs.
question
Which statement is true concerning marginal costs?
answer
Marginal costs typically decline and then increase with the quantity of output.
question
What rule is used by perfectly competitive firms to determine shut-down in the short-run?
answer
Price is less than average variable costs
question
What is true of perfectly competitive firms in the long-run?
answer
Economic profits will not be achievable.
question
What two market structures have common profit characteristics in the long run?
answer
Perfect competition and monopolistic competition.
question
Consider the structure/shape of the demand curve for the various firm types. In what way does a monopoly's demand curve differ from a perfectly competitive firm's demand curve?
answer
The monopoly's demand curve is downward sloping and the competitive firm's demand curve is horizontal.
question
Monopolistic firms seek to maximize profit. What condition allows them to achieve this goal?
answer
When marginal revenue equals marginal cost.
question
In pursuing the maximization of profit, monopolies set price at a point that is:
answer
Above marginal cost.
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Consider demand for the various firm types. How does a monopoly's demand curve compare to the demand curve for a perfectly competitive firm?
answer
It is less elastic.
question
A monopoly's demand curve is:
answer
The same as the market demand curve.
question
What is a key characteristic of the demand curve for a monopoly?
answer
It is the same as the market demand curve.
question
In the long-run, how do monopolistically competitive firms garner economic profits?
answer
They earn zero economic profits in the long-run.
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What is true of a monopolistically competitive firm's demand curve?
answer
It is less elastic than a perfectly competitive firm.
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What characteristic does a monopolistically competitive firm have in common with a perfectly competitive firm?
answer
Cannot earn economic profits in the long-run.
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What is the primary goal of a firm in monopolistic competition?
answer
Profit maximization.
question
Consider the choice that an oligopolistic firm has to either compete or to cooperate, collude and form a cartel with the only other existing firm in the market. What do game theory and the prisoner's dilemma teach regarding this firm's choice?
answer
It is difficult to maintain cooperation.
question
Consider the prisoner's dilemma example. In what way are an oligopoly and the prisoner's dilemma similar in nature?
answer
Both depict the difficulty of maintaining cooperative agreements.
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Why is studying the prisoner's dilemma applicable to business?
answer
It demonstrates the value of mapping out a potential strategy given the actions of rivals.
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Think of the way in which the prisoner's dilemma is resolved. In what way does self-interest influence each prisoner's decision in the prisoner's dilemma?
answer
Both prisoners will likely confess.
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How do self-interest and rivalry in an oligopoly affect each firm's market decisions?
answer
Collusion will fail and self-interest will prevail in the long-run.
question
In the prisoner's dilemma, what is the likely outcome?
answer
Both prisoners will confess.
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What can we learn from game theory and the prisoner's dilemma about oligopolies?
answer
Strategy is affected by rivalries.
question
Consider a situation in which the Federal Reserve decides to increase the reserve requirement. What impact will this change have on the nominal interest rate and the quantity of money?
answer
The interest rate increases, and the quantity of money decreases.
question
The Federal Reserve can increase the money supply by purchasing bonds from the public. This type of market operation is called:
answer
Open market operation.
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Banks often borrow money from the Federal Reserve and are then required to repay the money with interest. What is the interest rate on this type of loan called?
answer
Discount rate.
question
The reserve ratio is currently 10 percent and the Federal Reserve is planning to change the reserve ratio to 20 percent. What will be the impacts on interest rates and the quantity of money?
answer
The interest rate increases and the quantity of money decreases.
question
When banks borrow directly from the Federal Reserve, the interest rate is known as:
answer
The Discount rate.
question
What is the method that the Federal Reserve prefers to use to expand or contract the money supply?
answer
Open market operations.
question
Consider the impact of fiscal policy. In order to achieve a rightward shift of the aggregate demand curve, fiscal policy would need to consider:
answer
Expanding government purchases.
question
If the Federal Reserve uses monetary policy to increase the money supply, what impact will this have on aggregate demand and interest rates?
answer
Aggregate demand will increase, interest rates will decrease.
question
Which of the following is a Federal Reserve monetary policy that shifts the aggregate demand curve to the left?
answer
Increasing the reserve requirement.
question
What is the most effective fiscal method to stimulate aggregate demand by raising consumer spending?
answer
A permanent tax cut.
question
What term most fully describes decreasing aggregate demand and increasing prices?
answer
Stagflation.
question
What is likely to happen to interest rates if the government runs protracted large budget deficits?
answer
Interest rates rise.
question
The law of demand states that, all else equal:
answer
price and quantity demanded are inversely related.
question
If the equilibrium wage for fast food workers in a local community is $8.00 per hour and the local government imposes a price floor for wages of $15.00 per hour, what will be the market impact(s)?
answer
A surplus of fast food labor.
question
Which of the following factors influences the price elasticity of demand?
answer
Availability of close substitutes.
question
What measures how the quantity demanded of one good responds to a change in price of another good?
answer
Cross-price elasticity of demand.
question
What measures how much the quantity supplied responds to change in price?
answer
Price elasticity of supply.
question
Bob's income increases by 20% in a given year. Following Bob's change in income, he adjusts which products he purchases from the store. If Bob purchases less microwave pizza, this indicates that for Bob this product is:
answer
An inferior good.
question
Bob travels to the store to purchase steak for a weekend party. Upon arriving, Bob notices that the price of steak has doubled since his last visit. Bob decides to purchase chicken instead of steak. In relation to his decision to not purchase steak, Bob also opts to not purchase the best tasting steak sauce in the world (A-1). Bob's decision not to purchase A-1 Steak Sauce indicates that this sauce is:
answer
A complement to steak.
question
If packaged hamburger has a price elasticity of demand of 2.35, then what will be the impact on total revenue at the local grocery store if the store decides to cut the price of packaged hamburger as a six month marketing promotion?
answer
Total revenue will increase.
question
You are trying to determine whether a price decrease by a competitor will affect the sales of your product. Which of the following can help answer this question?
answer
Price elasticity of demand.
question
You are attempting to determine if your product is a normal or inferior good. What is the best calculation you can use to answer this question?
answer
Income elasticity of demand.
question
You are a buyer for a local department store that sells donuts every morning to commuting customers. There have been many complaints of stock outs of donuts by customers. You know that there are many bakers in town and you are trying to figure out what price you will need to pay to encourage these bakers to provide more donuts to your department store every morning. Which tool can best help you in your analysis?
answer
Price elasticity of supply.
question
If demand is elastic, what will happen to total revenue if the firm lowers its price?
answer
Total revenue will increase.
question
We would expect the cross-price elasticity of demand between hamburgers and hot dogs to be:
answer
positive, meaning they are substitute goods.
question
We would expect the cross-price elasticity of demand between computers and software to be:
answer
negative, meaning they are complementary goods.
question
The opportunity cost of one good relative to another reflects:
answer
The slope of the budget constraint.
question
Assume that an individual's budget decreases and that prices remain constant. What would happen to his/her budget constraint? The budget constraint line would:
answer
Shift inward in a parallel manner.
question
Observing an individual's indifference curve demonstrates his/her:
answer
Preferences.
question
Assume that Bob's income increases following a promotion at work, but prices do not change. What will happen to Bob's budget constraint?
answer
It will shift outward, parallel to its initial position.
question
How will an increase in income affect the budget constraint, assuming that prices remain the same?
answer
Shift outward.
question
What is a good called that consumers buy less of when their income increases?
answer
Inferior good.
question
What is true of indifference curves?
answer
The consumer's preferences are represented with indifference curves.
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