ECON 2030 – Exam 2

question

What is consumer surplus? (CS)

answer

CS = res. price of buyer - actual price

question

What is producer surplus? (PS)

answer

PS = actual price - res. price of seller

question

Suppose Andrea, a rational artist, recently sold her painting, City #1, for $325. Suppose further that her reservation price for selling the painting was $250. Andrea's producer surplus from this sale was...

answer

$75

question

What is economic surplus?

answer

benefit - cost (aka the benefit beyond the cost)

ES = CS + PS

question

Suppose rational decision-maker Gena was considering purchasing a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $100 and Gena's reservation price for the ticket was $150. Instead of buying the Springsteen ticket, however, Gena chose to go to a free Beth Patterson concert. Everything else held constant, it can be concluded with certainty that Gena's consumer surplus from seeing Beth Patterson was...

answer

greater than or equal to $50

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, consumer surplus in the market for t-shirts will _____ today.

answer

be ambiguous

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, producer surplus in the market for t-shirts will _____ today.

answer

decrease

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, economic surplus in the market for t-shirts will _____ today.

answer

decrease

question

Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes?

answer

the consumer/demander

question

Answer true or false to the following statement:

The difference between the price buyers pay for a good and the price sellers receive from selling it is the amount of the tax.

answer

TRUE

question

Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the buyers will bear _____ percent of the burden of the tax.

answer

75%

question

Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the sellers will bear _____ percent of the burden of the tax.

answer

25%

question

Buyers will bear the entire burden of an excise tax if supply is perfectly _____.

answer

elastic

question

Whoever is more (elastic/inelastic) will bear the greater tax burden.

answer

inelastic

question

Suppose a profit-maximizing firm is earning positive economic profits at its current level of output. Everything else held constant, the firm's accounting profits are...

1. positive.
2. negative.
3. normal.
4. ambiguous.

answer

positive

question

What is the formula for accounting profit?

answer

accounting profit = TR - explicit cost

question

What is the formula for economic profit?

answer

economic profit = (TR - explicit) - implicit

OR

(accounting profit) - implicit

question

TRUE/FALSE:

Accounting profit will always be greater than economic profit.

answer

TRUE

b/c accounting prof is TR - explicit

and econ prof is (TR-explicit) - implicit

question

What is 'normal profit'?

answer

When economic profit is equal to ZERO

question

Suppose you run a baking business. Your economic profit is zero. Should you continue to run your business, or shut down?

answer

continue to run business! means your accounting profit is positive (bc is always greater than economic profit)

question

Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's explicit cost of running his store for a year is...

answer

$225,000

($150,000 + $75,000)

question

Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's implicit cost of running his store for a year is...

answer

$100,000 (his old salary that he gave up)

question

Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's accounting profit from running his store for a year is...

answer

$75,000 (300,000 - 225,000)

question

answer

-25,000

question

What is the formula for profit?

answer

Profit = (P - ATC) x Q

question

What is the formula for Average Total Cost (ATC)?

answer

Total Cost/Quantity

question

What is the formula for Average Fixed Cost (AFC)?

answer

Fixed Cost/Quantity

question

What is the formula for Average Variable Cost (AVC)?

answer

Variable Cost/Quantity

question

What is happening with a firm's costs in the short term?

answer

the firm's fixed costs are greater than zero

question

What is the formula for TC (total cost)?

answer

TC = VC + FC

question

What is happening with a firm's costs in the long term?

answer

a firm's fixed costs become zero (means total costs are exactly equal to variable costs). So it ONLY has variable costs. FC = 0. TC = VC.

question

Suppose a firm producing three units of output has an average variable cost equal to $10 and a total cost equal to $50. In the short run, its fixed cost is equal to...

answer

$20

question

What are the indicators of a perfect competition market?

answer

1. many small buyers + sellers
2. homogenous goods
3. perfect information
4. No barriers to entry/exit

question

Which of the following is a characteristic of a perfectly competitive market?

Firms are price makers in the market.
Firms face significant barriers to entering the market.
There are few firms selling the good in the market.
The goods sold in the market are homogeneous.

answer

The goods sold in the market are homogeneous.

question

List the 2 things that are consistent for ALL firms

answer

Profit: (P - ATC) x Q

Profit-Maximizing Rule: produce Q* where MR = MC

-in perf com: P = MR = MC
-in monopoly: P > MR = MC

question

Firms operating in perfectly competitive markets face _____ demand curves and can sell _____ at the given price.

horizontal; only a limited amount
horizontal; as much as they want
downward sloping; only a limited amount
downward sloping; as much as they want

answer

horizontal; as much as they want

question

Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market (P = MR) and is producing its profit-maximizing level of output (MR = MC). Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, the price of ratatouille is...

answer

$8 (b/c P = MR)

question

Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, Rachel is earning an economic profit _____ zero.

above
below
equal to

answer

below (8 - 10 is negative)

question

If price is lower than average variable cost (AVC), should you remain in business or shut down?

answer

SHUT DOWN

question

What can we say with certainty about a firm in a perfectly competitive market in the long run?

answer

it's economic profits are equal to zero

question

What can we say with certainty about a monopolist in the LR?

answer

their profits are zero or greater

question

What are the necessary conditions in a monopoly?

answer

1) firm

1 of 42

question

What is consumer surplus? (CS)

answer

CS = res. price of buyer - actual price

question

What is producer surplus? (PS)

answer

PS = actual price - res. price of seller

question

answer

$75

question

What is economic surplus?

answer

benefit - cost (aka the benefit beyond the cost)

ES = CS + PS

question

answer

greater than or equal to $50

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, consumer surplus in the market for t-shirts will _____ today.

answer

be ambiguous

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, producer surplus in the market for t-shirts will _____ today.

answer

decrease

question

Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, economic surplus in the market for t-shirts will _____ today.

answer

decrease

question

Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes?

answer

the consumer/demander

question

Answer true or false to the following statement:

The difference between the price buyers pay for a good and the price sellers receive from selling it is the amount of the tax.

answer

TRUE

question

answer

75%

question

Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the sellers will bear _____ percent of the burden of the tax.

answer

25%

question

Buyers will bear the entire burden of an excise tax if supply is perfectly _____.

answer

elastic

question

Whoever is more (elastic/inelastic) will bear the greater tax burden.

answer

inelastic

question

answer

positive

question

What is the formula for accounting profit?

answer

accounting profit = TR - explicit cost

question

What is the formula for economic profit?

answer

economic profit = (TR - explicit) - implicit

OR

(accounting profit) - implicit

question

TRUE/FALSE:

Accounting profit will always be greater than economic profit.

answer

TRUE

b/c accounting prof is TR - explicit

and econ prof is (TR-explicit) - implicit

question

What is 'normal profit'?

answer

When economic profit is equal to ZERO

question

Suppose you run a baking business. Your economic profit is zero. Should you continue to run your business, or shut down?

answer

continue to run business! means your accounting profit is positive (bc is always greater than economic profit)

question

answer

$225,000

($150,000 + $75,000)

question

Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's implicit cost of running his store for a year is...

answer

$100,000 (his old salary that he gave up)

question

Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's accounting profit from running his store for a year is...

answer

$75,000 (300,000 - 225,000)

question

answer

-25,000

question

What is the formula for profit?

answer

Profit = (P - ATC) x Q

question

What is the formula for Average Total Cost (ATC)?

answer

Total Cost/Quantity

question

What is the formula for Average Fixed Cost (AFC)?

answer

Fixed Cost/Quantity

question

What is the formula for Average Variable Cost (AVC)?

answer

Variable Cost/Quantity

question

What is happening with a firm's costs in the short term?

answer

the firm's fixed costs are greater than zero

question

What is the formula for TC (total cost)?

answer

TC = VC + FC

question

What is happening with a firm's costs in the long term?

answer

a firm's fixed costs become zero (means total costs are exactly equal to variable costs). So it ONLY has variable costs. FC = 0. TC = VC.

question

Suppose a firm producing three units of output has an average variable cost equal to $10 and a total cost equal to $50. In the short run, its fixed cost is equal to...

answer

$20

question

What are the indicators of a perfect competition market?

answer

1. many small buyers + sellers
2. homogenous goods
3. perfect information
4. No barriers to entry/exit

question

answer

The goods sold in the market are homogeneous.

question

List the 2 things that are consistent for ALL firms

answer

Profit: (P - ATC) x Q

Profit-Maximizing Rule: produce Q* where MR = MC

-in perf com: P = MR = MC
-in monopoly: P > MR = MC

question

answer

horizontal; as much as they want

question

answer

$8 (b/c P = MR)

question

answer

below (8 - 10 is negative)

question

If price is lower than average variable cost (AVC), should you remain in business or shut down?

answer

SHUT DOWN

question

What can we say with certainty about a firm in a perfectly competitive market in the long run?

answer

it's economic profits are equal to zero

question

What can we say with certainty about a monopolist in the LR?

answer

their profits are zero or greater

question

What are the necessary conditions in a monopoly?

answer

1) firm

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ECON 2030 – Exam 2

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