Econ 211: Test 2

question

Which of the following factors is always present in consumer decision making?

a. scarcity
b. taxes
c. cost-of-living adjustments to income
d. high prices
e. changing consumer tastes

answer

Scarcity

question

Modern economists measure how much utility Fred gets from a hot dog by

answer

asking Fred how much of some other good he would give up to get the hot dog. The "other good" can be any good, including money.

question

A consumer possesses five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will

answer

rise to $2.25.

question

Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her total utility is equal to

answer

$2.25

question

The host at a party offers Justin a sixth beer. Justin says, "No thanks, man. The marginal utility of that fifth beer was, like, 20 cents, but the marginal utility of the sixth would be minus 10 cents." If Justin consumes the sixth beer, his total utility will

answer

fall by 10 cents

question

Net utility is

answer

equal to total utility from the quantity acquired of a good minus the utility lost by having to pay for it.

question

Marginal utility has a negative slope. This is because of the

answer

law of diminishing marginal utility.

question

Gwen's decision to buy a new television instead of a bicycle for the same price

answer

means that the opportunity cost to Gwen is the bicycle that she has given up.

question

Resolving Adam Smith's diamond-water puzzle involves

answer

knowing that, as increasing quantities of a good are consumed, marginal utility diminishes and, conversely, consuming a small quantity of a good produces high marginal utility.

knowing that at optimal purchase, price will tend to equal marginal utility.

realizing that price is not directly related to total utility.

question

An inferior good is a good whose quantity demanded

answer

rises when the consumer's real income falls.

question

When the price of one product falls,

answer

consumers' real income will increase.

question

The Wall Street Journal reports that "hard times aid poultry companies as people eat cheaper fowl." In the language of economists, this means

answer

chicken is an inferior good.

question

Market demand curves may slope downward even if some individual demand curves do not because

answer

lower prices may bring more purchasers into the market.

question

The law of demand states that as the price

answer

increases, total quantity demanded will decrease.

question

An increase in a family's income will cause its budget line to

answer

move away from the origin.

question

What would happen to the budget line if income as well as prices of both goods increase by the same percentage?

answer

No shift in the budget line.

question

Figure 5-5 shows a consumer budget line for French fries and hamburgers. The household allocates a budget for these two goods.. If the price of an order of french fries is $2, how much income is allocated to fries and burgers combined?

answer

$20

question

Which of the following observations is not true of a budget line?

answer

It helps examine the consumer's preferences.

question

Which of the following is characteristic of indifference curves?

answer

They are convex toward the origin.
They are negatively sloped.
They never intersect.

question

In Figure 5-11, a consumer is initially at point A. There is a price change and she moves to B. It follows that

answer

the demand for beer does not follow the law of demand.

question

In Figure 5-12, the move in the consumer equilibrium from A to B shows that

answer

both beer and wine are normal goods.

question

In Figure 5-13, the line AB is

answer

a budget line

question

In Figure 5-13, the consumer can afford any combination of X and Y represented by a point

answer

on or below line AB.

question

In Figure 5-16, Adam is

answer

equally well off at C and D but only able to afford C.

question

In Figure 5-17, which of the marked points would an economist use to help him construct a single demand curve for X?

answer

A and D

question

The slope of an indifference curve is called the

answer

marginal rate of substitution.

question

Elasticity

answer

employs percentage changes calculated in terms of average values of the prices and quantities at issue.

deals with percentage changes in price and quantity demanded.

is generally stated in absolute value.

question

Price elasticity of demand is defined as

answer

percentage change in quantity demanded divided by percentage change in price.

question

Demand is said to be price elastic at a point on a demand curve if a

answer

1 percent rise in price reduces the quantity demanded by more than 1 percent.

question

Demand is said to be elastic when percentage changes in quantity demanded are

answer

higher than the percentage changes in price.

question

In Figure 6-2, the price elasticity of demand (dropping all minus signs) is ____ between P = 4 and P = 6 than between P = 10 and P = 12 because between the lower set of prices the percentage change in price is ____.

answer

smaller; greater

question

In Figure 6-3(a), at any price above $6, quantity demanded

answer

falls to zero

question

If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,

answer

demand is elastic

question

The price elasticity of a horizontal demand curve is always

answer

infinitely large

question

Along a straight-line demand curve the

answer

slope is constant.

elasticity grows much smaller toward the right-hand end.

ratio P/Q constantly changes.

question

A price cut will increase the revenue a firm receives if the demand for its product is

answer

elastic

question

If two goods are complements, their cross elasticity of demand will normally be

answer

a negative number

question

If goods X and Y are complements, the

answer

quantities demanded of X and Y tend to move in the same direction.

question

Cross elasticity of demand for

answer

substitutes will normally be negative

question

If the cross elasticity of demand for potato chips and pretzels equals 1.5,

answer

potato chips and pretzels must be substitutes

question

A rightward shift in the demand curve for a product will ordinarily result from

answer

an increase in consumer

question

Regarding the price elasticities of demand, which of the following statements is true?

answer

Price elasticities vary considerably from product to product

question

The short run is the time period during which

answer

some of the firm's costs are fixed

question

In the long run,

answer

all of the firm's input quantities are variable

question

In the short run,

answer

firms have relatively little opportunity to change production progress.

question

Some costs cannot be varied no matter how long the period in question. These are called

answer

fixed costs

question

Marginal physical product can tell a producer

answer

how much the last input added to the total amount of production.

question

In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is

answer

question

The marginal physical product of an input is the

answer

addition to output from using one more unit of input

question

The optimum quantity of an input occurs when

answer

marginal revenue product equals input price

question

Marginal cost

answer

-is the cost of the marginal unit of output. -and the average cost curve are U-shaped.
-is the increase in total cost resulting from production of one additional unit of output.

question

A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory's TC

answer

equals $15,000

question

In Figure 7-2, average cost at 500 units of output equals

answer

question

total fixed cost

answer

is constant at all levels of output

question

In Figure 7-7 at 100 units, AFC equals

answer

question

Average cost curves decline because

answer

fixed cost is spread out over larger amounts of production.

question

The long-run average cost curve

answer

- is a composite of short-run AC curves.
- depends on the firm's planning horizon.
- shows the lowest possible short-run AC corresponding to each output level.

question

When economies of scale exist,

answer

production costs per unit decline as output expands.

question

If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing

answer

increasing returns to scale

question

A firm can choose a quantity of output, and the price is then determined by

answer

consumers demand

question

Profit maximization is

answer

behavioral assumption to simplify analysis

question

total profit equals

answer

-average profit times total output
-total sales revenue minus total cost
-TR-TC

question

Total profit = Total revenue − Total cost (including opportunity cost).

Total profit defined in this way is called

answer

economic profit

question

The difference between economic profit and accountant's definition of profit is that an economist's total cost counts the ____ of inputs.

answer

opportunity cost

question

Marginal revenue is the addition to a firm's revenue from

answer

a one-unit change in output

question

total revenue

answer

- can be calculated directly from the demand curve.
- can be calculated directly from the average revenue curve.
- is found by multiplying price times quantity.

question

Which of the following is true if the opportunity cost of producing a particular good is less than its accounting profit?

a. Economic profit is positive.
b. Economic profit is zero.
c. Economic profit cannot be determined.
d. Economic profit is negative.

answer

A. Economic profit is positive

question

Whenever average cost exceeds marginal cost,

answer

average cost is falling

question

average cost

answer

declines for some range of output, hits a minimum, and then increases.

question

Marginal cost,

answer

- is calculated as DTC/DQ.
- equals the slope of the total cost curve.
- is the increase in total cost resulting from a one-unit increase in output.

question

Total profit is maximized

answer

where the difference between total revenue and total cost is greatest.

question

Profit can be maximized only where marginal revenue equals

answer

marginal cost

question

If MC>MR then

answer

output should be reduced

question

Once the profit-maximizing output where MR = MC is determined, price is set by

answer

the demand curve

question

A firm's fixed cost

answer

does not vary with output

question

True or False: If a corporation is unable to repay its debts, the creditors to whom the debt is owed may sue an individual stockholder for more than he or she invested in the corporation.

answer

false: Stockholders in a corporation face limited liability. In the event that the corporation fails to pay its debt, each stockholder is liable for no more than he or she invested in the company. Limited liability allows many individuals to buy shares of a company without the fear of losing more than they put in. This is not the case in a partnership or a sole proprietorship.

question

A share of Dell stock represents:

answer

A claim on Dell's assests that gives the purchaser a share of ownership of the
Corporation.

Explanation: A share of corporate stock represents partial ownership in a corporation. Consequently, a share of Dell stock is a claim on Dell's assets that gives the purchaser a share of the corporation. For example, if someone owns 10% of the shares of a company, that individual is entitled to 10% of the company's dividends. Shareholders also vote in elections of corporate officers and corporate policies.
Finally, stocks are not risk-free. The value of the company may decline—and if it does, the value of that company's stock will decline as well. A bond issued by Dell represents an IOU, or promise to pay, from Dell.

question

General Finance Ltd. (GFL) issues 10-year bonds in 2011 with a $2,000 face value and a $100 coupon.
The interest rate at which GFL issues these bonds is________ .

answer

5%

Each year, GFL pays $100 for every $2,000 it has borrowed. This corresponds to an annual interest rate of
($100/$2,000) = 0.05 or 5%

question

When the bond reaches maturity in 2021, how much will each investor holding one of these GFL bonds receive?

answer

The initial investment of $2,000 plus $100 for the 10th coupon

Explanation: A company pays interest on its loans as long as the loan is outstanding and pays back the principal at the end of the term of the loan. Therefore, in the final year of the loan, GFL would pay $2,000 to each holder of its bonds plus the interest from the last year. (It will already have paid $900 in coupons over the previous nine years.)

question

Suppose interest rise dramatically. The market price of these GFL bonds will ________

answer

decrease

Explanation/Example:
Bond prices and interest rates move in opposite directions. If interest rates rise, companies currently borrowing money will be offering higher coupons than GFL. Therefore, the value of holding a GFL bond will drop. Conversely, if interest rates fall, companies currently borrowing money will be offering lower coupons than GFL, and the value of holding a GFL bond will rise.

For example, if you were to buy a GFL bond in 2020, you would, in fact, be buying an IOU for $2,100, to be paid in one year. If the market interest rate in 2020 were 10%—that is, if the rate of return from other investment options were 10%—then the most you would be willing to pay for this IOU is approximately $1,909, since $1,909 invested at 10% interest would grow to become 2,100 in one year. On the other hand, if the market interest rate were 2.5%, then you would be willing to pay about $2,049 for this IOU, since $2,049 invested at 2.5% interest would grow to become approximately $2,100 in one year.

question

Suppose a corporation earns a before-tax profit of $377 million. The firm pays $151 million in corporate taxes and $38 million in dividends to its stockholders. It reinvests the remaining profit in the firm.

The value of the firm's plowback is

answer

$188 million

Plowback (or retained earnings) is the fraction of a corporation's profit that management decides to reinvest in the firm. In this case, the firm reinvests everything that it does not pay out in the form of taxes or dividends. Retained earnings are equal to $377 million−$151 million−$38 million=$188 million .

question

Which of the following are popular stock exchanges in the United States? Check all that apply.

answer

- National Association of Securities Dealers Automated Quotations (NASDAQ)
- New York Stock Exchange (NYSE)

A stock exchange is a physical or virtual location where stocks are bought and sold. The NYSE, AMEX, and NASDAQ are three popular stock exchanges in the United States. A stock index, such as the Standard & Poor's 500 (S&P 500) or the Wilshire 5000 index, is a number that indicates the average of a large number of stock prices, with stocks selected to represent the overall market or some segment of the market.

question

If a company's stock price is very low in comparison with the value of its assets, it may be subjected to:

answer

A takeover

A takeover is the acquisition by an outside group of a controlling proportion of a company's stock. When a company's stock price is very low in comparison with the value of its assets, it becomes a tempting target for a takeover.
Circuit breakers are a series of rules, self-imposed by stock markets, that halt all trading for a short period of time when a stock index falls below its previous day's closing value by a defined percentage amount. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a financial regulatory act passed by the United States Congress in response to the financial crisis of 2007-2009.

question

Suppose a soybean farmer is concerned that the price of soybeans will decline before harvest time. In order to protect against this risk, the farmer signs a futures contract with a speculator for delivery of the harvested soybeans at a preset price.

In this case, the speculator will suffer a loss if the future price of soybeans turns out to be ________ than the contracted price.

answer

lower

By entering into a futures contract, the farmer receives a guaranteed price for his soybean crop and does not have to worry about falling prices. The speculator will suffer a loss only if the soybean prices turn out to be lower than the contracted price—in which case the speculator would have to sell the soybeans at a loss.

question

_________ consists of the use of borrowed money to purchase assets. It magnifies _________ both losses and gains from an investment.

answer

Leverage; both losses and gains

Leverage consists of the use of borrowed money to purchase assets. It magnifies both losses and gains. One of the reasons behind the severity of the financial crisis of 2007-2009 was that many financial firms were highly leveraged, thus magnifying their losses.

question

The decision to hold a variety of corporate stocks and bonds rather than investing in only one or two corporations is known as

answer

portfolio diversification

An investor's collection of securities (stocks, bonds, and other assets) is known as a portfolio. To avoid overexposure to the risk associated with one type of security, investors typically acquire a large variety of securities. The practice of reducing risk by holding a wide variety of securities is known as portfolio diversification.

1 of 86

question

Which of the following factors is always present in consumer decision making?

a. scarcity
b. taxes
c. cost-of-living adjustments to income
d. high prices
e. changing consumer tastes

answer

Scarcity

question

Modern economists measure how much utility Fred gets from a hot dog by

answer

asking Fred how much of some other good he would give up to get the hot dog. The "other good" can be any good, including money.

question

A consumer possesses five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will

answer

rise to $2.25.

question

Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her total utility is equal to

answer

$2.25

question

answer

fall by 10 cents

question

Net utility is

answer

equal to total utility from the quantity acquired of a good minus the utility lost by having to pay for it.

question

Marginal utility has a negative slope. This is because of the

answer

law of diminishing marginal utility.

question

Gwen's decision to buy a new television instead of a bicycle for the same price

answer

means that the opportunity cost to Gwen is the bicycle that she has given up.

question

Resolving Adam Smith's diamond-water puzzle involves

answer

question

An inferior good is a good whose quantity demanded

answer

rises when the consumer's real income falls.

question

When the price of one product falls,

answer

consumers' real income will increase.

question

The Wall Street Journal reports that "hard times aid poultry companies as people eat cheaper fowl." In the language of economists, this means

answer

chicken is an inferior good.

question

Market demand curves may slope downward even if some individual demand curves do not because

answer

lower prices may bring more purchasers into the market.

question

The law of demand states that as the price

answer

increases, total quantity demanded will decrease.

question

An increase in a family's income will cause its budget line to

answer

move away from the origin.

question

What would happen to the budget line if income as well as prices of both goods increase by the same percentage?

answer

No shift in the budget line.

question

answer

$20

question

Which of the following observations is not true of a budget line?

answer

It helps examine the consumer's preferences.

question

Which of the following is characteristic of indifference curves?

answer

They are convex toward the origin.
They are negatively sloped.
They never intersect.

question

In Figure 5-11, a consumer is initially at point A. There is a price change and she moves to B. It follows that

answer

the demand for beer does not follow the law of demand.

question

In Figure 5-12, the move in the consumer equilibrium from A to B shows that

answer

both beer and wine are normal goods.

question

In Figure 5-13, the line AB is

answer

a budget line

question

In Figure 5-13, the consumer can afford any combination of X and Y represented by a point

answer

on or below line AB.

question

In Figure 5-16, Adam is

answer

equally well off at C and D but only able to afford C.

question

In Figure 5-17, which of the marked points would an economist use to help him construct a single demand curve for X?

answer

A and D

question

The slope of an indifference curve is called the

answer

marginal rate of substitution.

question

Elasticity

answer

question

Price elasticity of demand is defined as

answer

percentage change in quantity demanded divided by percentage change in price.

question

Demand is said to be price elastic at a point on a demand curve if a

answer

1 percent rise in price reduces the quantity demanded by more than 1 percent.

question

Demand is said to be elastic when percentage changes in quantity demanded are

answer

higher than the percentage changes in price.

question

answer

smaller; greater

question

In Figure 6-3(a), at any price above $6, quantity demanded

answer

falls to zero

question

If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,

answer

demand is elastic

question

The price elasticity of a horizontal demand curve is always

answer

infinitely large

question

Along a straight-line demand curve the

answer

slope is constant.

elasticity grows much smaller toward the right-hand end.

ratio P/Q constantly changes.

question

A price cut will increase the revenue a firm receives if the demand for its product is

answer

elastic

question

If two goods are complements, their cross elasticity of demand will normally be

answer

a negative number

question

If goods X and Y are complements, the

answer

quantities demanded of X and Y tend to move in the same direction.

question

Cross elasticity of demand for

answer

substitutes will normally be negative

question

If the cross elasticity of demand for potato chips and pretzels equals 1.5,

answer

potato chips and pretzels must be substitutes

question

A rightward shift in the demand curve for a product will ordinarily result from

answer

an increase in consumer

question

Regarding the price elasticities of demand, which of the following statements is true?

answer

Price elasticities vary considerably from product to product

question

The short run is the time period during which

answer

some of the firm's costs are fixed

question

In the long run,

answer

all of the firm's input quantities are variable

question

In the short run,

answer

firms have relatively little opportunity to change production progress.

question

Some costs cannot be varied no matter how long the period in question. These are called

answer

fixed costs

question

Marginal physical product can tell a producer

answer

how much the last input added to the total amount of production.

question

In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is

answer

question

The marginal physical product of an input is the

answer

addition to output from using one more unit of input

question

The optimum quantity of an input occurs when

answer

marginal revenue product equals input price

question

Marginal cost

answer

-is the cost of the marginal unit of output. -and the average cost curve are U-shaped.
-is the increase in total cost resulting from production of one additional unit of output.

question

A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory's TC

answer

equals $15,000

question

In Figure 7-2, average cost at 500 units of output equals

answer

question

total fixed cost

answer

is constant at all levels of output

question

In Figure 7-7 at 100 units, AFC equals

answer

question

Average cost curves decline because

answer

fixed cost is spread out over larger amounts of production.

question

The long-run average cost curve

answer

- is a composite of short-run AC curves.
- depends on the firm's planning horizon.
- shows the lowest possible short-run AC corresponding to each output level.

question

When economies of scale exist,

answer

production costs per unit decline as output expands.

question

If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing

answer

increasing returns to scale

question

A firm can choose a quantity of output, and the price is then determined by

answer

consumers demand

question

Profit maximization is

answer

behavioral assumption to simplify analysis

question

total profit equals

answer

-average profit times total output
-total sales revenue minus total cost
-TR-TC

question

Total profit = Total revenue − Total cost (including opportunity cost).

Total profit defined in this way is called

answer

economic profit

question

The difference between economic profit and accountant's definition of profit is that an economist's total cost counts the ____ of inputs.

answer

opportunity cost

question

Marginal revenue is the addition to a firm's revenue from

answer

a one-unit change in output

question

total revenue

answer

- can be calculated directly from the demand curve.
- can be calculated directly from the average revenue curve.
- is found by multiplying price times quantity.

question

answer

A. Economic profit is positive

question

Whenever average cost exceeds marginal cost,

answer

average cost is falling

question

average cost

answer

declines for some range of output, hits a minimum, and then increases.

question

Marginal cost,

answer

- is calculated as DTC/DQ.
- equals the slope of the total cost curve.
- is the increase in total cost resulting from a one-unit increase in output.

question

Total profit is maximized

answer

where the difference between total revenue and total cost is greatest.

question

Profit can be maximized only where marginal revenue equals

answer

marginal cost

question

If MC>MR then

answer

output should be reduced

question

Once the profit-maximizing output where MR = MC is determined, price is set by

answer

the demand curve

question

A firm's fixed cost

answer

does not vary with output

question

True or False: If a corporation is unable to repay its debts, the creditors to whom the debt is owed may sue an individual stockholder for more than he or she invested in the corporation.

answer

question

A share of Dell stock represents:

answer

question

General Finance Ltd. (GFL) issues 10-year bonds in 2011 with a $2,000 face value and a $100 coupon.
The interest rate at which GFL issues these bonds is________ .

answer

5%

Each year, GFL pays $100 for every $2,000 it has borrowed. This corresponds to an annual interest rate of
($100/$2,000) = 0.05 or 5%

question

When the bond reaches maturity in 2021, how much will each investor holding one of these GFL bonds receive?

answer

question

Suppose interest rise dramatically. The market price of these GFL bonds will ________

answer

question

answer

question

Which of the following are popular stock exchanges in the United States? Check all that apply.

answer

question

If a company's stock price is very low in comparison with the value of its assets, it may be subjected to:

answer

question

answer

question

_________ consists of the use of borrowed money to purchase assets. It magnifies _________ both losses and gains from an investment.

answer

question

The decision to hold a variety of corporate stocks and bonds rather than investing in only one or two corporations is known as

answer

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Econ 211: Test 2

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