Econ 2nd Half

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Suppose a consumer is trying to decide how much to spend on transportation and how much to spend on all other (non-transportation) consumption.

The economic model of consumer behavior predicts that the consumer will

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choose the combination of transportation and non-transportation consumption that makes her as well off as possible from among the combinations of transportation and non-transportation items she can afford.

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Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of $5.00 per movie and to purchase 5 CDs per month at a cost of $10.00 per CD. Your marginal utility from the fifth movie is 50 and your marginal utility from the fifth CD is 92
Are you maximizing utility?
You are

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not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.

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What could you do to increase utility?

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You could increase utility by consuming more movies and fewer CDs

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What role does utility play in the economic model of consumer behavior?
When modeling consumer behavior, utility

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reflects the enjoyment a consumer receives from consuming a particular set of goods and services.

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Assume the price of CDs is $18 and the price of DVDs is $26. At those prices, Isabel consumes 16 CDs and 15 DVDs. Her marginal utility from the last CD consumed is 156 and her marginal utility from the last DVD consumed is 227.

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Without changing the combined amount spent on CDs and DVDs, Isabel can increase her utility by consuming
fewer CDs and more DVDs.

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How should sunk costs be used in consumer decision-making?
In consumer decision-making, sunk costs should

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be ignored

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Suppose you bought a ticket to a play. The ticket is nonrefundable (and can't be resold) and must be used on Saturday. Then, a friend calls and invites you to a football game on Saturday. You only have time to attend one of the events, and your friend offers to pay the cost of going to the football game.

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If you prefer football games over plays, then you should attend the football game

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Miriam consumes tacos and Coke. Suppose the price of a taco is $2.50, the price of a Coke is $1.00, and that Miriam is currently consuming tacos and Coke such that her marginal utility of tacos is 57 and her marginal utility of Coke is 32.
Is Miriam behaving optimally? If not, then what should she do?

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Miriam is not maximizing utility; she should instead consume more Coke and fewer tacos

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Suppose Farmer Smith grows apples. The enitre market for apples is shown in the figure below. Assume the market for apples is perfectly competitive. Use the line drawing tool to draw the demand curve for farmer Smith's apples. Label this line 'Demand for Smith apples'. ( The first graph is from the question, the 2nd graph is the correct answer)

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Actual answer depends on the first graph.
In this case - Answer is : Demand for apples is 13

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Farmer Smith grows corn. The average total cost and marginal cost of growing corn for an individual farmer are illustrated in the graph to the right. Suppose the market for corncorn is perfectly competitive. If the market price is $32 per bushel, then to maximize profits, farmer Smith should produce ___________ thousand bushels bushels of corn.

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Answer: Where MC curve meets the price curve at right. In this case the answer is 70

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Which of the following is an expression of profit for a perfectly competitive firm?
Profit for a perfectly competitive firm can be expressed as

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Proft=(PxQ)-(ATCxQ)
P=Price
Q=Output
ATC=Average Total Cost

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Farmer Brown grows blueberriesblueberries. The average total cost, average variable cost, and marginal cost of growing blueberriesblueberries for an individual farmer are illustrated in the graph to the right.
Farmer Brown will incur losses if the market price falls below $ ___________ per crate.

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In this case $16. per crate;
Answer is where MC & ATC meet

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Farmer Brown grows blueberries. The average total cost, average variable cost, and marginal cost of growing blueberries for an individual farmer are illustrated in the graph to the right
Furthermore, farmer Brown should shut down in the short run if the market price falls below $_____________ per crate.

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In this case $12 per crate
Answer is where MC & AVC meet

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In the figure to the right, Sacha Gillette reduces her output from 7500 to 5500 boxes of carrots when the price falls to $10.00 At this price and this output level, she is operating at a loss.
What option does Gillette have in this situation?

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Try to cut her costs of production to decrease the loss in the short run.

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Suppose the figure to the right illustrates the cost curves for a firm in a perfectly competitive market. Let MC be the marginal cost curve and ATC be the long-run average total cost curve.
At what point does the firm achieve productive efficiency?

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Productive efficiency is achieved where the firm produces more output with less inputs and at the minimum ATC .In the figure the intersection point between the MC and ATC is the productive efficient point,where Q unit of output is produced at ATC.

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Complete the following table showing the demand for snow skiing lessons per day. Do this by filling in the values for (i), (ii), and (iii)

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i = $204
(P*Q=TR)
$68 * 3 = $204

ii= $60
(TR/Q=AR)
$300 / 5 = $60

iii= $20
(TR of 8th minus TR of 7th = MR)
$384 - $364 = $20

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If Daniel sells 350 Big Macs at a price of $3.00, and his average cost of producing 350 Big Macs is $2.50, what is his profit?

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$175

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A columnist in the Wall Street Journal made the following observation:
"The [oil] refining business is just too competitive, which is great for consumers, but not shareholders."
Source: James B. Stewart, "Coping with the Inevitable: The Losers in Your Portfolio," Wall Street Journal, December 3, 2008.
Briefly explain why the high level of competition in the oil refining industry is good for consumers but bad for the shareholders who own these firms.
As competition increases,

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Answer: Variety for consumers will increase and profits for shareholders will decrease.

As competition increases with more firms in monopolistically competitive industries, consumers will gain additional variety.

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Are monopolistically competitive firms efficient in long-run equilibrium?
Monopolistically competitive firms

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are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.

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Why would a monopolistically competitive firm advertise?
A monopolistically competitive firm would advertise to

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Shift its demand curve to the right

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What is a key factor that determines a firm's profitability?

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All of the options are correct

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Sole Proprietorship

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A firm owned by a single individual and not organized as a corporation

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Partnership

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A firm owned jointly by two or more persons and not organized as a corporation

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Corporation

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A legal form of business that provides owners with protection from losing more than their investment should the business fail

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Asset

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Anything of value owned by a person or a firm

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Limited Liability

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The legal provision that shields owners of a corporation from losing more than they have invested in the firm.

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For which of the following types of business organizations is there a legal distinction between the personal assets of the owners of the firm and the assets of the firm?

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Answer: Corporations

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Your friend asks you to join him in the new Internet business he is setting up as a partnership. If you invest $10,000 in the business, what is the limit to your liability?

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Answer: There is no limit to your liability.

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In the United States, ________ account for the majority of revenue earned and ________ account for the majority of business organizations.

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Answer: corporations;
sole proprietorships

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Corporate Governance

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The way in which a corporation is structured and the effect that structure has on the corporation's behavior

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What term do economists use to refer to the conflict between the interests of shareholders and the interests of top management?

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a principal-agent problem

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Private equity firms, such as Blackstone and Kohlberg Kravis Roberts & Co., search for firms where the managers appear not to be maximizing profits. A private equity firm can buy stock in these firms and have its employees elected to the firms' board of directors and may even acquire control of the targeted firm and replace the top management.

Do private equity firms improve corporate governance?

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Yes, private equity firms replace poorly performing managers with shareholder-friendly managers.

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The members of many corporate boards of directors have to be reelected by the firm's stockholders every year. Some corporations, though, have staggered elections to their boards of directors, with only one-half or one-third of the members being up for election each year. According to an article in the Economist magazine, studies have found that firms that have staggered elections for their boards of directors are less profitable than similar firms where all members of the boards of directors are elected each year.

The staggered elections for their boards of directors

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raise doubt about the true financial picture of the firm making the investors reluctant to invest in the firm

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Sales personnel, whether selling life-insurance, automobiles, or pharmaceuticals, typically get paid on commission instead of a straight hourly wage.

The principal-agent problem between the owner of the business and its sales force is

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reduced when workers are paid on commission because it gives them an incentive to work harder.

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The principal-agent problem in the public corporation between ownership and top management results from asymmetric information.
All of the following are correct, except

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This principal-agent problem can be prevented or reduced if the managers are allowed to have freedom in running the company.

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Which of the following terms refers to a flow of funds from savers to firms through financial markets?

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direct finance

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The payments by a corporation to its shareholders are called ________, and the interest payments on a bond are called ________.

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dividends;
coupon payments

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An increase in a firm's stock price most likely indicates which of the following?

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optimism about the firm's profit prospects

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If the price of a firm's bonds decreases, this indicates

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a higher cost of new external funds.

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Separation of ownership from control

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A situation in a corporation in which the top management, rather than the shareholders controls day to day operations.

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Principal-Agent problem

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A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him

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Indirect Finance

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A flow of funds from savers to borrowers through financial intermediaries such as banks, Intermediaries raise funds from savers to lend to firms (and other borrowers).

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Direct Finance

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A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange.

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Bonds

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A financial security that represents a promise to repay a fixed amount of funds.

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Coupon Payment

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An interest payment on a bond

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Interest Rate

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The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

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Stock

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A financial security that represents partial ownership of a firm

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Dividends

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Payments by a corporation to its shareholders.

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Which of the following stock indexes experienced a sharp decline in late 2007, reflecting the severity of the recession which began late that year?

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Answer: All of the below.
A.The Dow Jones Industrial Average
B.the S&P 500
C.the NASDAQ

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Which of the following terms shows a firm's revenues, costs, and profit over a period of time?

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the income statement

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What term do economists use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?

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the normal rate of return

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Which of the following statements is correct?

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Accounting profit is typically larger than economic profit.

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What is a balance sheet?

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a summary of a firm's financial position on a particular day

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Top managers who hide the true financial condition of their firms can

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deceive investors and sometimes also deceive outside auditors.

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One of the causes of the 2007-2009 financial crisis was a dramatic decrease in the value of mortgage-backed securities when housing prices began to fall.
What does it mean when a financial firm securitizes a mortgage?

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To securitize a mortgage is to bundle mortgages together and sell them to investors.

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In 2010, Congress attempted to overhaul regulation of the U.S. financial system with the passage of

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the Dodd-Frank Act.

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True or False:
By 2000, large Wall Street investment banks had all converted from corporations to partnerships. This conversion is a key reason that the investment banks chose to take on significant risk by originating risky mortgage-backed securities.

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Answer: False

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Liability

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Anything owed by a person or a firm

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Income Statement

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A financial statement that shows a firm's reenues, costs and profit over a period of time.

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Accounting Profit

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A firm's net income, measured as revenue minus operating expenses and taxes paid

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Opportunity Cost

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The highest valued alternative that must be given up to engage in an activity

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Explicit Cost

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A cost that involves spending money

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Implicit Cost

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A non-monetary opportunity cost

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Economic Profit

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A firm's revenues minus all of it's implicit and explicit costs

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Balance Sheet

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A financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.

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What is the Wall Street Reform and Consumer Protection Act also known as

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Also known as Dodd-Frank Act

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Wall Street Reform and Consumer Protection Act

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Legislation passed during 2010 that was intended to reform regulation of the financial system.

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The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.

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True

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Utility

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The enjoyment or satisfaction people receive from consuming goods and services.

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Utility refers to how much consumers utilize a product or service.

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False

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Marginal utility (MU)

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The change in total utility a person receives from consuming one additional unit of a good or service.

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What is the definition of marginal utility?

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The change in utility from consuming an additional unit of a good or service.

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The law of diminishing marginal utility suggests that

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consumers experience diminishing additional satisfaction as they consume more of a good or service.

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Marginal utility is more useful than total utility in consumer decision making because

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optimal decisions are made at the margin.

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Law of diminishing marginal utility

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The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

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According to the law of diminishing marginal utility, as the consumption of a particular good increases,

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marginal utility decreases.

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Budget constraint

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The limited amount of income available to consumers to spend on goods and services.

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What is a budget constraint?

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It is the limited amount of income available to consumers to spend on goods and services.

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The optimal combination of pizza and coke you should consume is the one

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where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.

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LaToya is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her shopping cart. The marginal utility of the fourth bag of corn chips is 10, and the marginal utility of the fifth bottle of soda is also 10. Is LaToya maximizing utility?

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This cannot be determined because we do not know the price of corn chips and soda and whether or not she fully spent her budget allocated to corn chips and soda.

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The marginal utility per dollar you are spending on iTunes music downloads is less than the marginal utility per dollar you are spending on Red Bull. According to the rule of equal marginal utility per dollar spent, what can you do to increase your total utility from consumption of music downloads and Red Bull?

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You can increase your consumption of Red Bull.

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Income effect

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The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power, holding all other factors constant.

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Substitution effect

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The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

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The substitution effect is the change in the quantity demanded of a good that results from ________________________, holding constant the effect of the price change on the consumer purchasing power.

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a change in price making the good more or less expensive relative to other goods

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The income effect causes quantity demanded to _____________ when the price of a normal good decreases, and causes quantity demanded to ________________ when the price of an inferior good decreases.

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increase, decrease

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1) Utility is

2) Is it measurable?

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1) the enjoyment or satisfaction a person receives from consuming one additional unit of a good or service.
2) No

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A budget constraint:

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indicates the limited amount of income available to consumers to spend on goods and services.

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The rule of equal marginal utility per dollar spend suggests that consumers maximize utility by

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equalizing the marginal utility per dollar spent across goods and services.

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1) When does the law of diminishing marginal utility hold true?

2) In which of the following situations does the law of diminishing marginal utility not hold?

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1) It holds true in most situations involving the consumption of a good.
2) For methamphetamine addicts, the more dosages of the illegal drug, the more euphoric they become.

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Maya spends her $50 budget on two goods, cans of tuna and bottles of ginger ale. Initially, the marginal utility per dollar she spends on tuna is equal to the marginal utility per dollar she spends on ginger ale. Then the price of ginger ale decreases, while her income and the price of tuna does not change.

1) Her marginal utility from consuming ginger ale _____________________________.

2) The marginal utility per dollar she spends on ginger ale _______________________.

3) Because of the substitution effect, Maya will buy more ginger ale. Can we conclude that ginger ale is a normal good?

4) As Maya adjusts to the change in the price of ginger ale, her marginal utility per dollar spent on tuna will

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1) does not change
2) increases
3) No, because normal and inferior goods designations are related to the income effect, not the substitution effect
4) increase because she will buy less tuna

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Assume the price of CDs is $14 and of DVDs is $24. At those prices, Isabel consumes 15 CDs and 14 DVD's. Her marginal utility from the last CD is 121 and her marginal utility from the last DVD consumed is 250.

Without changing the amount spent on CD's and DVD's, Isabel can increase her utility by consuming _________ CDs and _________ DVDs.

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fewer; more

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1) Assume that a consumer buys only two goods - pizza and Coke. He is faced with a budget constraint because he has a limited amount of income to spend on the two goods.

All the following statements regarding the individual's demand curve for pizza are true except that...

2) When the price of pizza falls along the demand curve for pizza,

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1) at each point on the demand curve, marginal utility from the consumption of pizza equals marginal utility from the consumption of Coke.
2) the consumer adjusts the consumption of both pizza and Coke following the rule of equal marginal utility per dollar.

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In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu "Giffen behavior is most likely to be found among a range of households that are poor (but not too poor or too rich)."

1) "Giffen behavior" describes the purchase of

2) The poorest of the poor would be less likely to exhibit this behavior than people with slightly higher incomes because

3) If a good has an upward-sloping demand curve, then it has to be

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1) more of a good when the price rises.
2) the poorest of the poor often cannot purchase more of a good when the price rises.
3) an inferior good, and the income effect would have to be larger than the substitution effect.

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Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.

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When the price of a good declines, the ratio of the marginal utility to price rises, leading consumers to buy more of that good.

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What would need to be true for a demand curve to be upward sloping?

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The good would have to be an inferior good and the income effect would have to be larger ( in absolute value) than the substitution effect.

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The chapter states that:

"When the price of a normal good falls, the income and substitution effects work in the same direction."

This statement means:

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If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same directions.

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In early 2015, gasoline prices in many parts of the United States had fallen to below $2.00 per gallon, which a news story called "one of the swiftest declines on record."

1) For most people, gasoline is likely to be

Why is your answer important for predicting how much the quantity of gasoline demanded will increase as a result of the price decline?

2) When the price of a good declines, the income effect tells us that quantity demanded will ______________________ if the good is a normal good than if it is an inferior good.

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1) a normal good because as incomes increase people drive more.
2) increase more

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Dubai, one of the seven emirates that form the UAE, has a very high proportion of immigrants who account for more than 80 percent of its population. The city has been witnessing a massive growth in the construction sector fuelled by a very high demand for rental space in the city. This in turn led to an impressive increase in the availability of new rental property in Dubai. A substantial downward pressure was thus created on rental rates which declined by more than 50 percent earlier this year. With supply far exceeding the demand, industry analysts has earlier predicted a sharper fall in rental rates, given the construction boom.

Which of the following, if true, can explain why rental rates in Dubai did not decline further?

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Low rents have attracted many foreign firms, increasing overseas clients' demand for housing.

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In many cases, the popularity of people who use a product can make the product desirable.

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True

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Network externality

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A characteristic of a product in which its usefulness increases with the number of consumers who use it.

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What happens when network externalities are present?

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The usefulness of a product increases with the number of consumers who use it.

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What happens when consumption of a product is path dependent?

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The cost of switching to a product with a better technology gives the product with the initial technology an advantage.

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An article in the New York Times notes that classic rock star Tom Petty likes to perform in smaller venues that don't have as many seats as large venues such as Madison Square Garden in New York. According to the article, Petty insists that tickets to his concert be sold "below market price." The author of the article wondered why "Petty and his promoter would price tickets so low when there were clearly people willing to pay much, much more."

1) What is the best indicator that Petty sells tickets below market price?

2) Petty and his manager might want tickets to have prices below the market because

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1) Scalpers are able to sell many tickets high above the original price.
2) below market prices allow poorer fans to attend the concert.

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In considering the attitudes of consumers toward fairness, which of the following have economists found to be true?

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People attempt to treat other fairly, even if doing so makes them worse off financially.

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In the ultimatum game, if neither the allocator nor the recipient cared about fairness, what would be the optimal distribution of $20.00?

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$19.99 for the allocator and $0.01 for the recipient.

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In the ultimatum game, when the allocator and the recipient cares about fairness, how does that affect the distribution of $20.00?

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Recipients usually reject offers of less than a 10 percent share.

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In which of the following situations are social influences on consumer decisions making likely to be greater: choosing a restaurant for dinner or choosing a brand of toothpaste to buy?

Consumer decision making is likely to be more affected by social influences when

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choosing a restaurant for dinner because this takes place publicly.

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How does the fact that consumers apparently value fairness affect the decisions that businesses make?

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Firms will not raise prices in response to an increase in demand.

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Las Vegas is one of the most popular tourist destinations in the United States. In November 2008, the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to $5.99 for local residents, while keeping the regular price of $14.99 for nonlocals.

Why would the restaurant do this?

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They were willing to trade off some profits to keep their regular customers happy.

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In the presence of shortages, why would a firm, such as a restaurant with people waiting for a table or a theater with people waiting for a ticket, not raise prices when doing so would seem to increase profits?

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- Increasing prices might result in short run gains at the expense of long run profits.
- Increasing prices might alienate customers.
- Increasing prices requires the firm to pay substantial "switching costs."
- Both a and b.

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Behavioral economics

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The study of situations in which people make choices that do not appear to be economically rational.

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Consumers commonly commit the following three mistakes when making decisions:

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1) They take into account monetary costs but ignore nonmonetary opportunity costs that don't involve explicitly spending money.
2) They fail to ignore sunk costs.
3) They are unrealistic about their future behavior.

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Opportunity cost

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The highest-valued alternative that must be given up to engage in an activity.

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Sunk cost

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A cost that has already been paid and cannot be recovered.

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Endowment effect

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The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

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Baseball writer Rob Neyer described attending a Red Sox game at Fenway Park in Boston and having a seat in the sun on a hot, humid day:

"Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]."

What should Rob do?

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He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.

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Which of the following mistakes do consumers commonly commit when making decisions?

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- They fail to ignore sunk costs.
- They are unrealistic about their future behavior.
- They take into account monetary costs but ignore nonmonetary opportunity costs.
- All of the above are mistakes consumers commonly commit when making decisions.

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According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations?

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If they are offered a price greater than the price they would pay if they did not already own the good.

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Which of the following reasons do economists use to explain why people are overweight?

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- People overvalue the utility from current choices.
- People's preferences are not consistent over time.
- People undervalue the utility to be received in the future.
- All of the above explain why people are overweight.

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Rules of thumbs are guides to decision making that always produce optimal choices.

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False

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If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product.

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True

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Economically rational means that consumers and firms

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take actions that are appropriate to reach goals given available information.

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How does using "rules of thumb" impact the likelihood of a consumer making an optimal choice?

Consumer utility

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may be sub-optimized because rules of thumb may not reflect current reality.

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Marvin visits his aunt and uncle who live in Milwaukee. The Milwaukee Bucks basketball team is scheduled to play a home game against the Golden State Warriors during Marvin's visit. An online broker has a ticket for sale in Section 212 of the arena where the game will be played but the price, $75, is more than Marvin is willing to pay. From another online ticket broker he buys a ticket for $50 for a seat in Section 212 of the arena. On the day of the game, a friend of Marvin's uncle offers to pay Marvin $75 for his ticket. He declines the offer.

Marvin's refusal to sell his ticket can be explained by

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the endowment effect in which Marvin is not considering the nonmonetary opportunity cost of the ticket.

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Suppose that you are a big fan of the Harry Potter books. You would love to own a copy of the very first printing of the first book, but unfortunately you can't find it for sale for less than $5,000. You are willing to pay at most $200 for a copy, but can't find one at that price until one day in a used bookstore you see a copy selling for $10, which you immediately buy.

If you keep the copy rather than sell it, then all of the following are correct except
- you are behaving in a way that can be explained by the endowment effect.
- you value the book you already own more than a book you do not yet own.
- you have made choices that do not appear to be economically rational.
- you are making a rational choice since the opportunity cost of the book is $5,000.

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you are making a rational choice since the opportunity cost of the book is $5,000.

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According to a news story, the website Stickk offers a service where you give them money that they will donate to charity if you fail to go to the gym as often as you promise to. (You can even have the money donated to an anti-charity - a cause you disprove of.)

Why would anyone use this service?

People who fail to go to a gym to work out as often as they promise

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are overly optimistic about their future behavior in attending the gym regularly and Stickk provides a financial incentive for them to reach these goals.

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According to behavioral economics, consumers

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do not always behave rationally because they fail to ignore sunk costs.

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The construction of a nuclear power plant near a town was heavily opposed by the residents once they became aware of the health risks that the plant could pose if it became operational. The opposition to the construction was on various grounds. Although the town was located in an area with hardly any seismic activity, the inhabitants claimed that the power plant would still be dangerous. Apart from spent nuclear fuel, the plant would also release radioactive isotopes that can cause radiation poisoning to the inhabitants. Lobbyists in favor of the construction claimed that stopping now would lead to massive losses because the construction was half-way through and millions of dollars have already been invested. They also highlighted the power plant's potential to generate jobs. Not only would the plant reduce power shortages in this region, but it would also allow the state to trade excess power that would generate revenue for its government.

The residents and the lobbyists most likely disagree on which of the following issues related to the power plant's construction?

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whether expected benefits from constructing the plant will exceed the expected cost from the release of toxic pollutants.

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In economics, the best definition of technology is

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The process a firm uses to turn inputs into outputs

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Further, positive technological change is defined as

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Being able to produce more output using the same inputs

Being able to produce the same output using fewer inputs

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Example of technological change is

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being able to produce more output using the same inputs, being able to produce the same output using fewer inputs, and a decline in the quantity of output that can be produced from a given quantity of inputs

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Technological change

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change in the ability of a firm to produce a given level of output with a given quantity of inputs, more out puts using fewer inputs

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technology

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The process a firm uses to turn inputs into outputs of goods and services

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What is a positive technological change?

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when the firm is able to produce more output with the same output

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Implicit cost

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A nonmonetary opportunity cost.

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what is the production function?

answer

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.

question

short run

answer

The period of time during which at least one of a firm's inputs is fixed.

question

long run

answer

The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.

question

Marginal product and average product

answer

Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing. Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.

question

Average product of labor

answer

The total output produced by a firm divided by the quantity of workers.

question

Marginal product of labor

answer

The additional output a firm produces as a result of hiring one more worker.

question

which of the following is true of the relationship between the average product of labor and the marginal product of labor?

answer

whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing

question

Graphically, the marginal cost curve is

answer

a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

question

Total cost (TC)

answer

The cost of all the inputs a firm uses in production.

question

Variable cost (VC)

answer

Costs that change as output changes.

question

Fixed cost (FC)

answer

Costs that remain constant as output changes.

question

Marginal cost (MC)

answer

The change in a firm's total cost from producing one more unit of a good or service.

question

Economies of scale

answer

The situation when a firm's long-run average costs fall as it increases output.

question

Diseconomies of scale

answer

The situation when a firm's long-run average costs rise as the firm increases output.

question

Constant returns to scale

answer

The situation when a firm's long-run average costs remain unchanged as it increases output.

question

A partnership is :

answer

A firm owned jointly by 2 or more persons and not organized by a corporation.

question

Suppose that shortly after graduating from college you decide to start your own business. Assuming you are starting a small business and want it to be your business alone, which category of firm are you most likely to start?

answer

Sole Propietorship

question

ExxonMobil is a large corporation. Who owns this company?
ExxonMobil is owned by

answer

Stockholders

question

Suppose you originally invested in a firm when it was small and unprofitable. Now the firm has grown to be large and profitable.
Would you be better off now if you had bought the firm's stock or bonds?

answer

Stocks

question

Suppose Ford Motor Company issues bonds with a face value of $500 and an annual coupon payment of $10.
What is the interest rate Ford is paying on the borrowed funds?

answer

question

Changes in the value of a firm's stocks and bonds offer important information for a firm's managers. If the price is increasing investors are _______ and are providing information that indicates the firm's managers might want to _________ the business.

answer

more optimistic
expand

question

A firm's financial statements are generally assumed to include its income statement and balance sheet.
Which of the following piece of information is provided by a firm's balance sheet?

answer

Net worth

question

Briefly explain whether you agree with the following observation:
"Technological change refers only to the introduction of new products, so it is not relevant to the operations of most firms."

answer

Answer: Both A and B
A. The statement is incorrect. Technology includes firm operations such as the training of its workers
B. The statement is incorrect. Technology includes firm operations such as the speed of its machinery.

question

Suppose Sheri owns a restaurant that serves pizza using three inputs: workers, restaurant space (and layout), and ovens. If workers are variable, restaurant space (and layout) is variable, and ovens are variable, then Sheri is producing pizza in the

answer

long run

question

A student looks at the data in the table to the right and draws this conclusion:
"The marginal product of labor is increasing for the first 3 workers hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor workers."
Do you agree with the student's analysis? Briefly explain.

answer

Answer: No. Marginal product initially increases due to specialization and then decreases due to the law of diminishing returns.

question

A company that provides home-care for the elderly is able to provide monthly services for 5 patients at a total cost of $5,000 and monthly services for 6 patients at a cost of $5,350. What is the marginal cost of providing monthly services for a 6th patient?

answer

$350.00

question

For example, if the total cost of producing three units of output is $2,111 and the total cost of producing four units of output is $3,126, then the marginal cost of the fourth unit is $ __________________(Enter your response as an integer.)

answer

$3,126

question

List the errors in the graph to the right (where AFC is average fixed cost, AVC is average variable cost, ATC is average total cost, and MC is marginal cost).

answer

AFC should be MC, ATC should be AVC, and AVC should be ATC

question

The graph to the right illustrates the long-run average cost (LRAC) curve for a firm. What is the firm's minimum efficient scale of production?
Using the point drawing tool, indicate the firm's quantity and long-run average cost at the minimum efficient scale. Label your point 'E'.

answer

E is labeled

1 of 164

question

answer

question

answer

not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.

question

What could you do to increase utility?

answer

You could increase utility by consuming more movies and fewer CDs

question

What role does utility play in the economic model of consumer behavior?
When modeling consumer behavior, utility

answer

reflects the enjoyment a consumer receives from consuming a particular set of goods and services.

question

answer

Without changing the combined amount spent on CDs and DVDs, Isabel can increase her utility by consuming
fewer CDs and more DVDs.

question

How should sunk costs be used in consumer decision-making?
In consumer decision-making, sunk costs should

answer

be ignored

question

answer

If you prefer football games over plays, then you should attend the football game

question

answer

Miriam is not maximizing utility; she should instead consume more Coke and fewer tacos

question

answer

Actual answer depends on the first graph.
In this case - Answer is : Demand for apples is 13

question

answer

Answer: Where MC curve meets the price curve at right. In this case the answer is 70

question

Which of the following is an expression of profit for a perfectly competitive firm?
Profit for a perfectly competitive firm can be expressed as

answer

Proft=(PxQ)-(ATCxQ)
P=Price
Q=Output
ATC=Average Total Cost

question

answer

In this case $16. per crate;
Answer is where MC & ATC meet

question

answer

In this case $12 per crate
Answer is where MC & AVC meet

question

answer

Try to cut her costs of production to decrease the loss in the short run.

question

answer

question

Complete the following table showing the demand for snow skiing lessons per day. Do this by filling in the values for (i), (ii), and (iii)

answer

i = $204
(P*Q=TR)
$68 * 3 = $204

ii= $60
(TR/Q=AR)
$300 / 5 = $60

iii= $20
(TR of 8th minus TR of 7th = MR)
$384 - $364 = $20

question

If Daniel sells 350 Big Macs at a price of $3.00, and his average cost of producing 350 Big Macs is $2.50, what is his profit?

answer

$175

question

answer

question

Are monopolistically competitive firms efficient in long-run equilibrium?
Monopolistically competitive firms

answer

are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.

question

Why would a monopolistically competitive firm advertise?
A monopolistically competitive firm would advertise to

answer

Shift its demand curve to the right

question

What is a key factor that determines a firm's profitability?

answer

All of the options are correct

question

Sole Proprietorship

answer

A firm owned by a single individual and not organized as a corporation

question

Partnership

answer

A firm owned jointly by two or more persons and not organized as a corporation

question

Corporation

answer

A legal form of business that provides owners with protection from losing more than their investment should the business fail

question

Asset

answer

Anything of value owned by a person or a firm

question

Limited Liability

answer

The legal provision that shields owners of a corporation from losing more than they have invested in the firm.

question

For which of the following types of business organizations is there a legal distinction between the personal assets of the owners of the firm and the assets of the firm?

answer

Answer: Corporations

question

Your friend asks you to join him in the new Internet business he is setting up as a partnership. If you invest $10,000 in the business, what is the limit to your liability?

answer

Answer: There is no limit to your liability.

question

In the United States, ________ account for the majority of revenue earned and ________ account for the majority of business organizations.

answer

Answer: corporations;
sole proprietorships

question

Corporate Governance

answer

The way in which a corporation is structured and the effect that structure has on the corporation's behavior

question

What term do economists use to refer to the conflict between the interests of shareholders and the interests of top management?

answer

a principal-agent problem

question

answer

Yes, private equity firms replace poorly performing managers with shareholder-friendly managers.

question

answer

raise doubt about the true financial picture of the firm making the investors reluctant to invest in the firm

question

answer

reduced when workers are paid on commission because it gives them an incentive to work harder.

question

The principal-agent problem in the public corporation between ownership and top management results from asymmetric information.
All of the following are correct, except

answer

This principal-agent problem can be prevented or reduced if the managers are allowed to have freedom in running the company.

question

Which of the following terms refers to a flow of funds from savers to firms through financial markets?

answer

direct finance

question

The payments by a corporation to its shareholders are called ________, and the interest payments on a bond are called ________.

answer

dividends;
coupon payments

question

An increase in a firm's stock price most likely indicates which of the following?

answer

optimism about the firm's profit prospects

question

If the price of a firm's bonds decreases, this indicates

answer

a higher cost of new external funds.

question

Separation of ownership from control

answer

A situation in a corporation in which the top management, rather than the shareholders controls day to day operations.

question

Principal-Agent problem

answer

A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him

question

Indirect Finance

answer

A flow of funds from savers to borrowers through financial intermediaries such as banks, Intermediaries raise funds from savers to lend to firms (and other borrowers).

question

Direct Finance

answer

A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange.

question

Bonds

answer

A financial security that represents a promise to repay a fixed amount of funds.

question

Coupon Payment

answer

An interest payment on a bond

question

Interest Rate

answer

The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

question

Stock

answer

A financial security that represents partial ownership of a firm

question

Dividends

answer

Payments by a corporation to its shareholders.

question

Which of the following stock indexes experienced a sharp decline in late 2007, reflecting the severity of the recession which began late that year?

answer

Answer: All of the below.
A.The Dow Jones Industrial Average
B.the S&P 500
C.the NASDAQ

question

Which of the following terms shows a firm's revenues, costs, and profit over a period of time?

answer

the income statement

question

What term do economists use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?

answer

the normal rate of return

question

Which of the following statements is correct?

answer

Accounting profit is typically larger than economic profit.

question

What is a balance sheet?

answer

a summary of a firm's financial position on a particular day

question

Top managers who hide the true financial condition of their firms can

answer

deceive investors and sometimes also deceive outside auditors.

question

answer

To securitize a mortgage is to bundle mortgages together and sell them to investors.

question

In 2010, Congress attempted to overhaul regulation of the U.S. financial system with the passage of

answer

the Dodd-Frank Act.

question

answer

Answer: False

question

Liability

answer

Anything owed by a person or a firm

question

Income Statement

answer

A financial statement that shows a firm's reenues, costs and profit over a period of time.

question

Accounting Profit

answer

A firm's net income, measured as revenue minus operating expenses and taxes paid

question

Opportunity Cost

answer

The highest valued alternative that must be given up to engage in an activity

question

Explicit Cost

answer

A cost that involves spending money

question

Implicit Cost

answer

A non-monetary opportunity cost

question

Economic Profit

answer

A firm's revenues minus all of it's implicit and explicit costs

question

Balance Sheet

answer

A financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.

question

What is the Wall Street Reform and Consumer Protection Act also known as

answer

Also known as Dodd-Frank Act

question

Wall Street Reform and Consumer Protection Act

answer

Legislation passed during 2010 that was intended to reform regulation of the financial system.

question

answer

True

question

Utility

answer

The enjoyment or satisfaction people receive from consuming goods and services.

question

Utility refers to how much consumers utilize a product or service.

answer

False

question

Marginal utility (MU)

answer

The change in total utility a person receives from consuming one additional unit of a good or service.

question

What is the definition of marginal utility?

answer

The change in utility from consuming an additional unit of a good or service.

question

The law of diminishing marginal utility suggests that

answer

consumers experience diminishing additional satisfaction as they consume more of a good or service.

question

Marginal utility is more useful than total utility in consumer decision making because

answer

optimal decisions are made at the margin.

question

Law of diminishing marginal utility

answer

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

question

According to the law of diminishing marginal utility, as the consumption of a particular good increases,

answer

marginal utility decreases.

question

Budget constraint

answer

The limited amount of income available to consumers to spend on goods and services.

question

What is a budget constraint?

answer

It is the limited amount of income available to consumers to spend on goods and services.

question

The optimal combination of pizza and coke you should consume is the one

answer

where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.

question

answer

This cannot be determined because we do not know the price of corn chips and soda and whether or not she fully spent her budget allocated to corn chips and soda.

question

answer

You can increase your consumption of Red Bull.

question

Income effect

answer

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power, holding all other factors constant.

question

Substitution effect

answer

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

question

The substitution effect is the change in the quantity demanded of a good that results from ________________________, holding constant the effect of the price change on the consumer purchasing power.

answer

a change in price making the good more or less expensive relative to other goods

question

The income effect causes quantity demanded to _____________ when the price of a normal good decreases, and causes quantity demanded to ________________ when the price of an inferior good decreases.

answer

increase, decrease

question

1) Utility is

2) Is it measurable?

answer

1) the enjoyment or satisfaction a person receives from consuming one additional unit of a good or service.
2) No

question

A budget constraint:

answer

indicates the limited amount of income available to consumers to spend on goods and services.

question

The rule of equal marginal utility per dollar spend suggests that consumers maximize utility by

answer

equalizing the marginal utility per dollar spent across goods and services.

question

1) When does the law of diminishing marginal utility hold true?

2) In which of the following situations does the law of diminishing marginal utility not hold?

answer

1) It holds true in most situations involving the consumption of a good.
2) For methamphetamine addicts, the more dosages of the illegal drug, the more euphoric they become.

question

answer

1) does not change
2) increases
3) No, because normal and inferior goods designations are related to the income effect, not the substitution effect
4) increase because she will buy less tuna

question

answer

fewer; more

question

answer

question

answer

question

Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.

answer

When the price of a good declines, the ratio of the marginal utility to price rises, leading consumers to buy more of that good.

question

What would need to be true for a demand curve to be upward sloping?

answer

The good would have to be an inferior good and the income effect would have to be larger ( in absolute value) than the substitution effect.

question

The chapter states that:

"When the price of a normal good falls, the income and substitution effects work in the same direction."

This statement means:

answer

If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same directions.

question

answer

1) a normal good because as incomes increase people drive more.
2) increase more

question

answer

Low rents have attracted many foreign firms, increasing overseas clients' demand for housing.

question

In many cases, the popularity of people who use a product can make the product desirable.

answer

True

question

Network externality

answer

A characteristic of a product in which its usefulness increases with the number of consumers who use it.

question

What happens when network externalities are present?

answer

The usefulness of a product increases with the number of consumers who use it.

question

What happens when consumption of a product is path dependent?

answer

The cost of switching to a product with a better technology gives the product with the initial technology an advantage.

question

answer

1) Scalpers are able to sell many tickets high above the original price.
2) below market prices allow poorer fans to attend the concert.

question

In considering the attitudes of consumers toward fairness, which of the following have economists found to be true?

answer

People attempt to treat other fairly, even if doing so makes them worse off financially.

question

In the ultimatum game, if neither the allocator nor the recipient cared about fairness, what would be the optimal distribution of $20.00?

answer

$19.99 for the allocator and $0.01 for the recipient.

question

In the ultimatum game, when the allocator and the recipient cares about fairness, how does that affect the distribution of $20.00?

answer

Recipients usually reject offers of less than a 10 percent share.

question

answer

choosing a restaurant for dinner because this takes place publicly.

question

How does the fact that consumers apparently value fairness affect the decisions that businesses make?

answer

Firms will not raise prices in response to an increase in demand.

question

answer

They were willing to trade off some profits to keep their regular customers happy.

question

answer

question

Behavioral economics

answer

The study of situations in which people make choices that do not appear to be economically rational.

question

Consumers commonly commit the following three mistakes when making decisions:

answer

question

Opportunity cost

answer

The highest-valued alternative that must be given up to engage in an activity.

question

Sunk cost

answer

A cost that has already been paid and cannot be recovered.

question

Endowment effect

answer

question

answer

He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.

question

Which of the following mistakes do consumers commonly commit when making decisions?

answer

question

According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations?

answer

If they are offered a price greater than the price they would pay if they did not already own the good.

question

Which of the following reasons do economists use to explain why people are overweight?

answer

question

Rules of thumbs are guides to decision making that always produce optimal choices.

answer

False

question

If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product.

answer

True

question

Economically rational means that consumers and firms

answer

take actions that are appropriate to reach goals given available information.

question

How does using "rules of thumb" impact the likelihood of a consumer making an optimal choice?

Consumer utility

answer

may be sub-optimized because rules of thumb may not reflect current reality.

question

answer

the endowment effect in which Marvin is not considering the nonmonetary opportunity cost of the ticket.

question

answer

you are making a rational choice since the opportunity cost of the book is $5,000.

question

answer

are overly optimistic about their future behavior in attending the gym regularly and Stickk provides a financial incentive for them to reach these goals.

question

According to behavioral economics, consumers

answer

do not always behave rationally because they fail to ignore sunk costs.

question

answer

whether expected benefits from constructing the plant will exceed the expected cost from the release of toxic pollutants.

question

In economics, the best definition of technology is

answer

The process a firm uses to turn inputs into outputs

question

Further, positive technological change is defined as

answer

Being able to produce more output using the same inputs

Being able to produce the same output using fewer inputs

question

Example of technological change is

answer

question

Technological change

answer

change in the ability of a firm to produce a given level of output with a given quantity of inputs, more out puts using fewer inputs

question

technology

answer

The process a firm uses to turn inputs into outputs of goods and services

question

What is a positive technological change?

answer

when the firm is able to produce more output with the same output

question

Implicit cost

answer

A nonmonetary opportunity cost.

question

what is the production function?

answer

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.

question

short run

answer

The period of time during which at least one of a firm's inputs is fixed.

question

long run

answer

The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.

question

Marginal product and average product

answer

question

Average product of labor

answer

The total output produced by a firm divided by the quantity of workers.

question

Marginal product of labor

answer

The additional output a firm produces as a result of hiring one more worker.

question

which of the following is true of the relationship between the average product of labor and the marginal product of labor?

answer

whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing

question

Graphically, the marginal cost curve is

answer

a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

question

Total cost (TC)

answer

The cost of all the inputs a firm uses in production.

question

Variable cost (VC)

answer

Costs that change as output changes.

question

Fixed cost (FC)

answer

Costs that remain constant as output changes.

question

Marginal cost (MC)

answer

The change in a firm's total cost from producing one more unit of a good or service.

question

Economies of scale

answer

The situation when a firm's long-run average costs fall as it increases output.

question

Diseconomies of scale

answer

The situation when a firm's long-run average costs rise as the firm increases output.

question

Constant returns to scale

answer

The situation when a firm's long-run average costs remain unchanged as it increases output.

question

A partnership is :

answer

A firm owned jointly by 2 or more persons and not organized by a corporation.

question

answer

Sole Propietorship

question

ExxonMobil is a large corporation. Who owns this company?
ExxonMobil is owned by

answer

Stockholders

question

answer

Stocks

question

Suppose Ford Motor Company issues bonds with a face value of $500 and an annual coupon payment of $10.
What is the interest rate Ford is paying on the borrowed funds?

answer

question

answer

more optimistic
expand

question

A firm's financial statements are generally assumed to include its income statement and balance sheet.
Which of the following piece of information is provided by a firm's balance sheet?

answer

Net worth

question

Briefly explain whether you agree with the following observation:
"Technological change refers only to the introduction of new products, so it is not relevant to the operations of most firms."

answer

question

answer

long run

question

answer

Answer: No. Marginal product initially increases due to specialization and then decreases due to the law of diminishing returns.

question

answer

$350.00

question

answer

$3,126

question

List the errors in the graph to the right (where AFC is average fixed cost, AVC is average variable cost, ATC is average total cost, and MC is marginal cost).

answer

AFC should be MC, ATC should be AVC, and AVC should be ATC

question

answer

E is labeled

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