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Microeconomics Test #2 Review

question
TRUE OR FALSE
In a world with homogeneous labor, if a manager knows that the marginal productivity of the next worker hired will be lower than the marginal productivity of the previous worker hired, hiring one more worker will increase the marginal cost of production.
answer
True, hiring one more worker will increase the marginal cost of production because the marginal productivity is decreasing when you hire that worker, since the previous worker had a higher marginal productivity. So as each new employee is hired, the marginal productivity is decreasing so your marginal cost of production will increase.
question
TRUE OR FALSE
In the short run, the total cost of producing 100 Rapala Shad Rap fishing lures an hour is $500. The marginal cost of producing the 101st Rapala Shad Rap fishing lure $6.00. Average total cost will rise if the firm produces 101 Rapala Shad Rap fishing lure.
answer
True, iInitially, the average cost is $5.00 per lure. Marginal cost is $6.00 for the next lure. When marginal cost is greater than average cost average cost
must be rising. If you want to figure it out the hard way compare $500/100=$5.00 and $506.00/101=$5.0099.
question
TRUE OR FALSE
An effective price floor will reduce consumer surplus but may improve or reduce producer surplus.
answer
True: To be effective, the price floor will set above the prevailing equilibrium price and
not allow prices to fall below the floor. Consumers lose surplus because the price rises and
quantity demanded decreases. Producers may gain or lose surplus depending on which change
impacts them the most: The price increase will increase revenue per unit. But, the higher price
will reduce the size of the market (quantity demanded falls). This will reduce the number of units sold
question
The estimated price elasticity of demand for attending a Major League baseball spring training game is |-1.00|.* If Major League owners wanted to increase revenue during spring training games, they should decrease ticket prices.
answer
False, When demand is unit elastic (|Ed| = 1), revenue is at a maximum.
Either an increase or decrease in price will lower total revenue
question
The percentage change in quantity demanded of a good or service divided by the percentage change in income.
answer
Income Elasticity of Demand
question
Long-run average total cost decreases as the quantity of output increases.
answer
Economies of Scale
question
The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).
answer
marginal cost
question
The change in total output that results from the firm hiring one more unit of labor while holding other inputs constant.
answer
marginal product of labor
question
The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.
answer
consumer surplus
question
The more of a good a person consumes in a period of time the less additional utility that good provides.
answer
law of diminishing marginal utility
question
The change in total utility or satisfaction resulting from consuming one more unit of a good or service.
answer
marginal utility
question
Two goods with a negative cross-price elasticity of demand.
answer
complements
question
The marginal product of an input will eventually decrease as more of that input is used assuming all other inputs are held constant.
answer
Law of diminishing marginal returns
question
The percentage change in quantity demanded of a good or service divided by the percentage change in price.
answer
price elasticity of demand
question
Assume an additional waiter can increase the number of customers served in a restaurant by 100 customers per day. The waiter will cost the restaurant $50 per day. On the other hand, a new microwave oven will speed the cooking process and allow each customer to be served more quickly. The microwave oven will allow 150 more customers to be served with no additional labor. The microwave oven can be rented for $70 per day. Which of the following actions is the best option for the restaurant owner for the right reason?
a.) Hire another waiter, because the waiter is cheaper.
b.) Rent a microwave oven because the increase in output is greater than the increase resulting from a new waiter.
c.) Hire another waiter, because the increase in output per dollar spent is greater than the increase per dollar spent from renting a microwave oven.
d.) Rent a microwave oven, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker.
answer
d.) Rent a microwave oven, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker.
question
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what is most likely to happen in the market for rental housing?
a) An increase in the number of rental housing units available, but no change in rent.
b) An increase in quantity supplied and quantity demanded.
c) An increase in supply, but no change in quantity demanded.
d) An increase in demand, but no change in quantity supplied.
answer
d) An increase in demand, but no change in quantity supplied.
An increase in population will make demand increase, but rent control is a price ceiling, meaning that price is not allowed to rise. Therefore, demand will increase, but supply will not since price is capped at the ceiling.
question
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
a) Raise price when demand is elastic, because the quantity demanded will increase.
b) Lower price when demand is elastic, because the quantity demanded will decrease.
c) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.
d) Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.
answer
c) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

If a firm raises its price, then it will gain revenues from the higher price but lose revenues from the decrease in quantity demanded. If demand is inelastic, the percentage change in quantity will be less than the percentage change in price. The loss in revenues from the decrease in quantity will be less than the gain in revenues from the increase in price.
question
Assume that as your income increases, your consumption of hot dogs decreases. We can assume that your income elasticity of demand for hot dogs is what?
a) Between 0 and 1
b) Greater than 1
c) Equal to 1
d) Less than 0
answer
d) Less than 0
If consumption of hot dogs decreases as income increases, hot dogs must be an inferior good. The income elasticity of an inferior good is negative.
question
Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in their combined consumer surplus if the price of the shoes falls from $70 to $50?
a) $20
b) $40
c) $49
d) $30
answer
d) $30
At a price of $70, only Gail will buy the shoes and the consumer surplus is $19 ($89-$70). At a price of $50, both will buy the shoes and total consumer surplus is $39 + $10 = $49. Therefore, the gain in consumer surplus is $49-$19 or $30.
question
Assume you spend all of your income on two goods: peanuts and corn chips. Also, assume that you are consuming the combination of peanuts and corn chips that maximizes your utility. Which of the following statements is true?
a) If the price of peanuts is equal to the price of corn chips, then the marginal utilities must also be equal.
b) If the price of peanuts is more than the price of corn chips, then the marginal utility of peanuts is less than the marginal utility of corn chips.
c) If the price of peanuts is less than the price of corn chips, then the marginal utility of peanuts is more than the marginal utility of corn chips.
d) The marginal utilities of the two goods and their prices are not related.
answer
a) If the price of peanuts is equal to the price of corn chips, then the marginal utilities must also be equal.

Mathematically, if the ratio of the prices must equal the ratio of the marginal utilities at the optimal point, then if the prices are equal (and the ratio is equal to 1), the marginal utility ratios must also be equal.
question
The law of diminishing marginal returns is the cause of ______________ marginal product and ______________ marginal cost.
a) Increasing; increasing
b) Increasing; decreasing
c) Decreasing; decreasing
d) Decreasing; increasing
answer
d) Decreasing; increasing
The law of diminishing marginal returns states that if every other input is held constant, increases in the variable input will eventually result in smaller increases in output. Thus, marginal product eventually decreases. A decreasing marginal product means that a given change in input produces smaller additions to output. Thus, the cost of those additional units of output, the marginal cost, must increase.
question
The production of 120 sofas per week requires 15 workers. The average product of each worker is ______________ sofas per week.
a) 8
b) 0.125
c) 120
d) 105
answer
a) 8
120/15 = 8
question
In the table below, what is the marginal product of the third worker?
a) 40 units
b) 50 units
c) 55 units
d) 60 units
answer
c) 55 units
The change in output caused by adding the third worker is (190-135) = 55 units.
1 of 23
question
TRUE OR FALSE
In a world with homogeneous labor, if a manager knows that the marginal productivity of the next worker hired will be lower than the marginal productivity of the previous worker hired, hiring one more worker will increase the marginal cost of production.
answer
True, hiring one more worker will increase the marginal cost of production because the marginal productivity is decreasing when you hire that worker, since the previous worker had a higher marginal productivity. So as each new employee is hired, the marginal productivity is decreasing so your marginal cost of production will increase.
question
TRUE OR FALSE
In the short run, the total cost of producing 100 Rapala Shad Rap fishing lures an hour is $500. The marginal cost of producing the 101st Rapala Shad Rap fishing lure $6.00. Average total cost will rise if the firm produces 101 Rapala Shad Rap fishing lure.
answer
True, iInitially, the average cost is $5.00 per lure. Marginal cost is $6.00 for the next lure. When marginal cost is greater than average cost average cost
must be rising. If you want to figure it out the hard way compare $500/100=$5.00 and $506.00/101=$5.0099.
question
TRUE OR FALSE
An effective price floor will reduce consumer surplus but may improve or reduce producer surplus.
answer
True: To be effective, the price floor will set above the prevailing equilibrium price and
not allow prices to fall below the floor. Consumers lose surplus because the price rises and
quantity demanded decreases. Producers may gain or lose surplus depending on which change
impacts them the most: The price increase will increase revenue per unit. But, the higher price
will reduce the size of the market (quantity demanded falls). This will reduce the number of units sold
question
The estimated price elasticity of demand for attending a Major League baseball spring training game is |-1.00|.* If Major League owners wanted to increase revenue during spring training games, they should decrease ticket prices.
answer
False, When demand is unit elastic (|Ed| = 1), revenue is at a maximum.
Either an increase or decrease in price will lower total revenue
question
The percentage change in quantity demanded of a good or service divided by the percentage change in income.
answer
Income Elasticity of Demand
question
Long-run average total cost decreases as the quantity of output increases.
answer
Economies of Scale
question
The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).
answer
marginal cost
question
The change in total output that results from the firm hiring one more unit of labor while holding other inputs constant.
answer
marginal product of labor
question
The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.
answer
consumer surplus
question
The more of a good a person consumes in a period of time the less additional utility that good provides.
answer
law of diminishing marginal utility
question
The change in total utility or satisfaction resulting from consuming one more unit of a good or service.
answer
marginal utility
question
Two goods with a negative cross-price elasticity of demand.
answer
complements
question
The marginal product of an input will eventually decrease as more of that input is used assuming all other inputs are held constant.
answer
Law of diminishing marginal returns
question
The percentage change in quantity demanded of a good or service divided by the percentage change in price.
answer
price elasticity of demand
question
Assume an additional waiter can increase the number of customers served in a restaurant by 100 customers per day. The waiter will cost the restaurant $50 per day. On the other hand, a new microwave oven will speed the cooking process and allow each customer to be served more quickly. The microwave oven will allow 150 more customers to be served with no additional labor. The microwave oven can be rented for $70 per day. Which of the following actions is the best option for the restaurant owner for the right reason?
a.) Hire another waiter, because the waiter is cheaper.
b.) Rent a microwave oven because the increase in output is greater than the increase resulting from a new waiter.
c.) Hire another waiter, because the increase in output per dollar spent is greater than the increase per dollar spent from renting a microwave oven.
d.) Rent a microwave oven, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker.
answer
d.) Rent a microwave oven, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker.
question
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what is most likely to happen in the market for rental housing?
a) An increase in the number of rental housing units available, but no change in rent.
b) An increase in quantity supplied and quantity demanded.
c) An increase in supply, but no change in quantity demanded.
d) An increase in demand, but no change in quantity supplied.
answer
d) An increase in demand, but no change in quantity supplied.
An increase in population will make demand increase, but rent control is a price ceiling, meaning that price is not allowed to rise. Therefore, demand will increase, but supply will not since price is capped at the ceiling.
question
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
a) Raise price when demand is elastic, because the quantity demanded will increase.
b) Lower price when demand is elastic, because the quantity demanded will decrease.
c) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.
d) Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.
answer
c) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

If a firm raises its price, then it will gain revenues from the higher price but lose revenues from the decrease in quantity demanded. If demand is inelastic, the percentage change in quantity will be less than the percentage change in price. The loss in revenues from the decrease in quantity will be less than the gain in revenues from the increase in price.
question
Assume that as your income increases, your consumption of hot dogs decreases. We can assume that your income elasticity of demand for hot dogs is what?
a) Between 0 and 1
b) Greater than 1
c) Equal to 1
d) Less than 0
answer
d) Less than 0
If consumption of hot dogs decreases as income increases, hot dogs must be an inferior good. The income elasticity of an inferior good is negative.
question
Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in their combined consumer surplus if the price of the shoes falls from $70 to $50?
a) $20
b) $40
c) $49
d) $30
answer
d) $30
At a price of $70, only Gail will buy the shoes and the consumer surplus is $19 ($89-$70). At a price of $50, both will buy the shoes and total consumer surplus is $39 + $10 = $49. Therefore, the gain in consumer surplus is $49-$19 or $30.
question
Assume you spend all of your income on two goods: peanuts and corn chips. Also, assume that you are consuming the combination of peanuts and corn chips that maximizes your utility. Which of the following statements is true?
a) If the price of peanuts is equal to the price of corn chips, then the marginal utilities must also be equal.
b) If the price of peanuts is more than the price of corn chips, then the marginal utility of peanuts is less than the marginal utility of corn chips.
c) If the price of peanuts is less than the price of corn chips, then the marginal utility of peanuts is more than the marginal utility of corn chips.
d) The marginal utilities of the two goods and their prices are not related.
answer
a) If the price of peanuts is equal to the price of corn chips, then the marginal utilities must also be equal.

Mathematically, if the ratio of the prices must equal the ratio of the marginal utilities at the optimal point, then if the prices are equal (and the ratio is equal to 1), the marginal utility ratios must also be equal.
question
The law of diminishing marginal returns is the cause of ______________ marginal product and ______________ marginal cost.
a) Increasing; increasing
b) Increasing; decreasing
c) Decreasing; decreasing
d) Decreasing; increasing
answer
d) Decreasing; increasing
The law of diminishing marginal returns states that if every other input is held constant, increases in the variable input will eventually result in smaller increases in output. Thus, marginal product eventually decreases. A decreasing marginal product means that a given change in input produces smaller additions to output. Thus, the cost of those additional units of output, the marginal cost, must increase.
question
The production of 120 sofas per week requires 15 workers. The average product of each worker is ______________ sofas per week.
a) 8
b) 0.125
c) 120
d) 105
answer
a) 8
120/15 = 8
question
In the table below, what is the marginal product of the third worker?
a) 40 units
b) 50 units
c) 55 units
d) 60 units
answer
c) 55 units
The change in output caused by adding the third worker is (190-135) = 55 units.
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