Econ – Flashcard
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normative economics is
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the application of value theory to economics
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the basic assumptions in all economic models are all of the following except
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good choices are free of opportunity cost
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according to plato, the origin of the city is to be found in
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the need of people to join together and engage in commerce
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according to the text, historically the structure of society is based on who is in control:
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the producers or the confiscators
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the empirical views of Aristotle:
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rejected the theory of the forms; were rejected when they were first brought before the catholic church; provided a natural way of dealing with the day to day challenges of life; all of the above
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classical liberalism is the school of philosophy that states
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individuals are endowed with freedom rather than nobility being endowed with authority
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mercantilism is a
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rationalist based economic system; economic system that promotes greater exports than imports; economic system that calls for government interventions; all of the above
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producers will prefer a legal system that is based on
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personal and economic freedom
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for us to have all the advantages that the capitalist system provides, there must be
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private property rights
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the invisible hand works to promote the general welfare through
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the self interest of producers in the society
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among the fundamental concepts in economics are
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efficient markets; marginalism; opportunity cost; all of the above
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the study of economics
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is a way of analyzing decision making processes caused by scarcity
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suppose that you purchased a ticket to a jazz festival for 100 a month ago. last week someone invited you to a hockey game on the same night as the jazz festival. you would much rather go to the hockey game than the jazz festival. you have tried unsuccessfully to sell the jazz festival ticket. which of the following statements regarding this situation is c correct?
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the 100 you paid for the jazz festival ticket should be irrelevant in your decision making, because it is a sunk cost.
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the reason that opportunity costs arise is that
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resources are scarce
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if you own a building and you decide to use that building to open a book store
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there is an opportunity cost of using this building for a book store because it could have been used in other ways.
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capital, as economists use the term,
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refers to things that have already been produced that are in turn used to produce other goods and services
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when two people trade
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they both expect to be made better off by the exchange
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someone has a comparative advantage in producing a good if they can produce that good
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at a lower opportunity cost
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the law of demand is
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as price goes up, demand goes down
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at equilibrium two things are equal
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quantity demanded and quantity supplied
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consumer surplus is the
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area above the price line and below the demand curve
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if they demand curve shifts to the right
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equilibrium quantity and price will increase
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if a good is a normal good, and increase in consumer income will cause
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an increase in price
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rich nations will trade with poor nationals only when
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each has a comparative advantage in the good being exported
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two things are true about equilibrium
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quantity demanded equals quantity supplied, and there is a tendency to move towards that point
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if price is above the equilibrium level in a free market
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then price will fall
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what could cause is to redraw the demand curve for pizza
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a change in consumer income
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when quantity supplied is greater than quantity demanded in a free market
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price will go down to eliminate the surplus
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which of the following is held constant along the demand curve
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income
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which of the following will not cause a shift in the demand curve for compact discs
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a change in the price of compact discs
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during an economic downturn when consumer income falls, the demand for tacos increases and the demand for sushi decreases this implies that tacos
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are inferior goods and sushi is a normal good
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demand for one item goes down when the price of another item goes up these items must be
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complements
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a change in income, preferences, or prices of other goods or services leads to a ___ that causes a ___
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change in demand; shift of the demand curve
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if the market for tires is unregulated and is presently characterized by excess supply, you can accurately predict that price will
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decrease, the quantity demanded will rise, and the quantity supplied will fall
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if improvements in technology have reduced the cost of producing personal computers, you accurately predict that in the market for personal computers, there will be a
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increase in the supply of personal computers, a decrease in the price, and an increase in the quantity demanded.
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if exchange rates are set by the forces of supply and demand, then
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they are called floating exchange rates
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in the market for the US dollar, an increase in interest rates within the UW will cause
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the value of the US dollar to increase when compared to other currencies
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in the market for the US dollar, increase in prices within the US (i.e. inflation) will cause
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demand for the US dollar to decline in international exchange markets supply to increase in international exchange markets; value to decrease comparatively
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in a free economy, allocative efficiency is achieved through
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markets
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the price system
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automatically distributes scarce goods
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attempts to bypass rationing in the market
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are costly and always fail
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if the government imposes a maximum price that is above the equilibrium price
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this maximum price will have no economic impact
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people scalping tickets for a jazz festival will be successful at selling the tickets for a profit
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when the prices set by the festival organizers is less than the market equilibrium price
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if the market of coffee is 3 per pound but the government will not allow coffee growers to charge more than 2 per pound of coffee, which of the following will happen
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there will be a shortage of coffee
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the adjustment of ____ is the rationing mechanism in market economies
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price
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a price floor is
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a minimum price set by the government that sellers must charge for a good
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producer surplus is
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the difference between current market price and full costs of production for the firm
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if a household's income doubles, its budget constraint will
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shift out parallel to the old one
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richard is consuming X and Y so that he is spending his entire income and MUx/Px=6 and MUy/Py=10. To maximize utility he should
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consume less x and more y
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if MUx/Px<MUy/Py, then
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spending a dollar less on x and a dollar more on y increases utility
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the marginal utility of the first cup of coffee that tom brinks in the morning is worth 2. the marginal utility of the 9th cut of coffee he drinks is positive while the marginal utility of the 10th cup of coffee he drinks in the morning is worth 0. This implies that at a price of 0, Tom would drink
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at most 10 cups of coffee per morning
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we can state the utility maximizing rule in words in the following way: a personal maximizes utility when she equalizes the __________ across products
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marginal utility per dollar spent
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the law of demising marginal utility implies that
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demand curves always slope downward and to the right
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for normal goods, the substitution and income effects of a price decrease will
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both increase the quantity of the food demanded
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for inferior goods, the substitution and income effects of a price increase will
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the substitution effect will decrease the quantity of the good demanded while the income effect will increase the quantity of the good demanded
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a rise in the price of pepsi that causes a household to shift its purchasing pattern toward coke and away form pepsi is the ___ effect of a price change
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substituion
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in the substitution effect of a wage change outweighs the income effect of a wage change, the labor supply curve is
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upward sloping
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assuming that leisure is a normal good, if an individuals labor supply curve is backward bending, then the
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income effect outweighs the substitution effect at higher wages
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Sponsors invest 100,000 in a new deli on the promise that they will earn a return of 10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli's fixed costs include the return to investors and 42,000 in other fixed costs/ Variable costs consist of wages (1000 per week) plus materials etc (2000 per week). The deli is popen 52 weeks per year. What must the average price per sandwich be for the deli to earn a normal return? suppose the average price per sandwich is 5/50. What is the annual profit of the deli?
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$4; $78,000
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you are hired as an economic consultant to the pampered pet shop. they operate in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The market price is less than its average variable cost. You should advise the firm to
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cease production immediately because it is not covering its variable costs of production.
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if the price of an input increases, each individual firms marginal cost curve shifts ___ and the industry supply curve ___
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up; shifts to the left
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in the short run average costs eventually increase because of ___ and in the long run average costs eventually increase because of ____
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diminishing returns; diseconomies of scale
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engineers for the figgen record company have determined that a 35% increase in all compact disc inputs will cause a 45% increase in output. Assuming that input prices remain constant, you correctly deduce that such a change will cause ___ as output increases.
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average costs to decrease
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when an increase in the scale of production leads to higher average cost, the industry exhibits
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decreasing returns to scale
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suppose heidis ice cream experiences economies of scape up to a certain point and diseconomies of scale beyond that point. its long run average cost curve is most like to be
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U shaped
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assume the peanut industry, a perfectly competitive industry, is in long run equilibrium with a market price of $5. If demand for peanuts increases and this industry is a decreasing cost industry, long run equilibrium will be reestablished at a price
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less than $5
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assume a perfectly competitive industry is in long run equilibrium at a price of $20. If this industry is a constant cost industry and the demand for the product decreases, long run equilibrium will be reestablished at
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$20
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factors of production that can be used together to enhance the others productivity are
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complementary inputs
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Tonys lawn service uses only one variable input, fertilizer. The firms demand curve for fertilizer in the short run is the inputs
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total product curve
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the demand for any factor of production in a competitive industry depends on
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its productivity and upon the value of its output in the marketplace
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a wheat farmer sells wheat in a perfectly competitive market and hires la bor in a perfectly competitive market. the market price of wheat is 2 a bushel, the wage rate is 10, the farmer employs fie works and the marginal product of the fifth worker is 3 bushes. what would you advise this farmer to do?
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reduce employment because the wage [aid is more than the marginal revenue product.
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the marginal revenue product curve of labor will always shift to the right if
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product demand increases and product price increases
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when a firm substitutes away from a factor whose price has risen and toward a factor whose price has fallen it is an example of the
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factor substitution effect
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a profit maximizing firm will continue to employ land until
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MRPland=Pland
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assume the backwoods shoe company hires three inputs: labor (l) capital (k and land (a) to produce shoes (x). which of the following conditions must be met so that the firm is using the optimal, or least costly combination of inputs.
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MPL=MPL=MPA=1/PX
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a firm is currently hiring capital and labor so that MPL/PL<MPK/PK
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less labor and more capital
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if economic profit is zero, a firm
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earns exactly a normal rate of return
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you are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of 100,000. Your costs for rent and supplies were 50,000. To start this business you invested an amount of your own capital that could pay you a return of 20,000 a year. Your accounting profit last year was? Your economic profit last year was?
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50,000 30,000
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the optimal method of production is the one that
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minimizes cost
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a firm produces 5 units of output from the last dollar it spends on labor and 10 units from the last dollar spent on capital. The firm should
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employ more capital and less labor
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you are certain that a normal rate of return is 18% for the computer industry. What do you expect for a normal rate of return in the computer software industry, which is considered to be much riskier than the computer industry?
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above 18%
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dana spend 10,000 on remodeling a storefront that she then opens as a shoe store. The business has not been very successful and she needs an additional 3,000 to keep the shoe store open. Which of the following is true?
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the 10,000 dana spent on remodeling is a fixed cost of her business
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marginal cost
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is the increase in total cost resulting from producing one more unit
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diminishing marginal returns implies
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increasing marginal costs
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total variable costs
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always increase with output
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in the short run where total variable cost is ___ at an ___ rate, marginal cost is positive and increasing
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increasing; increasing
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if the marginal cost curve is below the average variable cost curve, then
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average variable costs are decreasing
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the law of diminishing marginal returns
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results in average variable cost (AVC), average total cost (ATC), and marginal cost (MC) curves eventually increasing at an increasing rate.
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marginal revenue for a perfectly competitive firms is
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horizontal
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profit maximizing firms want to maximize the difference between
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total revenue and total cost
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imperfect competition
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results in less efficient market outcomes
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monopolies, oligopolies, and monopolistic competitive industries all
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have market power
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a monopoly is an industry with
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a single firm in which the entry of new firms is blocked
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market power refers to a firms ability to
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raise price without losing all sales of its product
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for a monopolist to sell more units of output
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the price must be reduced
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an important distinction between perfect competition and monopoly is that in
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monopoly the firm faces the market demand curve
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relative to a monopolized industry, a competitively organized industry is more likely to produce
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more output, charges lower pries, and earns only a normal profit
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although patents are a ___, the also provide___
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barrier to entry; an incentive for invention and innovation
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suppose we know that a monopolist is maximizing its profits. Which of the following is a correct inference? The monopolist has
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equated marginal revenue and marginal cost
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the XYZ computer company has a monopoly over the production of a specialized color printer. the XYZ computer company will find it profitable to increase the production of specialized color printers as long as marginal cost
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is less than marginal revenue
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because of a patent, Alcoa is the only manufacturer of soda cans with a stay put tab. Alcoa can earn a profit on the sale of soda cans with stay put tabs
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in the long run because entry into the industry by new firms is blocked until the patent expires
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the Sherman antitrust act of 1890
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made illegal every conspiracy in restraint of trade or commerce among the several states.
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the biggest problem with the Sherman antitrust act of 1890 was that it was unclear what
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specific acts were to be considered "restraints of trade"
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the criterion introduced by the supreme court in 1911 to determine whether a particular action was illegal or legal within the terms of the Sherman act is called the
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rule of reason
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a form of industry structure characterized by a few firms each large enough to influence market price is
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oligopoly
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oligopoli is difficult to analyze because
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of the complex interdependence that usually exists among oligpolistic firms
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according to the five forces model, ____ are the five competitive forces that determine the level of competition and profitability in an industry.
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rivals, buyers, suppliers, substitutes, and potential entrants
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the oligopolistic model in which firms produce exactly the same results as would exist if a monopolist controlled the entire industry is called the
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collusive cartel model
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assume that firms in an oligopoly are currently colluding to set price and output to maximize total industry profit. If the government forces the oligopolists to stop colluding, the price charged by the oligopolies will ___ and the total output produced will ___
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decrease; increase
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in the Cournot model the final level of output falls between the output that would prevail if the market were ___ and out output that would be set by a ___
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competitive; monopoly
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a form of oligopoly in which a dominant firm sets the price and all the smaller firms in the industry follow the dominant firm's pricing policy is called
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the price leadership model
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the herfindahl-hirschman index is
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calculated by summing the squared market share percentages for all firms in the industry
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if the herfindahl-hirschman index of an industry is less than 1,000, then the antitrust decision of the justice department
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considers the industry unconcentrated
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economists no longer attack industry concentration with the same fervor they once did because
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the theory of contestable markets shows that even firms in highly concentrated industries can be pushed to produce efficiently under certain market circumstances.
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there is easy entry into the ___ and ___ industries
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perfectly competitive; monopolistically competitive
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monopolistic competition differs from perfect competition primarily because in
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monopolistic competition, firms can differentiate their products
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in monopolistic competition firms can have some market power
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by producing differentiated products
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the case for advertising includes the fact that
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it produces consumers with valuable information about product availability, quality, and price.
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the case against advertising includes that fact that
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firms spend large sums of money to create artificial differences among products
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critics of advertising contend all of the following except
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advertising can easily turn into productive competition that increases welfare
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the pizza delivery industry is monopolistically competitive. Little Joe's pizzeria raises its prices by 10% but all the other pizzerias in town keep their prices the same. Which of the following is most likely to occur.
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Little Joe's pizzeria will lose some if its customers
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a monopolistically competitive firm produces where
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marginal revenue equals marginal cost
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if firms in a monopolistically competitive industry are earning economic profits, then in the long run
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new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated
