microeconomics exam 4 - Flashcards

Q: The demand curve faced by a monopolistically competitive firm

is less elastic than the monopolist\'s demand curve.

question

Which of the following best represents the pricing behavior of firms in a monopolistically competitive industry?

answer

Teen Angle Hardware looks for a niche to sell its hardware products to teens but finds it difficult to earn anything more than normal profits due to other hardware stores also looking for niches.

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In the long run, a representative firm in a monopolistically competitive industry will end up

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earning a normal profit, but not an economic profit.

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If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes the industry would

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more closely approximate pure competition.

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Excess capacity implies

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productive inefficiency

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In the long run, the economic profits for a monopolistically competitive firm will be

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the same as the profits for a purely competitive firm.

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In monopolistic competition, a firm has a limited degree of "price-making" ability. This means that the firm will

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set price above marginal cost.

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Monopolistic competitive firms are productively inefficient because production occurs where

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average total cost is not at its lowest.

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A monopolistically competitive firm is producing at a short-run output level where average total cost is $10.00, marginal cost is $5.00, marginal revenue is $6.00, and price is $12.00. In the short run, the firm should

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increase the level of output.

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Demand and marginal revenue curves are downsloping for monopolistically competitive firms because

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product differentiation allows each firm some degree of monopoly power.

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At long-run equilibrium in monopolistic competition, there is

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neither allocative nor productive efficiency.

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Monopolistic competition is characterized by firms

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producing differentiated products.

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If monopolistically competitive firms in an industry are making an economic profit, then new firms will enter the industry and the product demand facing existing firms will

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decrease.

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The demand curve faced by a monopolistically competitive firm

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is less elastic than the monopolist's demand curve.

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Which is not true for a monopolistically competitive industry?

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Firms operate at the lowest point of their ATC curves in the long run.

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The goal of product differentiation and advertising in monopolistic competition is to make

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price less of a factor and product differences more of a factor in consumer purchases.

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Which of the following best represents the pricing behavior of firms in an oligopolistic market?

answer

Looking Over Your Shoulder Handbag Co. chooses the price it charges by estimating what its rivals are most likely to do and then taking their responses into consideration

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Which of the following is an example of an oligopolistic market with a standardized product?

answer

The market for aluminum.

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Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will

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decide to increase advertising expenditures even if it means a reduction in profits.

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Collusion among oligopolistic firms

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becomes more difficult if the firms all have different cost and demand curves.

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In an oligopolistic market there is likely to be

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neither allocative nor productive efficiency.

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A firm in an oligopoly is similar to a monopoly in that both firms

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could have significant market power and control over price.

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The characteristic most closely associated with oligopoly is

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a few large producers.

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A cartel is

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a formal agreement among firms to collude.

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Mergers of firms in an industry tend to

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transform monopolistic competition into oligopoly.

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Which of the following has not contributed to the development of oligopolies in the U.S. economy?

answer

interindustry competition

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Game theory, which is used in studying oligopoly behavior, originated from the study of games such as the following, except

answer

solitaire

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In an oligopolistic market there are

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few sellers.

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In which market model is there mutual interdependence?

answer

oligopoly

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Collusion refers to a situation where rival firms decide to

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agree with each other to set prices and output.

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A unique feature of an oligopolistic industry is

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mutual interdependence.

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In an oligopoly, producers' agreements to restrict output tend to be unstable because each firm has an incentive to

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produce more than its output quota.

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For a monopolistic competitor ____ in the long run equilibrium

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p = ATC and p > minimum ATC

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As firms enter a monopolistically competitive industry in which firms are currently earning economic profits

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the demand curve shifts to the left for the existing firms to the industry

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Under monopolistic competition, the demand curve faces by an individual firm is downward sloping because

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the product of each seller is differentiated from that of others

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In monopolistic competition

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products are differentiated

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Marginal revenue for a monopolistically competitive firm

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equals marginal cost

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Which of the following can best be characterized as a subject of microeconomics?

answer

An examination of how much of a particular good gets produced

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Microeconomics is the study of the

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economy at the small-scale level, examining individuals and specific markets. An example would be examining how much of a particular good gets produced.

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Bob, the owner of a deli in his town, needs to purchase something that economists would label as "capital" to help him produce sandwiches. Which of the following is an example of capital?

answer

A meat slicer to cut ham for sandwiches

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Samantha needs to purchase something that economists would label as "labor" to help her produce court documents for her law firm. Which of the following is an example of labor?

answer

A stenographer who can type courtroom proceedings

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Macroeconomics approaches the study of economics from the viewpoint of

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the entire economy.

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The opportunity cost to a consumer who smokes cigarettes consists of the

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products that the consumer could have bought instead of cigarettes.

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Microeconomics is concerned with

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a detailed examination of specific economic units that make up the economic system.

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The basic truth that underlies the study of economics is the fact that we all face

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scarcity

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As a consequence of the problem of scarcity

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individuals have to make choices from among alternatives.

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The scarcity problem persists because

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economic wants exceed available productive resources.

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The opportunity cost of constructing a new public highway is the

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value of other goods and services that are sacrificed in order to construct the new highway.

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The two basic markets shown by the simple circular flow model are

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product and resource.

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In the circular flow model of the market system, households

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buy products and sell resources.

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Economic analysis assumes "rational or purposeful behavior," which means that people will pursue decisions or actions

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that will increase their well-being.

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The simple circular flow model shows that workers and capital-owners offer their services to firms through the

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resource markets.

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If box A represents businesses or firms, B the resource market, and C households, and if flow (7) represents goods and services, then flow (6) would represent

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consumption expenditures

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According to the circular flow model, product markets are where businesses earn their revenues from

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households.

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After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the

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marginal benefit for the fifth pizza slice is less than its marginal cost.

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The opportunity cost of constructing a new public highway is the

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value of other goods and services that are sacrificed in order to construct the new highway

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When studying human behavior, economists assume rational self-interest. This means that people

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make decisions based on some desired outcome.

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Marginal cost can be defined as the change in cost resulting from

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one more unit of production.

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Use the following graph for a competitive market to answer the question below. A black market where the price is $2.00 could result from a price

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ceiling set at $1.50.

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Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?

answer

An increase in supply.

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Suppose that in each of four successive years producers sell more of their product and at higher prices. This could be explained

answer

in terms of a stable supply curve and increasing demand.

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Use the supply and demand curves depicted in following graph for a competitive market to answer the question below. If the government imposed a price ceiling of $15, then buyers will be intending to buy ___, but they will be able to legally buy ____.

answer

36 units, 24 units

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Use the following graph for a competitive market to answer the question below. In a market with supply and demand curves as shown above, a price floor of $2.50 will result in

answer

a surplus of 10 units.

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A large increase in the supply of HD-TV sets occurs simultaneously with a smaller decrease in its demand. As a result the equilibrium price will __________ and the equilibrium quantity will __________.

answer

decrease, increase

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Use the following diagram for the corn market to answer the question below. If the price in this market is fixed at $2 per bushel, then

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sellers will quickly run out of corn that they bring to market.

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If a price ceiling is set below the equilibrium price in a market

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the quantity demanded will exceed the quantity supplied.

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There is an excess demand in a market for a product when

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quantity demanded is greater than quantity supplied.

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A headline reads "Lumber Prices Up Sharply." In a competitive market, this situation would lead to a(n)

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increase in the price of new homes and decrease in quantity.

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A government will create a surplus in a market when it sets a price floor above the

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equilibrium price.

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There is a surplus in a market for a product when

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quantity demanded is less than quantity supplied.

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If a tax is placed on the production of good X, this will shift the

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supply curve for X to the left.

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An increase in the supply of music downloads indicates that more music downloads will be

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supplied, even if prices of music downloads stayed the same.

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The table below shows the weekly supply for hamburgers in a market where there are just three sellers. If the price of a hamburger increases from $3 to $5, then the weekly market quantity of hamburgers supplied will

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increase from 9 to 17.

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Use the figure below to answer the following question. An increase in quantity supplied caused by a change in price is depicted by a

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movement from point y to point x.

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All else being equal, if the law of supply states that as the price of a good, service, or resource rises

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the quantity supplied will increase, which explains the shape of the supply curve.

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Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates the

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amount of oranges that will be available at various prices has declined.

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When economists say that the supply for a product has increased, they mean that the

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supply curve has shifted to the right.

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Which of the following would cause a rightward shift of the supply curve for cell-phone services?

answer

a subsidy to cell-phone producers

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An "increase in the quantity supplied" suggests a

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movement up and to the right along the supply curve.

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A leftward shift of a product supply curve might be caused by

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some firms leaving the industry.

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Which of the following is most likely to decrease the demand for Mango Jarritos, a popular Mexican soft drink?

answer

Concerns over the empty calories soft drinks contain cause more people to drink mineral water.

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Pam sees that the price of bananas has risen in the grocery store. All else equal, she decides to buy more tangerines than she normally purchases. From the information given, you might conclude that:

answer

tangerines and bananas are substitutes.

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A market price:

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is a price at which buyers and sellers agree to exchange money for a good or service.

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The quantity demanded for cars monthly is shown in the table below. An increase in income increases the quantity demanded by 10% at every price. Which of the following columns represents the new monthly quantity demanded for cars (in thousands of cars)?

answer

Column C Explanation: Multiply the initial quantities demanded by 1.1, which will increases the values by 10%. For each price, follow the row to examine the quantities in each column, and you will see that column C holds the values that you calculated.

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The horizontal axis of a graph that shows a market demand curve indicates the

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quantities that consumers are willing and able to buy at various prices.

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Who determines the price and quantity traded in a market?

answer

buyers and sellers

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In a market, buyers want to pay the _____ possible price and sellers want to charge the _____ possible price.

answer

lowest, highest

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Tom enjoys drinking Diet Coke with his lunch, but his enjoyment decreases after each glass he consumes. This is an illustration of

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diminishing marginal utility.

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The demand schedule for a product shows the relationship between how much of the product buyers are willing and able to buy and the

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product's price.

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The market supply curve is:

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more elastic in the long run than in the short run.

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If nicotine in cigarettes is highly addictive, why would it make economic sense for producers of cigarettes to offer free samples of their products to young adults?

answer

The free samples will help get people addicted to nicotine, which makes demand less elastic.

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For which of the following products is demand likely to be the most elastic?

answer

Converse All Star sneakers

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It has been estimated that the price elasticity of demand for attending Atlanta Braves baseball games is -0.57.1 If price were the only factor to change, one might conclude that a decrease in attendance of 11.4% was caused by:

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an increase in ticket prices of 20%.

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Generic macaroni and cheese is an inferior good. Demand for generic macaroni and cheese is likely to increase when:

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income decreases.

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For which of the following products is demand likely to be the most inelastic?

answer

Table salt

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If a state decided to place a tax on home heating oil, over time:

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demand would become more elastic and tax revenue would decline.

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The price elasticity of supply for a product will be 2 if a

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1% decrease in price causes a 2% decrease in quantity supplied.

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If a 5% cut in the price of a product causes the quantity demanded to rise by 10%, the demand is

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elastic.

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The price elasticity of demand for a popular sporting event is -2. If the price of a ticket to this event increases by 10%, the quantity of tickets demanded will decrease by

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20%.

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The income elasticity of demand for jewelry is 2. Other things equal, a 10% increase in consumer income will ___________ the quantity of jewelry demanded by ________

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increase; 20%.

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Along a linear downward-sloping demand curve, the price elasticity of demand will be

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different across each price range.

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Suppose you are given the following demand data for a product. The price elasticity of demand (based on the midpoint formula) when price increases from $7 to $9 is

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-1.60.

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Total revenue decreases as the price of a good increases, if the demand for the good is

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elastic.

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If the absolute value of the price elasticity of demand for a good is .75, the demand for that good is described as

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inelastic.

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The price elasticity of supply measures how responsive the quantity supplied of X is to changes in the

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price of X.

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You are the sales manager for a software company and have been informed that the absolute value of the price elasticity of demand for your most popular software is less than 1. To increase total revenues from that product, you should

answer

increase the price of the software.

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Lucinda prefers chrysanthemums to gardenias. Chrysanthemums are priced lower than gardenias. Lucinda chooses not to buy the chrysanthemums. Which of the following reasons for Lucinda's choice is consistent with rational consumer choice?

answer

Lucinda would rather spend her income on other goods.

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Hector would like to buy a new pair of soccer cleats. Hector prefers Adidas to Puma brand soccer cleats. But Hector chooses to buy the Puma brand cleats instead. Which of the following reasons for Hector's choice is consistent with rational consumer choice?

answer

The price of Puma brand soccer cleats was less than the price of Adidas brand soccer cleats.

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The table below shows the utility schedule for a consumer of candy bars. Marginal utility becomes negative with the consumption of the

answer

seventh candy bar.

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While eating at Alex's "Pizza by the Slice" restaurant, Clara experiences diminishing marginal utility. She received 10 utils from consuming the first slice of pizza and would only receive 5 utils from consuming a second slice, at the same price. Based on this information we can conclude that

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Alex may have to lower the price to convince Clara to buy a second slice.

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The utility of a good or service

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is the satisfaction or happiness one receives from consuming it.

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Total utility is best defined as the

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total satisfaction received from consuming a good, service, or combination of goods and services

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After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the

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marginal utility is positive for the fourth slice and negative for the fifth slice.

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Sharon purchases two products, X and Y, with a given fixed budget. The marginal utility she receives from the last unit of X she consumes is 60 utils, and the marginal utility she receives from the last unit of Y she consumes is 30 utils. The price of X is $2.00 and the price of Y is $1.00. Based on the equal marginal principle, these data suggest that Sharon

answer

is maximizing her total utility from the given fixed budget.

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Which best expresses the law of diminishing marginal utility?

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The more of a product is consumed, the smaller is the marginal utility received from the product.

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Marginal utility can be

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positive, negative, or equal to zero.

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The decision-making process followed by consumers to maximize utility assumes that

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consumers behave rationally, attempting to maximize their satisfaction.

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Which of the following defines marginal utility?

answer

the additional satisfaction or happiness received from the consumption of an additional unit of a good or service

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Assume that Oscar is maximizing his total utility and that the equal marginal principle holds by the time he is done allocating his budget.If MUa/Pa = 100/$35, MUb/Pb = 300/?, and MUc/Pc = 400/?, the prices of products B and C

answer

must be $105 and $140, respectively.

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A consumer with a limited income will maximize utility when each good is purchased in amounts such that the

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marginal utility per dollar spent on each of the final choices in a bundle is equal.

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Use the following figure to answer the question below. The total utility yielded by consuming 4 units of X is

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17 utils.

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Which of the following is an implicit cost of owning and operating a farm?

answer

The money a farmer could earn by working for someone else.

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Barney decides to quit his job as a corporate accountant (which pays $10,000 a month) and go into business for himself as a certified public accountant. He decides not to rent office space downtown, but instead sets up shop in his converted garage apartment, which he could rent out for $300 a month if he wasn't using it as his own office. He must purchase office supplies worth $75 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $12,000 per month. a. What are Barney's average monthly accounting profits? b. What are Barney's average monthly economic profits?

answer

average monthly accounting profits $11,875 average monthly economic profits $1,575

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Economic profit is

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equal to the difference between accounting profit and implicit costs.

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Economic profit is equal to

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total revenue minus the explicit and implicit costs of production.

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Implicit costs are

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opportunity costs of using owned resources.

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If a firm's total revenue just covers its implicit and explicit costs of production, then

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economic profit is zero.

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To an economist, the economic costs associated with the use of resources include

answer

explicit and implicit costs.

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Use the table below to answer this question, which provides information on the production of a product that requires one variable input. With the addition of the second unit of input, the marginal product is __________ and the average product is __________.

answer

15; 10

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Monetary payments a firm makes to pay for resources are called

answer

explicit costs.

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Use the following figure to answer the next question. Total fixed cost at output level Q2 is measured by the vertical distance

answer

CD

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If the short-run average variable cost of production for a firm is decreasing, then it follows that average variable cost must be greater than

answer

marginal cost.

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Use the following table to answer the next question. The total variable cost associated with the production of 5 units of output is

answer

$63.00

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The following data show the relationship between total cost and output in the short run. The firm's marginal cost is equal to average total cost somewhere between units

answer

3 and 4

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If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be

answer

$200.

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The reason the marginal cost curve eventually increases as output increases for the typical firm is because of

answer

diminishing marginal returns.

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A firm encountering economies of scale over some range of output will have a

answer

falling long-run average total cost curve.

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Use the following figure to answer the next question. At which point does marginal cost (MC) equal average variable cost (AVC)?

answer

Point B

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Suppose that TC = $550, TVC = $500, and MC = $100. If the firm produces 10 units of output, then

answer

MC ; AVC

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Use the following table to answer the next question and assume that the total fixed cost incurred by the firm is $500. The total cost associated with the production of 5 units of output is

answer

$2,500

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Answer the next question on the basis of the following data. The marginal cost associated with the production of the sixth unit of output is

answer

$8

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The table shows short-run average total cost schedules for three plants of different sizes that a firm might build in the long run. What is the long-run average total cost of producing 30 units of output?

answer

$7

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With total fixed cost of $400, a firm incurs an average total cost of $3 and average variable cost of $2.50. The amount of output produced by the firm must be

answer

800 units

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In the long run

answer

all costs are variable.

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Variable costs are

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costs that change with the amount of output a firm produces

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Which of the following markets is most likely to be perfectly competitive?

answer

The market for mushrooms

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What is the most likely reason or reasons that the market for electricity is not perfectly competitive?

answer

It is not easy to enter or exit the industry as a supplier. There are not a lot of sellers in the market.

question

Bobby decides to sell lemonade on a hot summer day. If Bobby sell 20 glasses of lemonade for $0.20 per cup, and his average total cost is $0.17, what are his economic profits for the day?

answer

$0.60 Since ATC is $0.17 and Bobby sells each glass for $0.20, his profit per glass is $0.03 cents. He sold 20 glasses and therefore made an economic profit of $0.60 (20 x $0.03).

question

A perfectly competitive firm will be willing to produce even at a loss in the short run, as long as

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the loss is smaller than its total fixed costs.

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Price is taken to be a "given" by an individual firm selling in a perfectly competitive market because

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each producer supplies a negligible fraction of total market.

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Suppose that the market for corn is perfectly competitive. If corn farmers are currently generating losses, then we would expect that in the long run the market

answer

supply curve will shift to the left.

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A perfectly competitive firm should continue to operate even at a loss in the short run if

answer

it can cover its variable costs of production

question

T-Shirt Enterprises is operating in a perfectly competitive market. It is producing 3,000 t-shirts and selling them for $10 each. At this level of output, the average total cost is $10.50 and the average variable cost is $10.20. Based on these data, the firm should

answer

shut down in the short run.

question

Assume that the market for corn is perfectly competitive. Currently, firms growing corn are generating losses. In the long run, we can expect

answer

some firms to exit, causing the market price of corn to increase

question

Which is a feature of a perfectly competitive market?

answer

products are standardized or homogeneous

question

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 1,000 units is $2.50. The minimum possible average variable cost is $2. The market price of the product is $2.50. To maximize profits, the firm should

answer

continue producing 1,000 units.

question

Use the following graphs for a perfectly competitive market in the short run to answer the next question. The graphs suggest that in the long run, assuming no changes in the given information,

answer

new firms will enter the industry

question

In perfect competition, if the market price of the product is initially higher than the minimum average total cost faced by the firms, then

answer

other firms will enter the industry and the industry supply will increase.

question

The short-run supply curve for a perfectly competitive firm is the

answer

segment of the MC curve lying at and above the AVC curve.

question

Which of the following suppliers is most likely to be a monopolist?

answer

A water company

question

If a monopolist is able to increase the amount of product she sells from 400 to 420 units by lowering the price of that product from $50 to $45, her marginal revenue is:

answer

-$55 Marginal revenue is the change in total revenue from a change in quantity. Marginal revenue is found by taking the change in total revenue divided by the change in quantity. To find the marginal revenue, use the following formula: Marginal revenue = (New total revenue - Initial total revenue) / (New quantity - Initial quantity). In this case, the initial total revenue is the initial price ($50) multiplied by the initial quantity (400), which is $20,000. The new total revenue is the new price ($45) multiplied by the new quantity (420), which is $18,900. Therefore, the marginal revenue is found by: ($18,900 - $20,000) / (420 - 400) = $-1,100/20 = $-55.

question

The demand curve faced by a pure monopoly is

answer

downward sloping

question

Which of the following statements is a major criticism of a pure monopoly as a source of allocative inefficiency?

answer

A pure monopoly fails to expand output to the level where the price of an additional unit is just equal to its marginal cost

question

Which of the following is not a barrier to entry in an industry?

answer

profit maximization

question

Pure monopoly refers to

answer

a single firm producing a product for which there are no close substitutes.

question

A nondiscriminating pure monopoly must decrease the price on all units of a product in order to sell more units. This explains why

answer

a pure monopoly's marginal revenue curve is below its demand curve.

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Given a downward-sloping linear demand curve, if total revenue decreases as quantity of output increases, marginal revenue must be

answer

negative and demand is inelastic.

question

Pure monopolies are said to be allocatively inefficient because

answer

price is greater than marginal cost.

question

Use the following graph for a profit-maximizing pure monopoly to answer the next question. The firm will produce the quantity

answer

0V

question

Use the following graph showing the demand and marginal revenue curves faced by a pure monopoly to answer the next question. What price should the pure monopoly charge in order to maximize total revenue?

answer

P3

question

With a natural monopoly, the normal profit price is _________________ and the competitive price is _________________.

answer

not allocatively efficient; allocatively efficient

question

To answer the next question, use the following table, which shows the demand schedule faced by Ninaskets, a pure monopoly selling baskets. What is the change in total revenue if the pure monopoly lowers the price from $20 to $18?

answer

$30

question

Use the following graph to answer the next question. If the industry were perfectly competitive, the market price would be

answer

$14

question

A pure monopoly will generate an economic profit whenever

answer

total revenue is greater than total cost.

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