Microeconomics 1

Question 1

A consumption bundle is a ________

Answer 1

collection of 1 or more commodities

Question 2

What do we mean when we say that consumer preferences are transitive :

Answer 2

if a consumer prefers A to B and B is preferred to C

Question 3

Framing is the tendency to rely on the _______________

Answer 3

context in which a choice
is described when making a
decision.

Question 4

If the demanded quantity of a good increases with a larger price then we speak of a:

Question 5

as the price of food falls, attainable _______ increases and the consumer buys more food.

Answer 5

utility

Question 6

The lower the price of the product, the higher the level of ________

Answer 6

utility

Question 7

A consumer’s purchasing power increases with a ___________ price

Answer 7

lower

Question 8

At every point on the demand curve, the consumer is _________ utility
by satisfying the condition that the marginal rate of substitution (MRS)
of food for clothing equals the ratio of the prices of food and clothing.

Answer 8

maximizing

Question 9

If the indifference curves are steeper than the budget line (Mux/Muy > Px/Py) the optimum is to produce only the good on the :

Answer 9

X axis

Question 10

If the indifference curves are flatter than the budget line (Mux/Muy < Px/Py ) the optimum is to produce only the good on the :

Answer 10

Y axis

Question 11

If the indifference curves and the budget line have the same slope (Mux/Muy = Px/Py) any combination on the budget line is the :

Answer 11

optimum

Question 12

The banana market is in equilibrium and the demand for bananas is unit elastic. After an early frost the production of bananas drops by 10%. How does this change the equilibrium price of bananas

Answer 12

The equilibrium price increases by 10%

Question 13

In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to

Answer 13

consume compared to another good, as long as the new good is equally satisfying.

Question 14

Richard spends his whole income to consume positive quantities of X and Y, so MRS = MUX/MUY = 3 and PX/PY = 2.
In order to maximize its utility, Richard must

Answer 14

consume more of x and less of y

Question 15

When two goods are perfect complements, they are consumed _______________

Answer 15

proportionately ; so an example of an utility function for perfect complements could be U=min(F,2C)

Question 16

For durable goods such as refrigerators demand in the short run is more :

Answer 16

price elastic than in the long run

Question 17

As long as we account for and measure all of the firm’s resources properly, we will find that economic cost equals the

Answer 17

oppurtunity cost

Question 18

accounting cost includes actual expenses plus ________

Answer 18

depreciation charges for capital equipment

Question 19

Sunk costs should not influence firm’s decisions, because these costs ________

Answer 19

cannot be changed by decisions

Question 20

A good example of a sunk cost is:

Answer 20

For example, consider the purchase of specialized equipment for a plant. Suppose the equipment can be used to do only what it was originally designed for and cannot be converted for alternative use. The expenditure on this equipment is a sunk cost. Because it has no alternative use, its opportunity cost
is zero. Thus it should not be included as part of the firm’s economic costs.

Question 21

Last year it paid $500,000 for an option to buy a building in the city.
The option gives the firm the right to buy the building at a cost of $5,000,000, so
that if it ultimately makes the purchase its total expenditure will be $5,500,000.
Now it finds that a comparable building has become available in the same city
at a price of $5,250,000. Which building should it buy?

Answer 21

The firm should buy the original building because the 500 000 is a sunk cost and should not be considered in the decision of the firm. Therefore the firm should take the building which costs without the SUNK cost 5 mil rather than the one that costs 5.25 mil

Question 22

If a plant’s equipment is too specialized to be of use in
any other industry, it is said to be a _______ cost

Answer 22

sunk

Question 23

Why is it important to distinguish fixed costs from sunk costs?

Answer 23

Because fixed costs influence the firm’s decision whereas sunk costs do not

Question 24

Example of amortizing a sunk cost

Answer 24

A company that spent $600 million for a chip-fabrication plant (clearly a sunk cost) might amortize the expenditure over six years and treat it as a fixed cost of $100 million per year.

Question 25

Marginal cost is sometimes called an ____________

Answer 25

incremental cost

Question 26

A marginal cost is an increase in cost that results from ______________

Answer 26

producing an extra unit of output

Question 27

Because fixed cost does not change as the firm’s level of output changes, marginal cost equals the ___________

Answer 27

increase in the variable cost (delta VC/q)

Question 28

Average total cost is used interchangeably with _______ and _______

Answer 28

AC and average economic cost

Question 29

Policy of treating a one-time expenditure as an annual cost spread out over some number of years

Answer 29

amortization

Question 30

Formula for average variable cost :

Answer 30

VC/q

Question 31

When it comes to costs, in the short run there are _______

Answer 31

both variable and fixed costs

Question 32

When it comes to costs, in the long run there are only ________

Answer 32

variable costs

Question 33

Change in VC = w * change in labour

Answer 33

another formula for marginal cost is the per-unit cost of the extra labor (w)times the amount of extra labor needed to produce the extra output ∆L.

Question 34

MC = w/deltaq/deltaL=

Answer 34

MC= w/MPl

Question 35

Suppose, for example, that the marginal product of labor is 3 and the wage rate is $30 per hour. What is the marginal cost of producing an additional unit of output:

Answer 35

MC = 30/3 = 10 Dollars

Question 36

Graphically total cost is the vertical sum of :

Answer 36

AVC and AFC

Question 37

Marginal cost crosses the average variable cost and average total cost curves at _________

Answer 37

their minimum point

Question 38

Why does the marginal cost curve intersect AVC and ATC at their minimum points?

Answer 38

Because, at the lowest point, the curves become equal to each other.

Question 39

In the long run a firm has much more __________

Answer 39

flexibility

Question 40

User cost of capital is the sum of _______

Answer 40

interest cost of capital and depreciation cost of capital

Question 41

Formula for Marginal Rate of technical substitution

Answer 41

MPL/MPK

Question 42

Economic cost includes

Answer 42

oppurtunity costs

Question 43

for the economic costs of an entrepreuner it is important to count how much the entrepreuner would have _____

Answer 43

EARned if he worked for someone else and here ignore the salary he earns as an entrepreuner

Question 44

Function showing the highest output that a firm can produce for every specified combination of inputs.

Answer 44

production function

Question 45

The short run is the period of time when_________

Answer 45

quantities of one or more factor of production cannot be changed

Question 46

when mrts is fixed there is a _____ solution

Answer 46

corner

Question 47

the different combinations of labour and capital that produce the same output lie on the same _______ curve

Answer 47

isoquant

Question 48

APL is equal to MPL when the line going from 0 to the point has the same ________ as the _______

Answer 48

slope; tangent

Question 49

In the short run the formula for marginal cost is:

Answer 49

wage rate (w) divided by MPL

Question 50

In Paasche's index __________ year quantities are taken as weights

Answer 50

current

Question 51

For long term production function q=min(Q,L) what is not possible?

Answer 51

substitution ; hence this function matches perfect complements the best

Question 52

What does a function given by Q=Min(K,L) mean?

Answer 52

This means that inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. For example, a firm with five employees will produce five units of output as long as it has at least five units of capital.

Question 53

If marginal cost < avc then ____ is decreasing

Answer 53

avc

Question 54

if mc>avc then avc is

Answer 54

increasing

Question 55

diminishing marginal product leads to

Answer 55

increasing marginal costs

Question 56

user cost of capital =

Answer 56

depreciation of capital + interest rate on capital

Question 57

Formula for isocost line =

Answer 57

C= w*L + r*K

Question 58

Slope of the isocost line =

Answer 58

dK/dL or -w/r

Question 59

The short-run expansion path is a

Answer 59

horizontal; linear curve

Question 60

The long-run expansion path doesn't have to be _______

Answer 60

linear

Question 61

How does the isocost graph look like for firms that have CONSTANT RETURNS TO SCALE

Answer 61

isoquants are EQUIDISTANT

Question 62

In constant returns to scale output always ________ when we double all inputs

Answer 62

doubles

Question 63

In decreasing returns to scale when input is doubled ; output is ________

Answer 63

less than doubled

Question 64

In increasing returns to scale when input is doubled ; output is ___________

Answer 64

more than doubled

Question 65

How does the isocost graph look like for firms that have decreasing returns to scale

Answer 65

Isoquants get farther apart as you move outward

Question 66

How does the isocost graph look like for firms that have increasing returns to scale

Answer 66

Isoquants get closer together as you move outward

Question 67

If a firm has increasing returns to scale it may potentially lead to the creation of :

Answer 67

monopolies

Question 68

economies of scale is producing one product in

Answer 68

bulk

Question 69

economies of scope offer

Answer 69

a range of products

Question 70

in economies of scale with larger output the ________ falls

Answer 70

average cost per unit

Question 71

A good example of economies of scope

Answer 71

Amazon

Question 72

If MPL/w > MPK/r the firm should use _____ (less/more) capital and _____ (less/more) labor to minimize costs.

Answer 72

less; more

Question 73

The _____ run is a period of time during which at least one factor of production is fixed.

Answer 73

short

Question 74

Graphically, what is the distance between total cost (TC) and variable cost (VC)?

Answer 74

fixed cost

Question 75

Insert one word OR mathematical operator into the following expression to demonstrate the cost-minimizing input rule. MPL/MPK ___?___ w/r

Answer 75

equals

Question 76

When the price of labor rises, firms have a tendency to use

Answer 76

less labour and more capital

Question 77

The short-run production function is generally expressed as a function of which of the following inputs?

Answer 77

Labour only

Question 78

When C(Q1,0) + C(Q2,0) > C(Q1,Q2), we say that _____ _____ _____ exist (3 words)

Answer 78

economies of scope exist

Question 79

The marginal rate of technical substitution between labor and capital is (select all that apply)

Answer 79

a) the absolute value of the slope of the isoquant b) MPL/MPK e) The rate at which labor and capital can be substituted for each other

Question 80

As output increases, what happens to the difference between ATC and AVC?

Answer 80

decreases

Question 81

The _____ run is a period of time during which a manager can change all factors of production.

Answer 81

long

Question 82

A production function that assumes that inputs are relatively substitutable is called a _____.

Answer 82

Cobb-Douglas production function (L^aK^a)

Question 83

The different combinations of labor and capital that produce the same amount of output lie on the same:

Answer 83

isoquant curve

Question 84

Isocost curve is a producer's

Answer 84

budget line

Question 85

Reference point

Answer 85

is a point/perspective from which a consumer makes a decision. Example of this is: A person living in Nowa Iwiczna paying a rent of £600/mo might look at WWA's £3000/mo and think that its unfair and it’s a scam so he won't move there. At the same time for a citizen of WWA, Nowa Iwiczna is a bargain.

Question 86

True/false: a monopolist will increase its output if the government institutes a binding price ceiling.

Answer 86

True because A monopolist has an incentive to restrict output in order to inflate price. If the government mandates a price ceiling, this motive dissipates, and thus the monopolist will produce more.

Question 87

Increasing returns to scale signifies:

Answer 87

A declining long run average cost

Question 88

This describes as situation in which a buyer and a seller possess different information about a transaction

Answer 88

Asymmetric information

Question 89

The lemons problem

Answer 89

With asymmetric information low quality goods can drive high quality goods out of the market

Question 90

The consumers always spend the same amount of money on this good when the elasticity is

Answer 90

unitary meaning that it has a value of -1.

Question 91

For durable goods the demand is more ________ in the short run than in the long run

Answer 91

elastic

Question 92

ATC are minimal when they are equal to

Answer 92

MC

Question 93

If a firm has increasing returns to scale this means that its costs are :

Answer 93

declining in the long run (decling average costs)

Question 94

An information cascade occurs when:

Answer 94

when one's action depends on the actions of others which were also based on others

Question 95

when firm a and firm b choose a cooperative outcome they choose the outcome that ______

Answer 95

maximizes total gains

Question 96

Fairness is a bias in economics which concerns _______

Answer 96

making decision based off of moral rules

Question 97

Rules of thumb are essentially

Answer 97

mental shortcuts

Question 98

Salience is the cognitive bias that _____-

Answer 98

predisposes shoppers to focus on items that are more prominent in valuie

Question 99

after a government levies a tax on a monopoly which formula changes

Answer 99

you add t to the equation for price (P+T)

Question 100

The indifference curve is a straight line for

Answer 100

perfect substitutes

Question 101

The indifference curve is L-shaped for

Answer 101

perfect complements

Question 102

Moral Hazard

Answer 102

Moral hazard is a situation where the behavior of one party may change to the detriment of another after the transaction has taken place. For example, a person with insurance against automobile theft may be less cautious about locking their car because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company.

Question 103

Adverse Selection

Answer 103

A phenomenon that occurs when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.

Question 104

In the average cost curve, there is a point where production reaches a minimum. What is that minimum called?

Answer 104

The minimum is referred to as the optimum level of output or productively efficient level of output.

Question 105

What is the short run in the microeconomic theory?

Answer 105

The short-run is the period where at least 1 factor of production is fixed and cannot be changed.

Question 106

What is the long-run in the microeconomic theory?

Answer 106

The long-run is the period where no factors of production are fixed and where all factors of production can be changed.

Question 107

Accounting Cost =

Answer 107

Salary (your salary as entrepreuner is also included) + Other Expenses

Question 108

Economic cost includes

Answer 108

all the implicit and explicit costs

Question 109

Economic Cost =

Answer 109

Salary + Other Expenses + Opportunity Cost (Rent + Forgone Salary)

Question 110

Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.