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Flashcards in STUDY UNIT TWO MICROECONOMICS Deck (29):
1

A perfectly elastic demand curve is depicted as a vertical line.
True.
False.

False.
Your answer is correct.
A perfectly elastic demand curve is depicted as a horizontal line. It describes a situation where buyers are willing to buy all they can at a certain price, but not any product or service at a higher price. A perfectly inelastic demand curve is depicted as a vertical line. It describes a situation where quantity demanded does not change as price changes.

2

In any market structure, a firm should produce the level of output at which marginal cost equals average revenue.
True
False

False
Your answer is correct.
A firm should produce the level of output at which marginal cost (MC) equals marginal revenue (MR)

3

A firm’s long-run average total cost curve is an inverted U, representing portions of increasing returns to scale, constant returns to scale, and decreasing returns to scale.
True
False

False
Your answer is correct.
A firm’s long-run average total cost curve is a U, representing portions of increasing returns to scale, constant returns to scale, and decreasing returns to scale.

4

Given that fixed costs are incurred even if the firm shuts down, the firm gains in the short run by continuing to operate if revenues exceed variable costs.
True.
False.

True.
Your answer is correct.
In the short run, certain costs are fixed regardless of output. Given that fixed costs are incurred even if the firm shuts down, the firm gains in the short run by continuing to operate if revenues exceed variable costs.

5

If a group of consumers decide to boycott a particular product, the expected result would be

A. An increase in product supply because of increased availability.
B. That demand for the product would become completely inelastic.
C. An increase in the product price to make up lost revenue.
D. A decrease in the demand for the product.

D. A decrease in the demand for the product.
Answer (D) is correct.
A consumer boycott will decrease the demand for a product (shift the demand curve to the left). This decrease in demand should lead to a lower price for the product assuming that supply is constant (the supply curve does not shift).
(2.9.119)

6

In the economic theory of production and cost, the short run is defined to be a production process

A. That is subject to economies of scale.
B. That spans a time period of less than 1 year in length.
C. That always produces economic profits.
D. In which there is insufficient time to vary the amount of all inputs.

D. In which there is insufficient time to vary the amount of all inputs.
Answer (D) is correct.
The short run is defined as a period so brief that a firm has insufficient time to vary the amount of all inputs. Thus, the quantity of one or more inputs is fixed. The long run is a period long enough that all inputs, including plant capacity, can be varied.
(2.4.74)

7

A concerted effort to avoid doing business with a particular supplier is known as a

A. Group boycott.
B. Cartel.
C. Monopolistic competition.
D. Monopsony.

A. Group boycott.
Answer (A) is correct.
A group boycott is a concerted effort to avoid doing business with a particular supplier, often in retaliation for some policy followed by the supplier. Since the affected supplier’s demand is decreased, the supplier may be forced to lower prices to compete.

8

The amount of boysenberries demanded for the third quarter rose from 1,250 units to 1,750 units from last year. This was due to a decrease in price from $1.25 to $0.75 per unit. Therefore, the price elasticity of boysenberries using the midpoint method is

A. 3/2
B. 1
C. 2/3
D. 1/6

C. 2/3
Answer (C) is correct.
The price elasticity is calculated by dividing the percentage change in quantity by the percentage change in price. Under the midpoint method, the numerator and denominator are computed as “the change over the range.” Thus, the change in quantity of 500 units (1,750 – 1,250) divided by the range of 3,000 (1,750 + 1,250) produces a quantity increase of 1/6. The $.50 price decline divided by the price range of $2 produces a price decline of 25%. Dividing the quantity increase by the price change (1/6 ÷ .25) equals a price elasticity of 2/3.
(2.2.32)

9

Mr. Smith is hired as a consultant to a firm in a perfectly competitive industry. At the current output level the price is $20, the average variable cost is $15, average total cost is $22, and marginal cost is $20. In order to maximize profits in the short-run, Mr. Smith will recommend that the firm should

A. Not change output.
B. Shut down.
C. Decrease production.
D. Increase production.

A. Not change output.
Answer (A) is correct.
For profit maximization, a firm operating under pure competition should produce the level of output at which price is equal to marginal cost. Since price and marginal cost are both $20, the firm is already at its profit-maximizing position.
(2.6.87)

10

An increase in the market supply of beef would result in a(n)
A Increase in the quantity of beef demanded.
B Increase in the price of beef.
C Increase in the price of pork.
D Decrease in the demand for beef.

A Increase in the quantity of beef demanded.
This answer is correct.
An increase in market supply of a commodity (holding demand constant) is depicted as a rightward shift of the supply curve, reflecting the fact that more of the commodity is now available at every price level than before. With demand held constant, consumers can now buy more beef for the same amount of money.

11

In any competitive market, an increase in both demand and supply can be expected to always
A Increase price.
B Increase both price and market-clearing quantity.
C Decrease both price and market-clearing quantity.
D Increase market-clearing quantity.

D Increase market-clearing quantity.
This answer is correct.
In a competitive market, equilibrium exists when demand is exactly equal to supply. If both demand and supply increase in equal amounts, the market will still be in equilibrium, but the new price may be higher, lower, or unchanged depending upon the slopes of the demand and supply curves. Whatever the new price, the quantity of products cleared by the market should increase.

12

The change in total product resulting from the use of one unit more of the variable factor is known as
A Marginal product.
B The point of diminishing average productivity.
C Marginal cost.
D The point of diminishing marginal productivity.

A Marginal product.
This answer is correct.
Marginal product is the output obtained by adding one extra unit of a variable input factor. If the cost of the input factor is constant, a rising marginal product will result in a declining marginal cost of output. If marginal product is falling, marginal cost is rising. Hence, marginal cost is at a minimum when marginal product is at a maximum.

13

Which one of the following is a characteristic of pure competition?
A Mutual interdependence.
B Product differentiation.
C Standardized product.
D Significant research and development programs.

C Standardized product.
This answer is correct.
Pure competition is characterized by numerous buyers and sellers who act independently, a standardized product, ease of entry into or exit from the market, perfect information, the inability of each firm to influence prices, and the absence of nonprice competition.
View Subunit 2.6 Outline

14

A natural monopoly is
A Identified with an industry in which economies of scale are rapidly exhausted.
B Identified with an industry in which economies of scale are few and diseconomies are quickly incurred.
C Identified with a one-firm industry with significant economies of scale and in which unit costs are minimized.
D An important part of the analysis of monopolistic competition.

This answer is correct.
C Identified with a one-firm industry with significant economies of scale and in which unit costs are minimized.
A natural monopoly occurs when economies of scale are very great. In a natural monopoly, the unit cost of meeting the entire demand for a product is minimized when there is only one firm in the industry. Thus, the presence of two or more firms would prevent the realization of the economies of scale necessary to minimize cost. Public utilities are common examples of natural monopolies.
View Subunit 2.7 Outline

15

Which one of the following statements about supply and demand is true?
A If demand increases and supply decreases, equilibrium price will fall.
B If supply increases and demand remains constant, equilibrium price will rise.
C If demand increases and supply decreases, equilibrium price will increase.
D If demand increases and supply increases, equilibrium quantity will fall.

C If demand increases and supply decreases, equilibrium price will increase.
This answer is correct.
An increase in demand signifies a rightward shift in the demand curve, that is, an increase in the quantity demanded at each price. A decrease in supply involves a leftward shift in the supply curve, that is, a reduction in the quantity supplied at each price. Each event increases the equilibrium price if other factors are constant. Thus, if both events occur, the price will increase.
View Subunit 2.1 Outline

16

Which one of the following would cause the demand curve for a normal good to shift to the left?
A A change in consumers’ tastes in favor of the commodity.
B A rise in the price of a substitute product.
C A rise in average household income.
D A rise in the price of a complementary commodity.

D A rise in the price of a complementary commodity.
This answer is correct.
A shift to the left represents a decline in demand. A leftward shift may be caused by an unfavorable change in the tastes and preferences of consumers, a decline in consumer income (if the commodity is a normal good), a decrease in the price of a substitute good, an increase in the price of a complementary product, or the expectation of future price decreases.
View Subunit 2.1 Outline

17

Economies and diseconomies of scale are important determinants of the
A Pattern of costs in the long run.
B Type of product demand faced by individual firms.
C Law of diminishing returns.
D Market demand curve.

A Pattern of costs in the long run.
This answer is correct.
Economies and diseconomies of scale affect a company’s costs. When it experiences economies of scale, a company’s long-run average costs will decrease. Diseconomies of scale occur when the long-run average costs increase.
View Subunit 2.5 Outline

18

The price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10%. What is the new quantity demanded?

A. 6,000
B. 4,500
C. 1,000
D. 4,000

D. 4,000
Answer (D) is correct.
The price elasticity of demand measures the sensitivity of the quantity demanded of a product to a change in its price. It is calculated in absolute value. Hence, the price elasticity of demand is equal to the percentage change in quantity demanded over the percentage change in price. Based on the law of supply and demand, quantity demanded generally decreases when price increases. Therefore, a 10% price increase will decrease the demand for the goods by 20% (2.0 price elasticity of demand × 10% increase in prices). Accordingly, the new quantity demanded is $4,000 [$5,000 – (100% – 20%)].
(2.2.50)

19

Suppose that a stairway manufacturer’s price elasticity of demand was relatively inelastic. If this manufacturer decided to increase the price of its stairways, what should have been the result?

A. Total revenues increased.
B. Total revenues decreased.
C. Total revenues were perfectly inelastic.
D. Total revenues remain unchanged.

A. Total revenues increased.
Answer (A) is correct.
Inelasticity refers to the condition in which the percentage change in quantity is less than the percentage change in price. If price increased 10%, the quantity demanded would decline by less than 10%. Therefore, total revenues would increase.
(2.2.44)

20

The elasticity of resource demand tends to be high when

A. The elasticity of product demand is high.
B. The elasticity of product demand is low.
C. The resource cost is a lesser percentage of total cost.
D. Substitutes are not available.

A. The elasticity of product demand is high.
Answer (A) is correct.
The elasticity of resource demand tends to be high when the elasticity of product demand is high, substitutes are available, the elasticity of the product demand is also high, and the resource is a greater percentage of total cost.
(2.10.121)

21

When long-run average cost is declining over a range of increasing output, the firm is experiencing

A. Economies of scale.
B. Decreasing returns.
C. Technological efficiency.
D. Increasing fixed costs.

A. Economies of scale.
Answer (A) is correct.
When long-run average cost declines as output increases, the firm is experiencing economies of scale. Average cost falls when marginal cost is below it and rises when marginal cost is above it. Average cost reaches its minimum when it equals marginal cost. Some of the reasons for this phenomenon are increased specialization and division of labor, better use and specialization of management, and use of more efficient machinery and equipment.
(2.5.79)

22

If the price elasticity of demand for a normal good is estimated to be 1.5, a 10% reduction in its price would cause

A. Total revenue to fall by 10%.
B. Quantity demanded to rise by 15%.
C. Demand to decrease by 10%.
D. Total revenue to fall by 15%.

B. Quantity demanded to rise by 15%.
Answer (B) is correct.
Elasticity is the change in demand divided by the change in price. An elasticity of 1.5 means that the change in demand (the numerator of the fraction) will increase by 150% of any change in price (the denominator) measured in absolute terms (the minus sign is ignored). Thus, a 10% price reduction increases demand by 15% (1.5 × 10%).
(2.2.40)

23

Which one of the following changes will cause the demand curve for gasoline to shift to the left?

A. The price of cars decreases.
B. The price of cars increases.
C. The supply of gasoline decreases.
D. The price of gasoline increases.

B. The price of cars increases.
Answer (B) is correct.
A shift to the left means that the quantity demanded will be less at each price. This result follows because cars and gasoline are complementary goods. If automobile prices increase, fewer cars are purchased, fewer miles are driven, and the quantity of gasoline demanded declines at each price.
(2.1.6)

24

Entry into monopolistic competition is

A. Blocked.
B. Rare, as significant capital is required.
C. Difficult, with significant obstacles.
D. Relatively easy, with only a few obstacles.

D. Relatively easy, with only a few obstacles.
Answer (D) is correct.
Monopolistic competition is characterized by the existence of a large number of firms, differentiated products, relative ease of entry, some control of price by the firms, and significant nonprice competition (e.g., by advertising). Entry into monopolistic competition is more difficult than entry into pure competition, but it is relatively easy compared with entry into a monopoly.
(2.8.103)

25

An employer is a monopsonist with respect to hiring labor, but it sells its product in a competitive market. Compared with a firm that must hire from a competitive labor market, the monopsonist will pay a

A. Lower wage and hire more workers.
B. Higher wage and hire more workers.
C. Lower wage and hire fewer workers.
D. Higher wage and hire fewer workers.

C. Lower wage and hire fewer workers.
Answer (C) is correct.
A monopsonist maximizes profits by equating the marginal cost of labor with the marginal revenue product of labor. This results in the hiring of fewer workers than in a competitive market, the payment of a lower wage rate, and the production of a lower output.
(2.10.126)

26

The value of money varies

A. Directly with investment.
B. Directly with the tax rates.
C. Directly with government spending.
D. Inversely with the general level of prices.

D. Inversely with the general level of prices.
Answer (D) is correct.
Part of the value of money comes from its usefulness as a store of value or wealth. As prices rise, the purchasing power of a stock of money held diminishes. Accordingly, the value of money and the general level of prices must be inversely related.
(3.5.32)

27

If the price elasticity of demand for a product is inelastic,

A. A price increase leaves total revenue unchanged.
B. A price increase causes total revenue to increase.
C. A price decrease leaves total revenue unchanged.
D. A price decrease causes total revenue to increase.

B. A price increase causes total revenue to increase.
Answer (B) is correct.
If the demand for a product is inelastic (the ratio is less than 1.0), the price effect on total revenue is greater than the quantity effect. Thus, a firm could increase total revenue by raising its prices.
(2.2.48)

28

A decrease in the price of a complementary good will

A. Shift the supply curve of the other commodity to the left.
B. Shift the demand curve of the other commodity to the right.
C. Shift the demand curve of the other commodity to the left.
D. Increase the price paid for a substitute good.

B. Shift the demand curve of the other commodity to the right.
Answer (B) is correct.
A decrease in the price of a good (e.g., gasoline) will cause the demand curve of a complementary good (e.g., automobiles) to shift to the right (increase). The lower price of the first good results in greater demand for the complementary good at each price level.
(2.1.5)

29


Which of the following characteristics would indicate that an item sold would have a relatively high price elasticity of demand?
A The cost of the item is low compared to the total budget of the purchasers.
B Changes in the price of the item are regulated by governmental agency.
C The item has many similar substitutes.
D The item is considered a necessity.

C The item has many similar substitutes.
This answer is correct.
When an item has many substitutes, the quantity demanded will have a strong response to changes in the item’s price, reflected by a high price elasticity coefficient.
View Subunit 2.2 Outline