STUDY UNIT TWO MICROECONOMICS Flashcards
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.
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)
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.
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.
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)
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)
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.
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)
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)
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.
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.
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.
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
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
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
