Ivy Software MBA Prepworks Fundamentals of Economics TEST QUESTIONS WITH VERIFIED SOLUTIONS

Ivy Software MBA Prepworks Fundamentals of Economics TEST QUESTIONS WITH VERIFIED SOLUTIONS The main concept demonstrated in the production possibilities frontier is - answers Opportunity cost When country A has a lower opportunity cost of producing sugar relative to country B, then country A is said to have - answers Comparative Advantage A graph that shows the combinations of two goods that the economy can produce given the available scarce resources and available technology is called a - answers Production Possibilities Frontier Assume a production possibilities frontier for pickup trucks and big Mac hamburgers. The economy is producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65). What is the opportunity cost of producing an additional 20 Big Mac hamburgers (point 40, 60)? - answers Five Pickup Trucks The opportunity cost of an item is - answers whatever must be given up to obtain the item. Consider market for pork, suppose that price of beef, a substitute for pork, increases. Because of the change in price of beef, the equilibrium price of pork...? - answers Increases Consider the market for pork, suppose that the price of beef, a substitute for pork, increases. Because of this change in the price of beef, the equilibrium quantity of pork will...? - answers Increase because increase in price of beef causes demand curve for pork to shift North East. B/c of this shift, the equilibrium quantity of pork will increase. Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork, increases. Because of that change in the price of hog feed, the equilibrium quantity of pork ...? - answers Decreases because the increase in price of hog feed causes the supply curve for pork to shift NW. B/c of this shift, the quantity of pork decreases. Consider the market for pork. Suppose that disposable income increases and pork is an inferior good. Because of that change in income, the equilibrium price of pork...? - answers Decreases because the increase in disposable income causes the demand curve for pork to shift south west, because pork is an inferior good. because of this shift, the equilibrium price of pork decreases. Consider the market for pork. Suppose that 1) disposable income increases and pork is a normal good, And 2) the price of hog feed decreases. Because of these changes, the equilibrium price of pork is... - answers Indeterminate because the increase in disposable income causes the demand curve for pork to shift north east because pork is a normal good. The decrease in price of hog feed causes the supply curve to shift to the south east. The net effect of these shifts leaves us unable to say waht will happen to the equilibrium price of pork. Consider the market for pork. Suppose that disposable income increases and pork is a normal good and the price of hog feed decreases. The equilibrium quantity of pork...? - answers Increases. Suppose the price elasticity for demand for retail phone service in the US is 0.95. If the # of retail substitutes for retail telephone service increases, will the price elasticity of demand become more elastic or more inelastic? - answers Elastic. When the number of substitute products increases, the price elasticity of demand will become more elastic. consumers become more sensitive to price when they have more options to chose among. True or False: the law of demand states that if the price of a good increases, CP, then the quantity demanded of that good will increase. - answers False. quantity demanded of that good will decrease. Suppose the cross-price elasticity of demand for home heating oil with respect to the price of natural gas is +0.6. This number tells us that home heating oil and natural gas are substitute or compliment goods? - answers Substitute goods. When the cross price elasticity is positive then they are substitutes. Consider the market for mustard which is a complement to hot dogs. Suppose the price of hot dogs increase. What happens to the equilibrium price and equilibrium quantity of the mustard market? - answers Equilibrium price decreases and equilibrium quantity decreases. The price of hot dogs is an independent variable in the demand function for mustard. This is because hot dogs and mustard are complementary goods. Therefore, if the price of hot dogs increases, then the demand curve for mustard shifts to the southwest. People demand less mustard at every price when hot dogs are more expensive. In the mustard market, the equilibrium price decreases and equilibrium quantity decreases. profit maximizing rule - answers a business maximizes profits when it produces where the marginal revenue from selling another unit equals the marginal cost of producing another unit. Marginal Revenue=Marginal Cost Marginal cost - answers is equal to the change in the total cost that arises from an extra unit of production. It is calculated by taking the change in total cost and dividing it by the change in the quantity produced =change in TC/change in Q Marginal revenue - answers is the change in total revenue generated from an additional unit sold. It is calculated by taking the change in total revenue divided by the change in quantity sold Short Run - answers a time horizon where some fixed costs exist. is a time horizon within which a business is unable to adjust at least one input because there is a fixed cost of some kind. we think in terms of the short run not the long run Long Run - answers a situation where the fixed costs (the inputs) become variable. a time horizon long enough for the seller to adjust all inputs. If you observe a business with no fixed costs, then it is in a long run state. when prices remain low for a very long period of time, then the business moves into a long run decision mode. In the long run there are no fixed costs. fixed costs - answers costs that do not vary with changes in the quantity produced. what expenses must be paid even if production equals zero? variable costs - answers costs that do vary with changes in the quantity produced total cost - answers equals the sum of the fixed costs and variable costs TC=VC+FC average fixed cost - answers equals fixed cost divided by quantity produced AFC= TC/Q average variable cost - answers equals variable cost divided by the quantity produced average total cost - answers equals the total cost divided by the quantity produced, or it is the sum of average fixed cost plus average variable cost sunk cost - answers a cost that has already been committed and cannot be recovered joint costs - answers costs that do not change with changes in the scope of production. economies of scope arise when there are joint costs. (ie: comcast purchasing NBC universal). perfect competition - answers occurs in an industry in which - there are many buyers and many sellers - an industry in which the good is homogeneous - and an industry in which all who want to enter the industry are free to do so and any business may exit at a time of their choosing monopoly - answers an industry that is controlled by a monopolist firm who is the only seller of a good. the good the monopolist sells is heterogeneous because they are the only one that sells the good and the market that the monopolist sells its product in has barriers to entry