ECO 3101 Quiz with Complete Answers

ECO 3101 Quiz with Complete Answers What is the slope of the following line? P= 12Q + 5 - Correct Answers: 12 What is the derivative of Ln (x^3) - Correct Answers: 3 / X generally how do supply and demand curves curve? - Correct Answers: supply curves up while demand curves down A supply curve reveals: - Correct Answers: the quantity of output that producers are willing to produce and sell at each possible market price. You are analyzing the demand for good X. Which of the following will result in a shift to the right of the demand curve for X? - Correct Answers: An increase in the price of a good that is a substitute for X The battery packs used in electric and hybrid automobiles are one of the largest cost components for manufacturing these cars. As the price of these batteries decline, we expect that the: - Correct Answers: supply curve for electric and hybrid autos will shift rightward. The current market price for good X is below the equilibrium price, and then the demand curve for X shifts rightward. What is the likely outcome of the demand shift? - Correct Answers: The shortage increases The slope of an indifference curve reveals: - Correct Answers: the marginal rate of substitution of one good for another good. Indifference curves are convex to the origin because of: - Correct Answers: the assumption of a diminishing marginal rate of substitution. Graph with straight lines of demand , from 1 to 1 , 2 to 2 etcc - Correct Answers: The consumer regardes these two as perfect substitutes Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are: - Correct Answers: horizontal lines. If prices and income in a two-good society double, what will happen to the budget line? - Correct Answers: there will be no effect on the budget line. A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis? - Correct Answers: -7/15 Elaine views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Elaine's budget is $48 per month. What is her optimal choice under this scenario? - Correct Answers: 6 packages of hot dogs and 6 packages of buns Satisfaction from consumption is maximized when - Correct Answers: marginal benefit equals marginal cost. Bellatrix consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Bellatrix's income is $120.00, how much of good A will she purchase? - Correct Answers: 120 Jules currently uses his entire budget to purchase 5 cans of Sprite and 3 hamburgers per week. The price of Sprite is $1 per can, the price of a hamburger is $2, Jules's marginal utility from Sprite is 4, and his marginal utility from hamburgers is 6. Jules could increase his utility by: - Correct Answers: increasing Sprite consumption and reducing hamburger consumption. Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level? - Correct Answers: 8 units Which of the following claims is true at each point along a price-consumption curve? - Correct Answers: Utility is maximized, and all income is spent. After a good falls in price, consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called - Correct Answers: The substitution effect A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as: - Correct Answers: the income effect Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax? - Correct Answers: Consumer expenditures on gasoline increase over the short run and decline over the long run. When would it be plausible to describe the demand for a product by drawing a straight line, Q= a - bP - Correct Answers: Only if no important factors other than price affect demand If your income elasticity of demand for going to the movie theater is 1.5, then - Correct Answers: a 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income. Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. - Correct Answers: less, less If the price of Apple's iPhone generates a cross-price elasticity for Samsung's Galaxy of 0.7 then these two products are - Correct Answers: substitutes If the price of iPhone's generates a cross-price elasticity for Apple Watches of -0.6 then these two products are - Correct Answers: complements A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called: You Answered - Correct Answers: a production function The short run is: - Correct Answers: the time period in which at least one input is fixed According to the law of diminishing returns: - Correct Answers: the marginal product of an input will eventually decline Which of the following inputs are variable in the long run? - Correct Answers: plant size labor capital and equipment The law of diminishing returns refers to diminishing: - Correct Answers: marginal returns The marginal product of an input is: - Correct Answers: the addition to total output due to the addition of the last unit of an input, holding all other inputs constant. What describes the graphical relationship between average product and marginal product? - Correct Answers: Marginal product cuts average product from above, at the maximum point of average product. You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees? - Correct Answers: MP = 1.5 cars Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the average product of labor? Correct Answer - Correct Answers: AP = 5K An isoquant: - Correct Answers: is a curve that shows all the combinations of inputs that yield the same total output. If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the: - Correct Answers: rate at which the firm can replace capital with labor without changing the output rate. The marginal rate of technical substitution is equal to the: - Correct Answers: ratio of the marginal products of the inputs. A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use. - Correct Answers: labor, capital Use the following statements to answer this question. I. The numerical labels attached to indifference curves are meaningful only in an ordinal way. II. The numerical labels attached to isoquants are meaningful only in an ordinal way. - Correct Answers: I is true, and II is false. Consider a firm facing MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour? - Correct Answers: one hour A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C=L^0.5 M^0.75. This production function exhibits: - Correct Answers: increasing returns to scale for all output levels. Which of the following production functions exhibits constant returns to scale? - Correct Answers: q = K + L Does it make sense to consider the returns to scale of a production function in the short run? - Correct Answers: No, we cannot change all of the production inputs in the short run. A firm's total cost function is given by: TC = 4000 + 5Q + 10Q2 Find: TFC AVC TVC AVC ATC MC - Correct Answers: TFC = 4000 AVC = 4000/ Q TVC = 5Q+10Q^2 AVC = 5 + 10Q ATC= 4000/ Q + 5 + 10Q MC= 5 + 20Q Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do? - Correct Answers: Sell to ABC Corporation. Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision: - Correct Answers: is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be: - Correct Answers: -4/5 Which of the following is NOT an expression for the cost minimizing combination of inputs? - Correct Answers: MRTS = MPl /MPk With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies: - Correct Answers: the marginal product of labor is 3 times the marginal product of capital. a firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm: - Correct Answers: could reduce the cost of producing its current output level by employing more labor and less capital. In the long run, which of the following is considered a variable cost? - Correct Answers: all of the above An isocost line reveals the - Correct Answers: input combinations that can be purchased for a given total cost. Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery? - Correct Answers: Bubba adds grilled chicken sandwiches to the menu. Use the production function: Q = 4L^1/2 K^1/2. Refer to Scenario 7.3. Suppose that your firm decides to double its output to 400. To achieve this level of output the firm will have to: - Correct Answers: Exactly double its inputs Consider the following statements when answering this question: I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too. II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too - Correct Answers: I is false, and II is true. When an isocost line is just tangent to an isoquant, we know that: - Correct Answers: output is being produced at minimum cost. Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then: - Correct Answers: the optimal capital-labor ratio remains the same. Acme Container Corporation produces egg cartons that are sold to egg distributors. Acme has estimated this production function for its egg carton division: Q = 25L^0.6 K^0.4, where Q = output measured in one thousand carton lots, L = labor measured in person hours, and K = capital measured in machine hours. Acme currently pays a wage of $10 per hour and considers the relevant rental price for capital to be $25 per hour. Determine the optimal capital-labor ratio that Acme should use in the egg carton division. - Correct Answers: 4/15 An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees. - Correct Answers: Both are true Use the following statements to answer this question: I. Markets that have only a few sellers cannot be highly competitive. II. Markets with many sellers are always perfectly competitive. - Correct Answers: I and II are false. If any of the assumptions of perfect competition are violated, - Correct Answers: there may still be enough competition in the industry to make the model of perfect competition usable. At the profit-maximizing level of output, marginal profit - Correct Answers: is zero. A firm maximizes profit by operating at the level of output where: - Correct Answers: MR = MC Firms often use patent rights as a: - Correct Answers: barrier to entry If current output is less than the profit-maximizing output, then the next unit produced - Correct Answers: will increase revenue more than it increases cost. Rihanna's Diner, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Rihanna should: - Correct Answers: continue producing in the short run, but plan to go out of business in the long run. A firm never operates: - Correct Answers: on the downward-sloping portion of its AVC curve. suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error? - Correct Answers: Firm produces more than optimal quantity and earns lower profits. Cicero's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Cicero's profit maximizing decisions in the long run? - Correct Answers: Cicero's decision depends on the circumstances—if their profits are larger than $250 per year, then the tax does not impact output; otherwise, the restaurant will shut down. Eva's Taqueria operates in a perfectly competitive local taco market. If the price of taco cheese increases (ceteris paribus), what is the expected impact on Eva's profit-maximizing output decision? - Correct Answers: Output decreases because the marginal cost curve shifts upward. Consider the following statements when answering this question: I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price. - Correct Answers: 1 is true 2 is false In a constant-cost industry, an increase in demand will be followed by: - Correct Answers: an increase in supply that will bring price down to the level it was before the demand shift. Consumer surplus measures: - Correct Answers: the benefit that consumers receive from a good or service beyond what they pay. An effective price ceiling causes a loss of: - Correct Answers: producer surplus for certain and possibly consumer surplus as well. Price ceilings do what to consumer surplus? - Correct Answers: may decrease consumer surplus if demand is sufficiently inelastic. Consider the following statements when answering this question: I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. - Correct Answers: I is true, and II is false. When the market price is held above the competitive level, the deadweight loss is composed of: - Correct Answers: producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged. Import tariffs generally result in: - Correct Answers: less consumer surplus. higher domestic prices. a deadweight loss. more producer surplus for domestic producers When the government imposes a specific tax per unit on a product, changes in consumer surplus are ________ and changes in producer surplus are ________. - Correct Answers: negative, negative The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ________ and supply is relatively ________. - Correct Answers: inelastic; elastic Why is there a deadweight loss associated with subsidy payments? - Correct Answers: Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them. The market demand and supply functions for alcohol at Major League Baseball games are: QD = 10 - 0.04P QS = 3.8P - 2 Suppose that there is a proposal to increase the tax on alcohol sold at MLB games. What percentage of the burden of the tax will fall on producers? - Correct Answers: 1 Where Es is the elasticity of supply and Ed is the own price elasticity of demand, the fraction of the tax passed on to consumers in the form of higher prices is: - Correct Answers: Es/(Es-Ed). Politicians have reintroduced a tax on yachts to help pay for government programs. Which of the following is true? - Correct Answers: The sales of yachts will decrease. Which of the following is not an advantage of the Earned Income Tax Credit (EITC) over a minimum wage? - Correct Answers: Benefits arrive once a year Consider the following statements when answering this question: I. Employers are always hurt by minimum wage laws. II. Workers always benefit from minimum wage laws. - Correct Answers: I is true, and II is false. Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price. - Correct Answers: I is true, and II is false. Which of the following is NOT true for monopoly? - Correct Answers: At the profit maximizing output, price equals marginal cost. A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true? - Correct Answers: The firm should cut output A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately: - Correct Answers: 40 At the profit-maximizing level of output, demand is: - Correct Answers: elastic, but not infinitely elastic. The ________ elastic a firm's demand curve, the greater its ________. - Correct Answers: less; monopoly power Zinc Communications developed a new type of cellular telephone that has a three-dimensional (3-D) screen. The company holds a patent on this technology, so they are the only seller of the 3-D phone when it is introduced. Over time, other companies introduce phones that are similar but not identical (i.e., they do not violate the patent held by Zinc). What happens to the demand for 3-D phones facing Zinc and to the profit-maximizing price for the 3-D phone as these similar products enter the market? - Correct Answers: Demand becomes more elastic, price declines. If a monopolist's profits were taxed away and redistributed to its consumers, - Correct Answers: inefficiency would remain because output would be lower than under competitive conditions Which of the following statements about natural monopolies is true? - Correct Answers: For natural monopolies, marginal cost is always below average cost. There were initially two satellite radio providers in the U.S. market, Sirius and XM Radio. The firms merged to form one firm, and the federal government did not challenge the merger. Although the merger created a single seller in this market, the existence of a monopoly may not have much impact on U.S. consumers. Which of the following statements are plausible reasons for the limited impact of the merger? - Correct Answers: There are very large fixed costs in providing satellite radio, and the industry may be a natural monopoly. One seller may be able to operate at lower cost than two sellers. Although there will only be one seller of satellite radio, there are other forms of radio broadcasts available to U.S. consumers and demand for satellite radio may be relatively elastic. The merged firm will operate at higher capacity and may be able to reduce costs through economies of scale and perhaps learning-by-doing, which will benefit U.S. consumers. All Blu-Rays can be produced at a constant marginal cost of $5 per disk, and Superhero Studios is releasing the Blu-Rays for its last two major films. The Blu-Ray for Obscure-Man is priced at $20 per disk, and the Blu-Ray for Team-Up Flick 17: The Final Chapter, Part 1 is priced at $30 per disk. What are the price elasticities of demand for these two movies? - Correct Answers: -1.33 and -1.2, respectively Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking? - Correct Answers: 5400 Under perfect price discrimination, consumer surplus: - Correct Answers: equals 0 Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users? - Correct Answers: -1.5 Loud music from a neighbor's party is what kind of externality ? - Correct Answers: a positive externality if you like the music, and a negative externality if you don't. Given that MEC(q) = 2q2, what can be inferred about the total cost of pollution as output increases? (Choose the best answer) - Correct Answers: The total cost of pollution is growing at an increasing rate. When new technologies make cleaner production possible, - Correct Answers: the price of transferable permits falls. A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plastics, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward? - Correct Answers: Optimal price increases, optimal quantity decreases. When firms participate in group health insurance for all employees, it: - Correct Answers: may lower rates for all people to the extent that it keeps healthy people in the pool. The problem of adverse selection in insurance results in a situation in which: - Correct Answers: unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market. Suppose the private marginal cost of pumping water from an aquifer remains constant as the quantity of water pumped increases, and the marginal social cost is upward sloping. If the demand for water shifts to the right as population increases, then the amount of water pumped based only on private costs ________ and the social cost of the common property resource ________. - Correct Answers: increases; increases It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result. Factory Fisherman No filter or treatment plant $10,000 $2,000 Filter; no treatment plant $6,000 $10,000 No filter; treatment plant $10,000 $4,000 Filter; treatment plant $6,000 $6,000 - Correct Answers: the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining. Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to ________ the moral hazard problem associated with building private homes in risky areas. - Correct Answers: mitigate Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance, - Correct Answers: she is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is. The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because: - Correct Answers: firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. When there are externalities, economic efficiency can be achieved without government intervention - Correct Answers: when the externality affects only a few parties and property rights are well defined. Which of the following is NOT a public good? - Correct Answers: Books in a public library Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If you have a right to live in peace and quiet, how can you achieve the efficient outcome? - Correct Answers: He pays you some value between $300 and $400 to allow his home business. The provision of an education in public school is: - Correct Answers: exclusive and rival. A carbon tax is one policy proposal for addressing numerous health and environmental externalities. Which is not true? - Correct Answers: If the carbon tax is set too low it could lead to increased environmental damage.