Principles of Microeconomics CLEP

In a market economy, economic activity is guided by

prices.

Comparative advantage is based on

opportunity costs.

Which of the following would NOT be a determinant of demand?

The prices of the inputs used to produce the good

Suppose you like banana cream pie made with vanilla pudding. Although all other factors are constant, you notice that the price of bananas has gone up. How would your demand for vanilla pudding be affected by the price of bananas?

My demand would decrease.

If a decrease in income increases the demand for a good, then the good is

an inferior good.

What will occur in the rice market if buyers are expecting higher prices in the near future?

The demand for rice will increase.

Suppose you make gold jewelry. If the price of gold falls, we would expect you to

produce more jewelry than before at each possible price.

Suppose that the incomes of buyers in a particular market for a normal good declines while a reduction in input prices occurs. What would we expect to occur in this market?

equilibrium price would decrease, impact on amount of goods sold would be ambiguous.

Less demand paired with a larger supply would necessarily result in

a lower equilibrium price.

The legal maximum price at which a good can be sold is a

price ceiling.

Rent control is

example of price ceiling.

The rate at which a consumer is willing to exchange one good for another, and at which a constant level of satisfaction is maintained, is called the

marginal rate of substitution.

The amount of a good an individual has

affects the rate at which the consumer is willing to trade.

Utility measures

the satisfaction a consumer receives from consuming a bundle of goods.

The combination of two goods a consumer chooses depends on

the consumer's budget constraint and preferences.

When the price of a commodity rises, we can expect

marginal utility of the last unit purchased to rise.

A bottle of wine costs $8, and a quiche costs $5. At Robert's present levels of consumption, he spends all of his income and receives marginal utility of $10 from the last bottle of wine and marginal utility of $4 from the last quiche. To maximize his total utility, Robert should

buy more wine and less quiche.

If the marginal utility to Juan of sleeping an extra hour (from 8 a.m. to 9 a.m.) is negative,

Juan should get up at 8 a.m.

Tom is buying a quantity of wheat at which the marginal utility (in dollars) exceeds price. He should

increase wheat consumption, thus lowering MU to the level at which MU = P.

Chocolate chip ice cream would tend to have very elastic demand because

other flavors of ice cream are almost perfect substitutes.

Profit is defined as

total revenue minus total cost.

XYZ Corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold were sold for a price of $95. The total revenue of the XYZ Corporation is

$26,125. Total revenue is 275 units times $95, which equals $26,125.

An important implicit cost incurred by almost all businesses is the

opportunity cost of financial capital that has been invested in the business.

Which of the following costs does NOT vary with the amount of a firm's output?

Total fixed costs

If a firm produces nothing, which of the following costs will be zero?

Variable cost

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,

the size of the factory is fixed.

When marginal cost exceeds average total cost,

average total cost is rising.

In the long run,

all inputs are considered to be variable.

Economies of scale occur when

long-run average total costs fall as output increases.

Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time to instruct them if he is also to maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.

What is the total opportunity cost Farmer Tony incurred for his spring day in the field planting wheat?

$380. Opportunity cost is equal to the implicit cost ($250) plus the explicit cost ($130) or $380.

Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.

Tony's accounting profit equals

$170. Accounting profit equals total revenue minus explicit costs or 170

Tony is a wheat farmer but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.

Tony's economic profit equals

$-80. Economic profit is total revenue minus opportunity costs (explicit costs and implicit costs) or $-80.

The marginal product of labor is equal to the

increase in output obtained from a one-unit increase in labor.

In a perfectly competitive market, the actions of any single buyer or seller will

have a negligible impact on the market price.

The supply curve of a price taker firm in the short run is

the portion of the firm's marginal cost curve that lies above average variable cost curve.

A firm in a perfectly competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1,000 door knobs. After the increase in output, its average revenue will

equal $10.

Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true?

Meatball prices will exceed marginal cost.

A fundamental source of monopoly market power arises from

barriers to entry.

When a firm operates under conditions of a monopoly, its price is

constrained by demand.

A profit-maximizing monopolist will produce the level of output at which

marginal revenue is equal to marginal cost.

What is the monopoly's profit under the following conditions? The profit-maximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. Average cost for 10 units of output is $6.

$100. Total revenue is $160, and total cost is $60. Therefore, profit is equal to $100.

The economic inefficiency of a monopolist can be measured by

the deadweight loss.

Monopolistic competition differs from perfect competition because in monopolistically competitive markets,

each of the sellers offers a somewhat different product.

When firms are encouraged to enter monopolistically competitive markets,

some firms in the market must be making economic profits.

The deadweight loss associated with a monopolistically competitive market is a result of

pricing above marginal cost.

As a group, oligopolists would always be better off if they would act collectively

as a single monopolist.

A group of firms that are acting in unison to maximize collective profits is called a

cartel.

Labor markets are different from most other markets because labor demand is

derived.

The majority of income in the United States comes from

wages and fringe benefits.

To maximize profit, a competitive firm hires workers until the point where

value of the marginal product curve and the wage curves intersect.

A key determinant of labor productivity is

the amount of human capital workers acquire through education and training.

When externalities exist, buyers and sellers

neglect the external effects of their actions, and the market equilibrium is not efficient.

The impact of one person's actions on the well-being of a bystander is called

an externality.

Markets are often inefficient when negative production externalities are present because

social costs exceed private costs at the private market solution.

Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. If this market is not required to internalize this externality,

the market equilibrium would not be the socially optimal quantity.

Goods that are nonexcludable and nonrival are

public goods.

Competitive firms that maximize profit will hire workers until the value of the marginal product

equals the wage.

A lighthouse is typically considered an example of a public good because

all passing ships are able to enjoy the benefits of the lighthouse without paying.

The poverty line reflects an annual income equal to approximately

three times the cost of providing an adequate diet.

In economics, the opportunity cost of an item or entity is

what you sacrifice to obtain it.

A good is NOT scarce in a society if

all members of a society can have all they want of it.

Economics is defined as the study of

how society manages its scarce resources.

Efficiency means that a

society is getting the most it can from its scarce resources.

One advantage market economies have over central planning is that market economies

are more efficient.

The opportunity cost of an item is

what you forgo to get that item.

Sally tells you that she thinks the price of her favorite stationery will increase in the near future. She will probably respond by

increasing her current demand for the stationery.

What is the law of demand?

When the price of a good falls, buyers respond by purchasing more, all else remaining the same.

Suppose that John receives a pay increase. We would expect

John's demand for inferior goods to decrease.

A dress manufacturer is expecting higher prices for dresses in the near future. We would expect

the dress manufacturer to supply fewer dresses now.

Wheat is the main ingredient in the production of flour. If the price of wheat increases, all else equal, we would expect

the supply of flour to decrease.

Suppose that the number of buyers in a market increases and a technological advancement occurs simultaneously. What would we expect to happen in the market?

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

Which of the following would cause both the equilibrium price and equilibrium quantity of number two grade potatoes (an inferior good) to increase?

A decrease in consumer income

Economists generally believe that rent control is

a highly inefficient way to help the poor raise their standard of living.

The earned income tax credit is an example of

a wage subsidy.

An optimizing consumer will select a consumption bundle in which utility is maximized

subject to constraints imposed by their budget.

Optimizing consumers will select a consumption bundle in which their

marginal rate of substitution is equal to the relative price ratio.

When the price of a good increases, ceteris paribus, consumers perceive

a loss in well-being since they can no longer purchase the same bundle that they had previously.

Elaine values the utility of her first cup of coffee at $1; a second cup, $0.75; and a third cup, $0.50. If Elaine drinks three cups of coffee for breakfast, her total utility is equal to

$2.25.

Fred has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends writing, he can earn $75.

If Fred decides to spend 80 hours a week playing volleyball on the beach and the rest of his time writing, how much income will he have available to spend on consumption goods?

$2,400. Fred spends 32 hours writing times $75 per hour for a total of $2,400.

Fred has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends writing, he can earn $75.

What is the implicit price that Fred pays for the satisfaction derived from playing an hour of volleyball?

$75

For most goods and most people, marginal utility probably

declines as consumption increases.

A consumer possesses five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will

rise to $2.25.

Economists compute the price elasticity of demand as

the percentage change in the quantity demanded divided by the percentage change in price.

Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. If all else is constant, Joan's income elasticity of demand for hamburger is

negative, so Joan considers hamburger to be an inferior good.

Economic profit is equal to

total revenue minus the opportunity cost of producing goods and services.

When marginal cost is less than average total cost,

average total cost is falling.

Diseconomies of scale occur when

long-run average total costs rise as output increases.

A downward-sloping portion of a long-run average total cost curve is the result of

economies of scale.

The marginal product of labor (where Δ denotes "change") can be defined as

Δoutput / Δlabor.

A diminishing marginal product of labor occurs when adding another unit of labor

increases output but not by as large a margin as previous units of labor.

When a firm has little ability to influence market prices, it is said to be in what kind of a market?

A perfectly competitive market

In perfectly competitive price-taking markets, firms

can sell all of its output at the market price.

In the midst of a price war, a soft drink company determines that the price of a six-pack is $0.69 and expects that price to hold for up to three months. If the firm temporarily shuts down for three months, it could avoid $0.84 per six-pack in costs. Economic theory suggests that the firm should

shut down but only temporarily, if it expects the price to be sufficiently high after three months.

If the expansion of output in an industry leads to unchanged resource prices, the industry is most likely to be a(n)

constant cost industry.

Which one of the following factors is NOT an explanation of the positive relationship between market price and quantity supplied?

For most firms, unit costs decrease as output increases in the long run.

A monopoly's marginal cost will likely

be less than average variable cost.

A monopoly that arises from exclusive ownership of a key resource results in

a price that exceeds marginal cost of production.

The defining characteristic of a natural monopoly is its

economies of scale over the relevant range of output.

If a monopolist faces a downward-sloping market demand curve, its

marginal revenue is always less than the price of the units it sells.

Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized mutually beneficial trades are

a deadweight loss to society.