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95 Cards in this Set
- Front
- Back
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A supply curve reveals
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The quantity of output that producers are willing to produce and sell at each possible market price
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Coffee and cream
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are complements
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Assume that steak and potatoes are complements. When the price of steak goes up, the demand curve for potatoes:
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shifts to the left
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which of the following will not cause a shift in the supply of gasoline
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a decrease in the price of gasoline
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which of the following would cause a rightward shift in the demand curve for gasoline?
1. a large increase in the price of public transportation 2. a large decrease in the price of automobiles 3. a large reduction in the costs of producing gasoline |
1 and 2
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To protect the cod fishery off the northeast coast of the U.S., the federal gov't may limit the amt of fish that each boat can catch in the fishery. the result of this public policy is to:
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shift the cod supply curve to the left
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assume that the current market price is below the market clearing level. we would expect:
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upward pressure on the current market price
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if the actual price were below the equilibrium price in the market for bread a:
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shortage would develop, which market forces would eliminate over time
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The demand for books is Qd=120-P
The supply of books is Qs=5P |
Scenario 2.1
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Refer to scenario 2.1 What is the equilibrium price of books?
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20
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Refer to Scenario 2.1 What is the equilibrium quantity of books sold?
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100
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Refer to Scenario 2.1 If P=$15, which of the following is true?
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There is a shortage equal to 30
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Refer to Scenario 2.1 If P=$15, which of the following is true?
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Quantity supplied is less than quantity demanded
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Refer to Scenario 2.1 If P=$15, which of the following is true?
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There is a surplus equal to 30
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Refer to Scenario 2.1 If P=$15, which of the following is true?
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Quantity supplied is greater than quantity demanded
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Suppose the equilibrium price of milk is $3 per gallon but the federal gov't sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the gov't:
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Buys the excess supply of milk and removes it from the market.
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Suppose Congress passes a law that states the price of gasoline may not exceed $6 per gallon (but may be lower). If the current price of gasoline is less than $6, what impact does this law have on the current price and quantity of gasoline in the US market?
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The law currently has no impact, and the market clears at the equilibrium price
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The inverse demand curve for product X is given by:
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Px=25-.005Q+0.15Py where Px represents price in dollars per unit, Q represents rate of sales in pounds per week, and Py represents selling price of another product Y in dollars per unit. The inverse supply curve of product X is given by Px=5+.004Q
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Determine the equilibrium price and sales of X. Let Py=$10.
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Equate supply to demand to calculate Q. 25-.005Q+.15(10)=5+.004Q
21.5=.009Q Q=2388.9 units per week At Q=2388.9, P=25-.005(2388.9)+.15(10) P=$14.56 per unit |
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Determine whether X and Y are substitutes or complements.
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Since we can solve for quantity demanded as a function of prices,
Q=(25+.15Py-Px)/(.005) we see that there is a direct, positive relationship between Q and Py. An increase in the price of good Y generates an increase in the quantity demanded for good X at any value of Px, which implies that goods Y and X are substitutes. |
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From 1970 to 2010, the real price of eggs decreased and the total annual consumption of eggs decreased.Which of the following would cause an unambiguous decrease in the real price of eggs and an unambiguous decrease in the quantity of eggs consumed?
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none of the above (not a right supply, right demand)(not a left supply, right demand)(not a left supply, left demand)
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Whcih of the following will cause the price of beer to rise?
-a shift to the right in the demand curve for beer -a shift to the left in the supply curve of beer |
Both A and B
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In recent years, the world demand curve for copper shifted rightward due to continued economic growth in China and other emerging economies. Also, the costs of extracting the copper increased due to higher energy prices. As a result, we observed:
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Higher equilibrium copper prices and either higher or lower quantities
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By 2020, automobile market analysts expect that the demand for electric autos will increase as buyers become more familiar with the technology. However, the costs of producing electric autos may increase because of higher costs for inputs (e.g. rare earth elements), or they may decrease as the manufacturers learn better assembly methods (i.e., learning by doing). What is the expected impact of these changes on the equilibrium price and quantity for electric autos?
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We cannot form any unambiguous expectations for either price of quantity
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The price elasticity of demand for a demand curve that has a zero slope is:
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Infinity
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Which of the following represents the price elasticity of demand?
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(change in quantity)/(change in price)(multiplied by)(price)/(quantity)
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The cross-price elasticity between a pair of complementary goods will be
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Negative
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Along any downward sloping straight-line demand curve:
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the price elasticity varies, but the slope is constant
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Consider the demand curve of the form Q=a-bP. If a is positive real number, and b=0, then demand is:
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completely inelastic
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The cross-price elasticity of demand for peanut butter with respect to the price of jelly is -0.3. If we expect the price of jelly to decline by 15%, what is the expected change in the quantity demanded for peanut butter?
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+4.5%
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Suppose the market price for wheat changes, and we move from point A to point B on the wheat demand curve. If the price elasticity of wheat demand was -0.3 at point A and -0.4 at point B, what is a plausible value for the arc elasticity of demand for wheat between points A and B
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-0.35
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The demand for a bushel of wheat in 1981 was given by the equation Qd=3550-266P. At a price of $3.46 per bushel, what is the price elasticity of demand? If the price of wheat falls to $3.27 per bushel, what happens to the revenue generated from the sale of wheat?
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At a price of $3.46 per bushel, the quantity demanded for wheat is 2629.64 bushels of wheat. At a price of $3.27 per bushel, the quantity demanded for wheat is 2680.18. The price elasticity of demand is $3.46 per bushel, the revenue generated from the sale of wheat is $12,558.554. At a price of $3.27 per bushel, the revenue generated from the sale of wheat is $87641886. Wheat revenue drops by $3794.366 when price decreases from $3.46 t $3.27 per bushel, which is expected when price declines along the inelastic portion of demand curve.
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The month supply of desktop personal computers is given by the equation Qs=15,000+43.75P. At a price of $800, the quantity supplied is 50,000. The price elasticity of supply is
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Es=(P)/(Q)(multiplied by)(change in quantity)/(change in price)=(800)/(50,000)(multiplied by)(43.75)=0.7
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Due to capacity constraints, the price elasticity of supply for most products is:
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Greater in the long run than the short run
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This year a new oil field with substantial reserves has been discovered. Such discoveries are not made every year. Therefore an increase in the demand for oil will:
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Increase the long-run price of oil less than the short-run price of oil
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Consider a supply curve of the form:Q=c+dP. If d equals zero, then supply is:
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Completely inelastic
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A simple linear demand function may be stated as Q=a-bP+cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for b, we can use observed values for Q and P and then set -b(P/Q) equal to the:
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Price elasticity of demand
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Suppose that the long-run world demand and supply elasticities of crude oil are -.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the linear long-run demand and supply equations. Next, suppose the long-run supply curve you derived above consists of competitive supply and OPEC supply. If the long-run competitive supply equation is: Sc=7.78+0.29P, what must be OPEC's level of production in this long-run equilibrium?
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If the demand curve is linear, it is in the form of Qd=a+bP. Also, we know that E=b(P/Q) <->b=E(Q/P)=-0.906(16.88/30)=-0.510. Rearranging the linear expression for demand allows us to solve for c as follows: c=Qd-bP-->a=16.88+0.510(30)=32.180. We may now write the linear expression for demand as Qd=32.18-0.510P. If the supply curve is linear, it is in the form of Qs=c+dP. Also, we know that E=d(P/Q)<->d=E(Q/P)=0.515(16.88/30)=/290. Rearranging the linear expression for demand allows us to solve for c as follows: c=Qs-dP->c=16.88-0.290(30)=8.18. We may now write the linear expression for supply as Qs=8.18+0.290P. OPEC's supply is the difference between the world supply and competitive supply at $30. We know that world supply at $30 is 16.88. Competitive supply at $30 is 7.78+0.29(30)=16.48. This implies that OPEC's supply is 0.4 billion barrels per year at $30 in this long-run equilibrium.
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The theory of consumer behavior is based on certain assumptions includes:
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both transitivity and completeness
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A consumer prefers market basket A to market basket B, and prefers market basket B to market basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion is:
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Transitivity
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An upward sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior?
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more is preferred to less
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If indifference curves cross, then:
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the assumption of transitivity is violated
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Use the following two statements to answer this question:
1. According to the three basic assumption regarding people's preferences, a person will always prefer to earn a living through honest work rather than a life of crime. 2. When we say that preferences are complete, we mean that if a consumer prefers market basket A to market basket B, and prefers market basket B to market basket C, then the consumer prefers market basket A to market basket C |
Both 1 and 2 are false
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Use the following two statements to answer this question:
1. Consumer theory can determine whether giving an individual a more preferred basket of goods doubles her overall level of satisfaction, less than doubles her satisfaction, or more than doubles her satisfaction 2. There is not much empirical evidence to support that higher incomes result in higher levels of satisfaction |
Both 1 and 2 are false
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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?
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8 units
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Each of the following consumers exhibit behavior that violates one of the basic assumptions of consumer preferences. Identify the assumption that is violated for each individual.
Art says that he can watch 2 movies a week but couldn't be paid to watch another movie after that. Alex says that he prefers going to a movie over hiking. He also indicates that he prefers hiking to swimming. Alex then states that he would rather go swimming than go to a movie. Alicia says that she prefers hiking to watching a movie but can't determine her preferences for swimming. |
Art violates the assumption that consumers desier more of a good to less. Alex's preferences violate transitivity. Alicia violates the completeness assumption.
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In the theory of consumer behavior, certain axioms about about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this?
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Transitivity and more is better together imply that indifference curves cannot cross. If two indifference curves did cross, then by choosing three points, A, B,and C in the following way. A lies on the first indifference curve, B is the intersection point, C lies on the second curve, and A lies to the left and below point C. It is easily shown that the two axioms cannot both be satisfied. A is at least preferred as B, and B is at least as preferred as C. By transitivity A is at least as preferred as C, contradicting more is better.
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The endpoints (horizontal and vertical intercepts) of the budget line:
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represent the quantity of each good that could be purchased if all of the budget were allocated to that good
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To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?
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Parallel outward (rightward) shift
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The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized the utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:
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2 lemonades for each popcorn
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Bob views apple and oranges as perfect substitutes in his consumption, and MRS=1 for all combination of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods?
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15 pounds of apples and no oranges
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The local farmer's market sells corn for 20 cents an ear. At this price, Sam buys 6 ears each Thursday. What would happen to Sam's consumption of corn if the market offered corn at 20 cents for the first 6 ears, but 10 cents an ear for each additional ear?
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Sam's budget constraint would now exhibit a "kink" at 6 ears of due to the change in the price per ear for high quantity purchases.
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Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each semester that can only be used to buy books. Diagram Bobby's budget constraint when he has the gift certificate in addition to his $500 income. Is Bobby better-off with the gift certificates?
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Without the gift certificiate, Bobby's budget constraint is indicated by the line segment from 10 books and 0 pizza to 0 books and 50 pizzas (labled BC1). With the gift certificate that can only be used for book purchases, Bobby still cannot afford anymore pizza. Since the price of books and pizza hasn't changed, the slope of his new budget constraint is the same as the slope of the old budget constraitn. The new budget constraint is drawn above as BC2. Note that with the gift certificate, Bobby has an expended opportunity set and is guaranteed more of both goods no matter what his original consumption choice on BC1 was. This implies that Bobby is strictly better off with the gift certificate
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The principle of revealed preference would say that if Xavier chooses market basket A over market basket B then:
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If A is more expensive than B, then Xavier must prefer A over B
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Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?
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Px/Py=money income
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If Px=Py, then when the consumer maximizes utility
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MU(x) must equal MU(y)
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You view tea and scones as perfect complements and the corners of the indifference curves lie on the 45-degree line. Tea is plotted along the horizontal axis of the indifference map. Also, at your current point of consumption, you have not fully exhausted the available budget and you consume more tea than scones. Based on this information, which of the following statements is NOT true?
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The marginal utility of scones equals zero for your current consumption bundle
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Define the marginal rate of substitution. Using this concept, explain why market basket A is not utility maximizing while market basket B is utility maximizing.
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The MRS is the magnitude of the slope of an indifference curve. It is the maximum amount of one good (clothing) that a consumer is willing to give up to get another unit of another good (food). In an indifference curve diagram, MRS measures the subjective value of the good on the horizontal axis in terms of the good on the vertical axis. In this example, if the slope of the indifference curve through A were, say, 5, the consumer would be willing to exchange 1 unit of food for 5 units of clothing. The slope of the budget line, on the other hand, measures the market value of the good on the horizontal axis in terms of the good on the vertical axis. In this example, the indifference curve through A is steeper than the budget line, so the consumer's value of good is greater than the market price. He would be better off if he bought more food.
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The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that
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Goods A and B are complemtns
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The income-consumption curve
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illustratest the utility-maximizing combinations of goods associated with every income level
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If an Engel curve has a positive slope
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The good on the horizontal axis is normal
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Jon's income-consumption curve is a straight line from the origin with a positive slope. Now suppose that Jon's preferences change such that his income-consumption curve remains a straight line but rotates 15 degrees clockwise. Jon's demand curve for the good on the horizontal axis.
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Will shift right
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The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect
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Substitution
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A Giffen good
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is the special subset of inferior goods in which the income effect dominates the substitution effect.
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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
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less, less
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As a group, U.S. consumers have no income response for their consumption that results from a price increase is entirely composed of the substitution effect?
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Yes, the income effect associated with a price change is zero
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When a good is price inelastic, consumer expenditures on the good
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increase when price increases
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When a good has a unitary price elasticity, consumer expenditures for the good
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do not change when the price of the good decreases
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which of the following is true about the demand for gasoline
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it is probably more price elastic in the long run because it is easier to find substitutes for gasoline in the long run
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Suppose the aggregate demand for housing in the U.S. includes a substantial speculative component. What happen of the expectations of speculators change, and they believe housing prices will not increase in the future?
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The aggregate demand curve shifts leftward, and the equilibrium market price declines
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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?
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Consumer expenditures on gasoline increase over the short run and decline over the long run
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The demand curve for tickets to the George Winston concert (with special guest star Kenny G) is given as follows:Q=200-0.1P
At a price of $30, what is the consumer surplus from concert tickets? |
$194045
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The aggregate demand for good X is Q=20-P, and the market price is P=$8. What is the maximum amount that consumers are willing to pay for the quantity demanded at this price/
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$168
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When the snob effect exists, a change in price is likely to
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Change total revenue less than if there were no network externalities
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Which of the following goods may have demand that is potentially affected by the bandwagon effect
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All of the above: satellite radio, cellular telephones, HD televisions, electronic book readers
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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
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a production function
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use the following two statements to answer this question:
1. Production functions describe what is technically feasible when the firm operates efficiently 2. The production function shows the least cost method of producing a given level of output |
1. is true and 2. is false
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A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K'=L'=10 to produce Q' units of corn where Q'<F(10,10) is said to be
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technically feasible and inefficient
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Joe owns a small coffee shop, and his production function is q=3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function?
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Q=100KL0.5
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Writing total output as Q, change in output as (triangle)Q, total labor employment as L, and change in labor employment as (triangle)L, the marginal product of labor can be written algeraically as
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(triangle)Q/(triangle)L
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the slope of the total product curve is
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the marginal product
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When the average product is decreasing, marginal product
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is less than average product
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Technological improvement
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can hide the presence of diminishing returns; can be shown as a shift in the total product curve; allows more output to be produced with the same combination of inputs
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the law of diminishing returns
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the marginal product of an input will eventually decline
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the Malthusian dilemma relates to marginal product in that
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because of diminishing marginal product, the amount of food produced by each additional member of the population decreases
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Marginal product crosses the horizontal axis (is equal to zero) at the point where
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total product is maximized
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One of the factors contributing to the fact that labor productivity is higher in the U.S. than in the People's Republic of China is
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the higher capital/labor ratio in the U.S.
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Consider the following statements when answering this question:
1. Suppose a semiconductor chip factory uses a technology where the average product of labor is constant for all employment levels. This technology obeys the law of diminishing returns. 2. Suppose a semiconductor chip factory uses a technology where the marginal product of labor rises, then is constant and finally falls as employment increases. The technology obeys the law of diminishing returns |
1 is false, and 2 is true.
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Consider the following statements when answering this question:
1. Whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve. 2. If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands. |
1 is false, and 1 is true
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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 hire her hour (labor). What is the average product of labor?
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AP=5K
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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 marginal product of labor?
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MP=5K
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Use the following two statements to answer the question:
1. Isoquants cannot cross one another 2. An isoquant that is twice the distance from the origin represents twice the level of output |
1 is true and 2 is false
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Use the following two statements to answer this question:
1. If the marginal products of labor is zero, the total product of labor is at its maximum. 2. If the marginal product of labor is at its maximum, the average product of labor is falling. |
1 is true, and 2 is false
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An examination of the production isoquants in the diagram below reveals that:
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capital and labor will be used in fixed proportions
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A straight-line isoquant
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would indicate that capital and labor are perfect substitutes in production
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