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1 1 of 14 5/1/2014 4:56 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods that yield the same utility. Reflects the price of one good divided by the price of another good. The slope of the budget constraint, when a consumer has reached optimal consumption of two goods, is equal to the Marginal rate of substitution. Cross-price elasticity of the two goods. Total utility for the two goods. Marginal rate of indifference. Which of the following is used to depict all combinations of goods that are affordable with a given income and given prices? An indifference curve. An indifference map. A demand curve. A budget constraint. Rosa is willing to pay $200 for the iphone, but the actual price is $400. This means Rosa will enjoy a consumer surplus of $200 if she buys the iphone. Rosa will not enjoy any consumer surplus from purchasing the iphone. Rosa will buy this product. The iphone is overpriced. The of the demand curve corresponds to the idea that the marginal utility for the first few goods is.

2 2 of 14 5/1/2014 4:56 PM top; lower bottom; lower top; higher bottom; higher The law of diminishing marginal utility suggests that People are willing to buy additional quantities of a good only if its price falls. People will substitute lower-priced goods for more expensive goods, ceteris paribus. Price and quantity demanded are directly related. As marginal utility decreases, the willingness to pay increases. Refer to Figure The total consumer surplus in this market is equal to $950. $900. $850. $800.

3 3 of 14 5/1/2014 4:56 PM If a successful advertising campaign increases brand loyalty, the Supply of the advertised good will become less elastic. Demand for the advertised good will become less elastic. Supply of substitutes for the advertised good will increase. Total level of consumption will decrease. Complete Table 19.2 below: In Table 19.2, the total utility when two units are consumed is The four determinants of demand that are held constant when we consider a movement along a demand curve include all of the following except Price. Income. Tastes. Availability and price of substitute goods. Sociopsychiatric explanations of consumer behavior include the Desire for ego and status. Level of income.

4 4 of 14 5/1/2014 4:56 PM Level of wealth. Prices of other goods. Total utility is The additional utility from consuming one more unit of a good. The sum of the marginal utilities from the consumption of good. A function that always falls as a buyer enjoys more units of a good. How much utility a seller gets from producing a good. The point where the budget constraint and an indifference curve are tangent Represents maximum total revenue. Indicates the optimal level of production. Represents the optimal consumption point. Indicates profit maximization. Which of the following is most likely an inferior good? Rolex watches. Nike running shoes. Generic canned food. A custom-built mansion. Which of the following products will have more inelastic demand? New cars. Fresh flowers. Fast food. Medicines.

5 5 of 14 5/1/2014 4:56 PM In Figure 20.1, at what price is the elasticity of demand unitary? $40. $100. $160. $200. Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to Raise his price to increase revenues. Keep his price the same to maximize revenues. Lower his price to increase revenue. Offer more high-priced products. If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent, New cars are a normal good, and the income elasticity is +.5. New cars are an inferior good, and the income elasticity is +2.0.

6 6 of 14 5/1/2014 4:56 PM New cars are a normal good, and the income elasticity is New cars are an inferior good, and the income elasticity is If demand is perfectly elastic, The demand curve is vertical. The demand curve is very steep. The demand curve is horizontal. The demand curve has a zero slope. Maximum total revenue occurs when Total revenue is The absolute value of the price elasticity of demand is 1.0. Price multiplied by quantity is 1.0. The absolute value of the price elasticity of demand is 100. Technically the elasticity number is negative because When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number. When price falls quantity demanded will fall, but for simplicity economists take the absolute value of the elasticity number. When price rises quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number. The demand curve is always upward-sloping. When demand is price-inelastic, ceteris paribus, an increase in Price leads to lower total revenue. Total revenue means quantity rises. Total revenue indicates a reduction in price. Price leads to greater total revenue. When demand is inelastic

7 7 of 14 5/1/2014 4:56 PM The percentage change in price is greater than the percentage change in quantity demanded. Buyers are very sensitive to changes in price. The product in demand has many substitute goods. The percentage change in quantity demanded is greater than the percentage change in price. What is the marginal cost of the 120 th unit of output in Figure 21.2? $1.20. $ $ $ When the size of a factory (and all its associated inputs) doubles and, as a result, output more than doubles, The law of diminishing returns must not apply in the smaller factory.

8 8 of 14 5/1/2014 4:56 PM Economies of scale must exist. The short-run ATC curve must be declining. Marginal costs must be declining. If a fifth unit of labor was added to Table 21.1, its MPP would most likely be Zero. 7. Less than 7. Greater than 7. Complete Table 21.3 below: What is the marginal physical product of the second unit of labor in Table 21.3?

9 9 of 14 5/1/2014 4:56 PM Which of the following costs do not change when output changes in the short run? Average variable costs. Variable costs. Average fixed costs. Fixed costs. The marginal cost curve intersects the minimum of the curve representing TC. ATC. AFC. MPP. Average total cost is equal to Total cost divided by fixed cost. Total cost multiplied by quantity. The sum of average variable cost and marginal cost. Total cost divided by quantity produced. Average total cost is important to a business because It tells the firm what the profit per unit produced is. It always declines as more output is produced. It tells the firm what its fixed costs are. It is an indicator of the production function.

10 10 of 14 5/1/2014 4:56 PM Refer to Figure The vertical difference between the total cost curve and the total fixed cost curve represents Total variable costs. Total marginal costs. Average fixed costs. Average variable costs. Normal profit implies that Economic profit must be positive. Economic profit must be negative. The factors employed are earning as much as they could in the best alternative employment. Firms will expand their scale of production. If a perfectly competitive firm wanted to maximize its total revenues, it would produce The output where MC equals price. As much as it is capable of producing.

11 11 of 14 5/1/2014 4:56 PM The output where the ATC curve is at a minimum. The output where the marginal cost curve is at a minimum. A perfectly competitive firm will maximize profits by choosing an output level where Price is greater than marginal cost. Price equals marginal cost. Price equals total cost. Price is greater than total cost. Which of the following is the best explanation for why individuals own small businesses? Because they cannot earn a living working for corporate America. To provide a product consumers want. The expectation of profit. To gain experience for their next job. For the perfectly competitive firm, the marginal revenue is always Increasing. Constant. Equal to average total cost. Decreasing. Which of the following affects the ATC curve for a firm but not the MC curve? A change in property taxes. A change in payroll taxes. A change in profit taxes. A change in the price of the good. An investment decision involves choosing A rate of output and is a short-run decision. A rate of output and is a long-run decision.

12 12 of 14 5/1/2014 4:56 PM The amount of plants and equipment and is a short-run decision. The amount of plants and equipment and is a long-run decision. If price is greater than marginal cost, a perfectly competitive firm should increase output because Marginal costs are increasing. Additional units of output will add to the firm's profits (or reduce losses). The price it receives for its product is increasing. Total revenues would increase. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above? $450,000. $120,000. $90,000. $360,000.

13 13 of 14 5/1/2014 4:56 PM Refer to Figure 22.3 At quantity level B The company is maximizing profit. Marginal cost is greater than marginal revenue, so it should cut production. The company is minimizing loss. Marginal revenue is greater than marginal cost, so the firm should expand production. In order to sell additional units of their products, competitive firms must Increase their advertising. Lower their price. Cut their expenses. Increase output.

14 14 of 14 5/1/2014 4:56 PM Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, total profits are maximized at an output of Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? $450,000. $160,000. $90,000. $360,000.

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