____ 1. Total utility always decreases when additional amounts of a commodity are consumed. ____ 2. Marginal utility can fall even as total utility from the consumption of a good is rising. ____ 3. Total utility increases if one more unit of a product is purchased and marginal utility is positive. ____ 4. Total utility decreases when diminishing marginal utility is present. ____ 5. An optimal purchase is one that maximizes total utility. ____ 6. The law of diminishing marginal utility guarantees that demand curves will have positive slopes. ____ 7. Rolls Royce may actually sell fewer cars at lower prices due to the "snob effect." ____ 8. The slope of the budget line is determined only by the prices of the commodities purchased. ____ 9. A decrease in the price of one good results in a parallel shift in the budget line. ____ 10. A change in the price of a good will shift the indifference curves. ____ 11. A line that is perfectly elastic has an elasticity of demand of zero. ____ 12. Perfectly inelastic demand curves are vertical. ____ 13. Perfectly elastic demand curves are vertical. ____ 14. A vertical demand curve has an elasticity of demand equal to zero. ____ 15. A straight-line demand curve has the same elasticity throughout its length. ____ 16. A unit-elastic demand curve will be concave toward the origin. ____ 17. A demand curve with an elasticity of 1.0 is said to be an elastic demand curve. ____ 18. Elasticity of demand is another way to measure slope. ____ 19. The elasticity of a straight-line demand curve is the same as its slope. ____ 20. Buyers' expenditures and sellers' revenues are always identical. ____ 21. Total expenditure equals price times elasticity. ____ 22. If demand is elastic, an increase in price will increase total revenue. ____ 23. If demand is inelastic, a drop in price will raise total expenditure. ____ 24. A rise in price will always result in an increase in the total amount consumers spend on a product. ____ 25. If a product constitutes a large portion of a consumer's income, demand will be more inelastic. ____ 26. Income elasticity of demand describes how change in income affects the quantity demanded of a good. ____ 27. Two goods are substitutes if a decrease in the price of one raises the quantity demanded of the other. ____ 28. The short run is that period during which there are no fixed commitments. ____ 29. The long run is a period long enough so that one of the firm's commitments ends. ____ 30. Fixed cost increases when output rises. ____ 31. In the long run, more costs become fixed. ____ 32. Total physical product is maximized if marginal physical product is zero. ____ 33. Marginal revenue product equals the marginal physical product multiplied by the quantity demanded. ____ 34. When marginal revenue product of an input is less than its price, the producers should use less of the input. ____ 35. Most firms have very little flexibility in their choice of input proportions. ____ 36. Input proportions are usually fixed by technological conditions alone. ____ 37. The marginal cost curve shows the per-unit cost associated with various levels of output. ____ 38. Economies of scale are also called increasing returns to scale. ____ 39. The law of diminishing marginal returns is the same as increasing returns to scale. ____ 40. Accounting profit is usually larger than economic profit. ____ 41. Accounting profit is usually smaller than economic profit. ____ 42. A firm that is earning zero economic profit should go out of business. ____ 43. Total revenue cannot be derived from the demand curve or a demand schedule. ____ 44. Marginal, average, and total figures are bound together. If any two are known, the third can be calculated. ____ 45. If marginal cost is less than average cost, average cost must fall when more units are produced. ____ 46. If marginal cost of an additional unit of output is greater than average cost, then average cost will rise. ____ 47. Total cost equals average cost multiplied by the quantity of output. ____ 48. Total profit is represented by the vertical distance between a total revenue curve and a total cost curve. ____ 49. If marginal profit is zero, then total profit is at a maximum. ____ 50. Profit is maximized at the output at which marginal revenue exceeds marginal cost by the greatest margin. Multiple Choice (25%)Identify the choice that best completes the statement or answers the question. ____ 51. Total utility can be thought of as the a. total satisfaction derived from a bundle of goods. b. minimum amount of money a consumer is willing to spend on a bundle of goods. c. additional satisfaction a consumer receives from the marginal unit of a good. d. willingness to pay for the marginal unit of a good. ____ 52. Modern economists measure how much utility Fred gets from a hot dog by a. asking Fred how many utils he gets from its consumption. b. examining the price of the hamburger Fred chose not to buy. c. asking Fred how much of some other good he would give up to get the hot dog. The "other good" can be any good except money. d. asking Fred how much of some other good he would give up to get the hot dog. The "other good" can be any good, including money. ____ 53. If a commodity is inexpensive and its total utility great, a. it is an inferior good. b. it is plentiful. c. its marginal utility is high. d. the ratio of price to marginal utility is very high. ____ 54. The theory of consumer choice is based on the hypothesis that each consumer wants to a. maximize her total utility. b. maximize her marginal utility. c. minimize the rate at which her marginal utility diminishes. d. minimize the percentage of her consumption diverted to inferior goods. ____ 55. The marginal utility of a unit of good X a. is always greater than the total utility of X. b. is always less than the average utility of X. c. generally depends on how much X the consumer already has. d. is always equal to the price of X. ____ 56. Total utility a. diminishes as the quantity consumed of a good increases. b. increases as long as more goods are acquired. c. increases as long as marginal utility increases. d. increases as long as marginal utility is positive. e. diminishes as consumption of some good rises. ____ 57. The law of diminishing marginal utility explains why a. most individual demand curves are straight lines. b. the consumer's optimal purchase is at the tangency of an indifference curve and the budget line. c. most individual demand curves slope downward. d. marginal utility falls when total utility falls. ____ 58. Marginal utility has a negative slope. This is because of the a. optimal purchase rule. b. law of increasing costs. c. law of diminishing marginal utility. d. marginal rate of substitution. ____ 59. Which of the following statements is correct? a. The "law" of diminishing marginal utility implies that demand curves slope upward and to the right. b. If the price of a good falls, the utility-maximizing consumer will assure that marginal utility rises. c. If the price of a good falls, the consumer will purchase more of the good in order to maximize total utility. d. MU and demand have different underlying consumer behavior assumptions. Figure 5-2 ____ 60. In Figure 5-2, consumer surplus is measured by the area a. ABC. b. OBCD. c. OACD. d. DCE. ____ 61. Market demand curves are found by a. vertically summing individual demand curves. b. horizontally summing individual demand curves. c. summing individual demand curves in a parallel fashion. d. adding the slopes of individual demand curves. ____ 62. If indifference curves and budget lines are used to analyze consumer choice, an inferior good will a. escape detection when income rises. b. be easily identified because the quantity purchased will fall as income rises. c. be easily identified because the quantity purchased will rise as income rises. d. be easily identified because it will change the slope of the budget line. e. escape detection because this model does not show that relationship. ____ 63. At $6 per steak, consumers are willing to buy two steaks. At a price of $2, consumers are willing to buy six steaks. The elasticity of the market demand curve between P = $6 and P = $2 (dropping all minus signs) is a. 0.33. b. 1. c. 2. d. 4. ____ 64. If the price of gasoline rises by 20 percent and consumption of gasoline falls 5 percent, a. demand is elastic. b. demand is unit-elastic. c. demand is inelastic. d. elasticity of demand cannot be calculated. Figure 6-3 ____ 65. In Figure 6-3(a), at any price above $6, quantity demanded a. falls to zero. b. becomes infinitely large. c. is equal to price. d. is equal to the elasticity of demand. ____ 66. In Figure 6-3(a), demand is a. perfectly elastic. b. perfectly inelastic. c. unit elastic. d. fixed at one particular quantity. ____ 67. In Figure 6-3(b), as price falls from $15 to $6, total expenditure a. falls. b. increases. c. remains constant. d. first falls and then increases. Figure 6-5 ____ 68. If the demand curve in Figure 6-5 is unit elastic, then total expenditure at A is ____ total expenditure at B. a. greater than b. less than c. equal to d. less elastic than ____ 69. In Figure 6-5, if price falls from point A to point B along the unit-elastic demand curve, a. total expenditure remains unchanged. b. total expenditure increases. c. total expenditure decreases. d. total expenditure first increases and then declines. ____ 70. A relatively large increase in the cost of electricity would likely a. result in a large increase in the use of gas for home use immediately. b. cause an immediate large decline in the use of electricity. c. increase the use of gas and decrease the use of electricity after a time lapse. d. cause an equal reduction in the use of electricity immediately. ____ 71. The demand for a new effective drug for the cure of AIDS would most likely be a. elastic. b. unit elastic. c. perfectly elastic. d. highly inelastic. ____ 72. Chicken and fish are substitutes. Therefore, the cross elasticity of demand between chicken and fish is a. negative. b. positive. c. zero. d. Any of the above is possible. ____ 73. If the cross elasticity of demand for potato chips and pretzels equals 1.5, a. potato chips and pretzels must both be luxury goods. b. either potato chips or pretzels must be a luxury good, and both may be luxury goods. c. potato chips and pretzels must be substitutes. d. potato chips and pretzels must be complements. ____ 74. If the demand for gasoline becomes more elastic over time, a. the demand curve will shift out. b. the demand curve will become flatter. c. other things being equal, the equilibrium price of gasoline must fall. d. other things being equal, the equilibrium quantity of gasoline must fall. ____ 75. In the long run, a. all of the firm's input quantities are variable. b. the firm can vary the quantities of some but not all inputs. c. managers become less efficient. d. the total cost of producing any given level of output is greater than or equal to the short-run total cost of producing that level of output. ____ 76. In the short run, a. all of the firm's input quantities, including plant size, become adjustable. b. firms are not constrained by past decisions. c. firms have relatively little opportunity to change production processes. d. all of the firm's current commitments come to an end. ____ 77. Some costs cannot be varied no matter how long the period in question. These are called a. overheads. b. total costs. c. fixed costs. d. variable costs. ____ 78. Which of the following observations is true? a. In the long run, more costs become variable. b. Fixed costs can be completely varied if the time period is sufficient. c. Fixed costs arise when some types of inputs can be bought only in big batches. d. Variable costs arise when inputs have a large productive capacity. ____ 79. In which case will the transition from short run to long run involve the shortest chronological time? a. a service that provides temporary secretaries to companies b. an automobile factory c. a farm d. an electric utility Table 7-1 Workers Toys 1 5 2 12 3 22 4 30 5 35 ____ 80. In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is a. 8. b. 7. c. 10. d. 5. ____ 81. In Table 7-1, the average physical product after five workers are hired is a. 5. b. 6. c. 7. d. 8. ____ 82. In Table 7-1, the marginal physical product begins to diminish with the addition of the a. second worker. b. third worker. c. fourth worker. d. Marginal returns never diminish in Table 7-1. John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3. Table 7-3 Pickers Oranges Picked 1 1,000 2 2,000 3 3,000 4 3,900 5 4,700 6 5,400 7 6,000 8 6,200 9 6,000 ____ 83. In Table 7-3, diminishing returns set in with picker a. 3. b. 4. c. 5. d. 6. e. 9. ____ 84. In Table 7-3, negative returns set in with picker a. 6. b. 7. c. 8. d. 9. e. There are no negative returns in this table. ____ 85. A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory's TC a. equals $15. b. equals $5,005. c. equals $15,000. d. cannot be determined from the information given. ____ 86. Where marginal cost is less than average cost, a. opportunity cost must have been excluded from the calculation of marginal cost. b. marginal cost must be falling. c. marginal cost must be rising. d. marginal cost may be rising, falling, or constant. ____ 87. Al's Donuts produces about 600 dozen doughnuts daily. If flour prices increase 20 percent a. only marginal cost will shift up. b. only marginal cost and average total cost will shift up. c. marginal cost, average variable cost, and average total cost will shift up. d. marginal cost, average total cost, average variable cost, and average fixed cost will shift up. ____ 88. Which of the following observations is true? a. TFC remains the same irrespective of units of output produced. b. TVC remains the same irrespective of units of output produced. c. TVC falls as the unit of output increases. d. AFC increases as output increases further and further. Table 7-5 Stereos produced 0 1 2 3 4 5 6 Total cost (in $) 200 325 410 475 550 660 825 ____ 89. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The manufacturer's short-run fixed cost is a. 0. b. $75. c. $200. d. $400. ____ 90. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The short-run average variable cost of producing five stereos is a. $92. b. $110. c. $132. d. $460. ____ 91. In arriving at the quantity of output and price of its product, a company a. chooses either output or price, and consumer demand determines the other. b. has no control over either quantity or price. c. makes two decisions by setting both optimal output and optimal price. d. generally leaves both quantity and price decisions to consumers. ____ 92. Ben quit his job as an economics professor to become a golf professional. He gave up his salary ($40,000) and invested his retirement fund of $50,000 (which was earning 10 percent interest) in this venture. After all expenses, his net winnings (profit) were $45,000. Ben's economic profits were a. $45,000. b. $5,000. c. $2,000. d. zero. ____ 93. Sally leaves her $24,000 secretarial position with a company and invests her savings of $15,000 (on which she was earning 6 percent interest) in her own Ready Sec agency. After expenses, her net income was $28,900. Her economic profit was a. $4,900. b. $4,000. c. $28,900. d. -$10,100. ____ 94. To find a firm's total revenue at every quantity, all you need to know is a. the demand curve for its product. b. the demand curve for its product and its total cost. c. its profit-maximizing price and quantity. d. its total profit curve. ____ 95. Company A manufactures a single automotive component. It had total revenue of $100,000 and an economic profit of $20,000. What is the price of the component it manufactures? a. ($100,000/quantity sold). b. ($100,000/quantity produced). c. ($100,000/quantity sold) - average cost of the product d. ($100,000/quantity produced) - average cost of the product ____ 96. Average revenue is equal to a. TR/Q. b. (P ´ Q)/P. c. TR ´ Q d. All of the above are correct. ____ 97. Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3. They agree to split the lunch bill evenly. Ed chooses a hot dog. The marginal cost to Joe then of ordering a hamburger instead of a hot dog is a. $1. b. $2. c. $2.50. d. $3. Table 8-1 Output (units) 0 1 2 3 4 5 Total Revenue ($) 0 9 16 21 27 31 Total Cost ($) 10 12 15 19 26 35 ____ 98. To maximize its profits, the firm described in Table 8-1 should produce ____ unit(s) of output. a. 1 b. 2 c. 3 d. 4 ____ 99. The firm described in Table 8-1 has a fixed cost of ____ at its optimal level of output. a. 2 b. 6 c. 10 d. 26 ____ 100. At optimal output, the firm described in Table 8-1 sells its output at a price of a. $5.40. b. $6.25. c. $7. d. $8. Essay 30% 1. What are the properties of indifference curves? 2. Are there ever exceptions to the law of demand? 3. How might a market research analyst use measures of elasticity-price, cross, and income-in her work? Explain. 4. "If it were not for the law of diminishing marginal returns, the world's wheat could be grown in a flower pot." Explain. 5. The following table depicts the production relationship between units of labor and output of pepper on Pietrov's Pepper Farm. Labor Peppers Labor Peppers 1 10 6 75 2 25 7 77 3 45 8 78 4 60 9 77 5 70 10 75 Graphically show the three zones of production corresponding to increasing, decreasing, and negative marginal product, noting the point of diminishing returns. 6. Graph typical total, average, and marginal cost curves and explain how their shapes are influenced by the law of diminishing returns. Graph TC on a separate graph, AC and MC on a second graph. 7. The table below gives data on output for a firm in the short run. The firm is able to hire labor and its TPP is given. Compute the APP, MPP, and MRP for labor if the price of the good is fixed at $12 per unit. LABOR TPP APP MPP MRP 1 4 _____ _____ _____ 2 9 _____ _____ _____ 3 15 _____ _____ _____ 4 21 _____ _____ _____ 5 26 _____ _____ _____ 6 30 _____ _____ _____ 7 33 _____ _____ _____ 8 35 _____ _____ _____ 9 36 _____ _____ _____ 8. Complete the table below by computing the missing numbers from those that are given. Q Fixed Costs Variable Costs Average Cost Marginal Cost 0 $20 _____ _____ _____ 1 _____ _____ _____ $8 2 _____ $15 _____ _____ 3 _____ _____ $13.67 _____ 4 _____ _____ _____ 6 5 _____ _____ _____ 7 6 _____ 42 _____ _____ 7 _____ 51 _____ _____ 8 _____ _____ 10.125 _____ 9. Given a demand curve, explain how total revenue may be calculated. 10. Tour companies and cruise lines often offer last minute fares that are far below the prices paid by customers who have booked their trips far in advance. Use marginal analysis to explain this pricing tactic. Vocabulary definitions: Test in Class 20% Short run Total physical Product Marginal physical productMarginal revenue product Economies of scale Economic profit Marginal revenue Marginal cost Law of diminishing marginal return Variable cost Marginal physical product Marginal revenue product Economic profit Increasing return to scale Marginal revenueMarginal profit Total Cost Average Total Cost1
Intro to Macroeconomics Test 2
Fall 2015 Due Date Thursday
. 2015 in class. The same day Vocabulary exam in
class. (Vocabulary list is given at the end of this test)
Indicate whether the statement is true or false.
Total utility always decreases when additional amounts of a commodity are consumed.
Marginal utility can fall even as total utility from the consumption of a good is rising.
Total utility increases if one more unit of a product is purchased and marginal utility is positive.
Total utility decreases when diminishing marginal utility is present.
An optimal purchase is one that maximizes total utility.
The law of diminishing marginal utility guarantees that demand curves will have positive slopes.
Rolls Royce may actually sell fewer cars at lower prices due to the "snob effect."
The slope of the budget line is determined only by the prices of the commodities purchased.
A decrease in the price of one good results in a parallel shift in the budget line.
A change in the price of a good will shift the indifference curves.
A line that is perfectly elastic has an elasticity of demand of zero.
Perfectly inelastic demand curves are vertical.
Perfectly elastic demand curves are vertical.
A vertical demand curve has an elasticity of demand equal to zero.
A straight-line demand curve has the same elasticity throughout its length.
A unit-elastic demand curve will be concave toward the origin.
A demand curve with an elasticity of 1.0 is said to be an elastic demand curve.
Elasticity of demand is another way to measure slope.