What is the change in total cost equal to in the marginal cost equation?
Marginal cost multiplied by change in quantity.
Fixed costs equal:
Total
... [Show More] costs minus variable costs
Economic profit is distinct from accounting profit because
Economic profit incorporates both explicit and implicit costs.
Total costs include:
Variable costs plus fixed costs
Marginal costs consider
The increase in total cost arising from an extra unit of production.
What response best describes the relationship between marginal costs and total costs?
Whenever marginal cost is less than average total cost, average total cost is falling.
Which statement is true about productivity?
The value of marginal product of labor equals wage in a competitive firm.
A production function expresses the relationship between:
Quantity of resource inputs and product/service outputs.
Opportunity costs include:
The income the entrepreneur could have earned working for an employer.
Economists and decision makers study and then make decisions or judgments based on (select best answer):
Marginal analysis.
The primary reason that the marginal cost curve declines and then increases is:
Firms experience increasing marginal product, then diminishing marginal product.
When do marginal costs eventually rise?
With the quantity of output.
Consider the following example: A perfectly competitive firm finds that at current production levels marginal cost is greater than marginal revenue. What action should this firm take in order to pursue the maximization of profit?
Decrease the target output.
A competitive firm is characterized by:
Trading of identical products.
Competitive firms experience marginal revenue that is:
Equal to price.
In the short-run, a competitive firm would continue to produce under the following circumstance:
Total revenue exceeds total variable costs.
What fundamental shape does a demand curve take in a competitive market?
Horizontal.
For a perfectly competitive firm which condition is true?
The demand curve is the same as the marginal revenue curve.
Which condition is true for perfectly competitive firms in the long-run?
They will exit the market if total revenue is less than total costs.
Which statement is true concerning marginal costs?
Marginal costs typically decline and then increase with the quantity of output.
What rule is used by perfectly competitive firms to determine shut-down in the short-run?
Price is less than average variable costs
What is true of perfectly competitive firms in the long-run?
Economic profits will not be achievable.
What two market structures have common profit characteristics in the long run?
Perfect competition and monopolistic competition.
Consider the structure/shape of the demand curve for the various firm types. In what way does a monopoly's demand curve differ from a perfectly competitive firm's demand curve?
The monopoly's demand curve is downward sloping and the competitive firm's demand curve is horizontal.
Monopolistic firms seek to maximize profit. What condition allows them to achieve this goal?
When marginal revenue equals marginal cost.
In pursuing the maximization of profit, monopolies set price at a point that is:
Above marginal cost.
Consider demand for the various firm types. How does a monopoly's demand curve compare to the demand curve for a perfectly competitive firm?
It is less elastic.
A monopoly's demand curve is:
The same as the market demand curve.
What is a key characteristic of the demand curve for a monopoly?
It is the same as the market demand curve.
In the long-run, how do monopolistically competitive firms garner economic profits?
They earn zero economic profits in the long-run.
What is true of a monopolistically competitive firm's demand curve?
It is less elastic than a perfectly competitive firm.
What characteristic does a monopolistically competitive firm have in common with a perfectly competitive firm?
Cannot earn economic profits in the long-run.
What is the primary goal of a firm in monopolistic competition?
Profit maximization.
Consider the choice that an oligopolistic firm has to either compete or to cooperate, collude and form a cartel with the only other existing firm in the market. What do game theory and the prisoner's dilemma teach regarding this firm's choice?
It is difficult to maintain cooperation.
Consider the prisoner's dilemma example. In what way are an oligopoly and the prisoner's dilemma similar in nature?
Both depict the difficulty of maintaining cooperative agreements.
Why is studying the prisoner's dilemma applicable to business?
It demonstrates the value of mapping out a potential strategy given the actions of rivals.
Think of the way in which the prisoner's dilemma is resolved. In what way does self-interest influence each prisoner's decision in the prisoner's dilemma?
Both prisoners will likely confess.
How do self-interest and rivalry in an oligopoly affect each firm's market decisions?
Collusion will fail and self-interest will prevail in the long-run.
In the prisoner's dilemma, what is the likely outcome?
Both prisoners will confess.
What can we learn from game theory and the prisoner's dilemma about oligopolies?
Strategy is affected by rivalries.
Consider a situation in which the Federal Reserve decides to increase the reserve requirement. What impact will this change have on the nominal interest rate and the quantity of money?
The interest rate increases, and the quantity of money decreases.
The Federal Reserve can increase the money supply by purchasing bonds from the public. This type of market operation is called:
Open market operation.
Banks often borrow money from the Federal Reserve and are then required to repay the money with interest. What is the interest rate on this type of loan called?
Discount rate.
The reserve ratio is currently 10 percent and the Federal Reserve is planning to change the reserve ratio to 20 percent. What will be the impacts on interest rates and the quantity of money?
The interest rate increases and the quantity of money decreases.
When banks borrow directly from the Federal Reserve, the interest rate is known as:
The Discount rate.
What is the method that the Federal Reserve prefers to use to expand or contract the money supply?
Open market operations.
Consider the impact of fiscal policy. In order to achieve a rightward shift of the aggregate demand curve, fiscal policy would need to consider:
Expanding government purchases.
If the Federal Reserve uses monetary policy to increase the money supply, what impact will this have on aggregate demand and interest rates?
Aggregate demand will increase, interest rates will decrease.
Which of the following is a Federal Reserve monetary policy that shifts the aggregate demand curve to the left?
Increasing the reserve requirement.
What is the most effective fiscal method to stimulate aggregate demand by raising consumer spending?
A permanent tax cut.
What term most fully describes decreasing aggregate demand and increasing prices?
Stagflation.
What is likely to happen to interest rates if the government runs protracted large budget deficits?
Interest rates rise.
The law of demand states that, all else equal:
price and quantity demanded are inversely related.
If the equilibrium wage for fast food workers in a local community is $8.00 per hour and the local government imposes a price floor for wages of $15.00 per hour, what will be the market impact(s)?
A surplus of fast food labor.
Which of the following factors influences the price elasticity of demand?
Availability of close substitutes.
What measures how the quantity demanded of one good responds to a change in price of another good?
Cross-price elasticity of demand.
What measures how much the quantity supplied responds to change in price?
Price elasticity of supply.
Bob's income increases by 20% in a given year. Following Bob's change in income, he adjusts which products he purchases from the store. If Bob purchases less microwave pizza, this indicates that for Bob this product is:
An inferior good.
Bob travels to the store to purchase steak for a weekend party. Upon arriving, Bob notices that the price of steak has doubled since his last visit. Bob decides to purchase chicken instead of steak. In relation to his decision to not purchase steak, Bob also opts to not purchase the best tasting steak sauce in the world (A-1). Bob's decision not to purchase A-1 Steak Sauce indicates that this sauce is:
A complement to steak.
If packaged hamburger has a price elasticity of demand of 2.35, then what will be the impact on total revenue at the local grocery store if the store decides to cut the price of packaged hamburger as a six month marketing promotion?
Total revenue will increase.
You are trying to determine whether a price decrease by a competitor will affect the sales of your product. Which of the following can help answer this question?
Price elasticity of demand.
You are attempting to determine if your product is a normal or inferior good. What is the best calculation you can use to answer this question?
Income elasticity of demand.
You are a buyer for a local department store that sells donuts every morning to commuting customers. There have been many complaints of stock outs of donuts by customers. You know that there are many bakers in town and you are trying to figure out what price you will need to pay to encourage these bakers to provide more donuts to your department store every morning. Which tool can best help you in your analysis?
Price elasticity of supply.
If demand is elastic, what will happen to total revenue if the firm lowers its price?
Total revenue will increase.
We would expect the cross-price elasticity of demand between hamburgers and hot dogs to be:
positive, meaning they are substitute goods.
We would expect the cross-price elasticity of demand between computers and software to be:
negative, meaning they are complementary goods.
The opportunity cost of one good relative to another reflects:
The slope of the budget constraint.
Assume that an individual's budget decreases and that prices remain constant. What would happen to his/her budget constraint? The budget constraint line would:
Shift inward in a parallel manner.
Observing an individual's indifference curve demonstrates his/her:
Preferences.
Assume that Bob's income increases following a promotion at work, but prices do not change. What will happen to Bob's budget constraint?
It will shift outward, parallel to its initial position.
How will an increase in income affect the budget constraint, assuming that prices remain the same?
Shift outward.
What is a good called that consumers buy less of when their income increases?
Inferior good.
What is true of indifference curves?
The consumer's preferences are represented with indifference curves. [Show Less]