Question 1

In Figure 2-24, if a new process reduces the cost of manufacturing this good, what would be the expected result? A)a shift from D₁ to D₃ B)a shift from S₁ to S₃ C)a shift from D₁ to D₂ D)a shift from S₁ to S₂

Accepted Answer

A reduction in the cost of manufacturing would shift the supply curve to the right, from S1 to S3. This would lead to a lower equilibrium price and a higher equilibrium quantity, as represented by the shift from D1 to D3.

Question 2

Consumer Surplus is equal to&#10;A)total value - total spending&#10;B)the net benefits of a market to consumers&#10;C)the area under the demand curve but above the price&#10;D)all of the above

Accepted Answer

Consumer surplus is indeed equal to the total value to consumers minus their total spending, represents the net benefits of a market to consumers, and is graphically depicted as the area under the demand curve but above the price.

Question 3

Let P_D=100-1/2Q_D be the demand curve and P_S= 20+1/2Q_S be the supply curve.What is the equilibrium quantity? A)Q=80 B)Q=100 C)Q=60 D)Q=100

Accepted Answer

To find the equilibrium quantity, set the demand curve equal to the supply curve: 100 - 1/2Q = 20 + 1/2Q. Solving for Q gives Q = 80.

Question 4

In Figure 2-24, if a good is inferior and income falls, which of the following will result? A)a shift from D₁ to D₃ B)a shift from S₁ to S₃ C)a shift from D₁ to D₂ D)a shift from S₁ to S₂

Accepted Answer

If a good is inferior, a decrease in income will actually increase demand for the good. Therefore, the demand curve will shift to the right (from D₁ to D₃) while the supply curve remains the same. This is represented by option A.

Question 5

At a utility maximum&#10;A)the budget line is tangent to the indifference curve&#10;B)(MUx/MUy) = Px/Py&#10;C)MUx/Px = MUy/Py&#10;D)all of the above&#10;E)none of the above

Accepted Answer

At a utility maximum, the consumer achieves maximum satisfaction given their budget constraint. This means that the consumer is indifferent between all possible combinations of goods that they could purchase, but cannot afford to purchase a combination that would make them more satisfied. Therefore, at a utility maximum, the budget line is tangent to the indifference curve (A). This also means that the marginal utility per dollar spent on one good equals the marginal utility per dollar spent on the other good, or (MUx/Px) = (MUy/Py) (C). By rearranging this equation, we can also see that (MUx/MUy) = (Px/Py) (B). Therefore, all of the above must be true at a utility maximum.

Question 6

If supply is P= 20+1/2Q_Sand P = 50, the quantity is ___ and the producer surplus is ___ A)Q = 50, PS = 750 B)Q = 60, PS = 900 C)Q = 70, PS = 400 D)Q = 60, PS = 1800

Accepted Answer

- Set P=50 in the supply equation: 50=20+1/2Q ⇒ Q=(50-20)×2 = 60
- Calculate producer surplus: 
PS = (1/2)×(50-20)×(60-20) = 900. 
Therefore, the best choice is B.

Question 7

If an increase in the price of one good leads to a decrease in demand for another, the two goods are&#10;A)complements&#10;B)substitutes&#10;C)inferior goods&#10;D)marginal goods

Accepted Answer

When an increase in the price of one good leads to a decrease in demand for another, the two goods are said to be complements. Complementary goods are those that are often used together, such as hot dogs and hot dog buns, or computers and computer software. As the price of one good (e.g., hot dogs) increases, people are less willing or able to buy as much of it, which means they'll also be less likely to buy the complementary good (e.g., hot dog buns). This is because the two goods are usually consumed together, and so the decrease in demand for one good will reduce the demand for the other as well.

Question 8

If gasoline falls from $4 per gallon to $3 and the quantity demanded rises from 3 million gallons to 4 million, what is the arc elasticity of demand?&#10;A)0&#10;B)&#190;&#10;C)4/3&#10;D)1

Accepted Answer

The answer of If gasoline falls from $4 per gallon...

Question 9

The maximum a person is willing to pay for the first unit of a good is called&#10;A)maximum utility&#10;B)marginal utility&#10;C)marginal value&#10;D)total value

Accepted Answer

Marginal value represents the maximum amount a consumer is willing to pay for the first (or an additional) unit of a good, reflecting the utility or satisfaction derived from that unit.

Question 10

Which of the following is not an assumption of perfect competition&#10;A)perfect information&#10;B)many buyers and sellers&#10;C)each product has a unique quality&#10;D)freedom of entry and exit

Accepted Answer

In perfect competition, products are assumed to be homogeneous, meaning that each product is identical to every other product in the market. Therefore, each product does not have a unique quality, making option C incorrect. The other three options are assumptions of perfect competition.

Question 11

Lynn owns a small ballet supply store.He currently spends $80,000 per year on inventory, rent, and labor, and collects $120,000 in revenue.He could still be earning $20,000 as a dancer.His economic profit is

A)$120,000
B)$40,000
C)$20,000
D)$60,000

Accepted Answer

The answer of Lynn owns a small ballet supply store.He...

Question 12

Let P_D=100-1/2Q_D be the demand curve and P_S= 20+1/2Q_S be the supply curve.Which of the following is the equilibrium price? A)P=80 B)P=100 C)P=60 D)P=120

Accepted Answer

The answer of Let P_D=100-1/2Q_D be the demand curve and...

Question 13

The formula for the slope of a budget line (with Y on the vertical axis) is&#10;A)&#8710;x/&#8710;y&#10;B)-x/y&#10;C)I/Py&#10;D)-Px/Py

Accepted Answer

The answer of The formula for the slope of a...

Question 14

If an increase in income leads to an increase in the demand for noodles, noodles must be&#10;A)an inferior good&#10;B)a normal good&#10;C)a luxury good&#10;D)a substitute good

Accepted Answer

The answer of If an increase in income leads to...

Question 15

The basic assumptions for preferences used in utility functions include all of the following EXCEPT&#10;A)preferences are variable&#10;B)preferences are transitive&#10;C)preferences are complete&#10;D)marginal utilities are generally positive

Accepted Answer

The answer of The basic assumptions for preferences used in...

Question 16

An indifference curve displays&#10;A)a set of quantities that provide different levels of utility&#10;B)a set of quantities that the person can afford&#10;C)a set of quantities among which the person is indifferent&#10;D)a set of prices that define a person's utility

Accepted Answer

The answer of An indifference curve displays&#10;A)a set of quantities...

Deck 2: A Review of Markets and Rational Behavior