Microeconomics Applications Overview
41 Questions
9 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which factor does NOT directly influence the supply of a product?

  • Fluctuations in consumer incomes (correct)
  • Variations in production costs
  • The prices of production factors
  • Changes in technology

Given demand $Q_d = 90 - 10P$ and supply $Q_s = 10 + 6P$, what is the outcome if the government imposes a price ceiling of 4?

  • The market clears at 34 units
  • A supply surplus of 16 units
  • A demand surplus (shortage of supply) (correct)
  • An equilibrium of 5 units

With $Q_s = 3P$ and $Q_d = 12 - P$, if a price floor is set twice the equilibrium price, what market condition occurs?

  • A surplus of demand of 6 units
  • A shortage of demand of 18 units
  • A shortage of supply of 12 units
  • A surplus of supply of 12 units (correct)

What is the typical outcome of government-set minimum prices?

<p>Market surpluses (B)</p> Signup and view all the answers

If both demand and supply decrease with different rates, how will the equilibrium price and quantity be affected?

<p>Price may either increase or decrease; quantity decreases (D)</p> Signup and view all the answers

How do ticket speculators typically impact market conditions?

<p>They help move the market toward equilibrium (A)</p> Signup and view all the answers

If a firm has total revenue of $600,000, explicit costs of $400,000, and implicit costs of $100,000, what are the firm's accounting profit and economic profit respectively?

<p>$200,000 and $100,000 (A)</p> Signup and view all the answers

What is a common result of imposing price controls/price capping in a market?

<p>Shortage of supply (D)</p> Signup and view all the answers

Consider a market where demand decreases substantially while supply decreases only slightly. Which outcome is most likely to occur?

<p>The equilibrium quantity will decrease, although the price change is uncertain. (C)</p> Signup and view all the answers

A firm operating in a perfectly competitive market has a total cost (TC) function of $TC = 2Q^2 - 8Q + 20$. If the market price is $20, what quantity will the firm produce to maximize profit, and what will be the profit?

<p>Q=6; Profit=$28 (B)</p> Signup and view all the answers

According to the given information, a firm's total cost function is given as $TC = 400 + 10Q$, where Q is the quantity produced. If the market price for the good is 50 units, what output level corresponds to the point where the total revenue equals total costs?

<p>10 units (B)</p> Signup and view all the answers

With two goods, good A and good B, there is a direct relationship between the price of A and the demand of B. What type of goods are, A and B, likely to be?

<p>Substitute goods (D)</p> Signup and view all the answers

A firm in a perfectly competitive market has a total cost function of $TC = Q^2 - 4Q + 10$. If the market price is $10, what quantity will the firm produce in order to maximize profit and what is the maximum profit?

<p>Q=7; Profit=$39 (A)</p> Signup and view all the answers

Under what circumstances should a firm in a perfectly competitive market decide to shut down in the short run to minimize its losses?

<p>When average variable cost is greater than marginal revenue. (A)</p> Signup and view all the answers

An airline is considering selling a standby ticket for $300 on a flight with some empty seats. The average cost per seat is $500, but the marginal cost of an extra passenger is very low. This scenario best exemplifies which of the following concepts?

<p>A situation where focusing on marginal cost rather than average cost leads to a rational decision. (A)</p> Signup and view all the answers

Which of the following statements is the BEST example of a testable, positive economic statement?

<p>A reduction in average income tax rates will lead to an increase in aggregate consumption. (C)</p> Signup and view all the answers

Which of the following represents a normative economic statement about wage levels?

<p>An increase in the minimum wage is justified to reduce the level of excessive income inequality across all economic sectors. (D)</p> Signup and view all the answers

According to the theory of comparative advantage, specialization in production should be based on which of the following?

<p>Minimizing the next best opportunity given up to produce a specific good or service. (D)</p> Signup and view all the answers

If economic agents engage in trade based on comparative advantage, what is the likely outcome in terms of their consumption possibilities?

<p>Both can achieve a level of consumption beyond what they could produce individually by themselves. (B)</p> Signup and view all the answers

An airline with 200 seats is operating a flight with 10 empty seats. A standby passenger offers $300 for a ticket, while the average cost per seat is $500. What economic principle justifies the airline selling the standby the ticket?

<p>The idea that the marginal cost of the extra passenger is significantly less than $300. (B)</p> Signup and view all the answers

Which of the following BEST explains the difference between a positive and a normative economic statement?

<p>Positive statements are objective and testable, while normative statements involve value judgments. (D)</p> Signup and view all the answers

If the price of a good increases by 15% and total revenue decreases by 3%, what is the approximate percentage change in quantity demanded and the elasticity of demand?

<p>-18%, elastic demand (D)</p> Signup and view all the answers

A 40% increase in the price of a good leads to a 20% decrease in the quantity sold. What best describes the demand for this good?

<p>Inelastic (B)</p> Signup and view all the answers

Which of these characteristics is least likely to be associated with goods that have a high price elasticity of demand?

<p>Few available substitutes (A)</p> Signup and view all the answers

If a 5% decrease in price causes a 2% increase in quantity supplied, the supply is best described as:

<p>Inelastic (C)</p> Signup and view all the answers

When an indirect tax is introduced, and demand for the product is highly elastic compared to its supply, who predominantly bears the tax burden?

<p>Primarily the producers (A)</p> Signup and view all the answers

Given the price elasticity of demand for a product is 1.2 and the price elasticity of supply is 0.8. If a tax is imposed, which is likely to bear a greater share of the tax burden?

<p>Suppliers (C)</p> Signup and view all the answers

If a good has a price elasticity demand of 1.5 and a price elasticity of supply of 0.5 and a tax is levied on this good, who are most likely to bear the majority of the tax burden?

<p>Producers will bear must of the tax (A)</p> Signup and view all the answers

If a 20% decrease in price leads to a 60% increase in quantity demanded, this implies the demand is:

<p>Elastic (A)</p> Signup and view all the answers

Which of the following is least likely to characterize a good with inelastic demand?

<p>Many readily available substitutes (C)</p> Signup and view all the answers

The price elasticity of supply for a particular good is 0.6. What does this indicate about the responsiveness of quantity supplied to a price change?

<p>A 1% change in price leads to a 0.6% change in quantity supplied (B)</p> Signup and view all the answers

When a tax is imposed on a good with an inelastic demand and an elastic supply, who primarily bears the tax burden?

<p>Consumers, due to their lower sensitivity to price changes. (C)</p> Signup and view all the answers

What is the primary consequence of implementing a tariff in international trade?

<p>A reduction in the total surplus, indicating inefficiency. (B)</p> Signup and view all the answers

How does the imposition of a tariff typically affect total surplus in a market?

<p>Total surplus decreases, due to inefficiencies and market distortion. (A)</p> Signup and view all the answers

If a firm increases its production by 25%, what will be the approximate percentage change in average fixed cost (AFC)?

<p>A decrease of 20% (D)</p> Signup and view all the answers

Given that production increases by 75% and variable cost increases by 50%, what is the likely impact on average total cost (ATC)?

<p>Average total cost decreases from both average fixed and variable cost reductions. (B)</p> Signup and view all the answers

A company produces 100,000 units, sells them at $5 each, has explicit costs of $375,000, and implicit costs of $50,000. What are the accounting and economic profits respectively?

<p>$125,000; $75,000 (B)</p> Signup and view all the answers

In a scenario with a tax on a good, if demand is relatively inelastic and supply is relatively elastic, which party is most likely to bear a larger portion of the tax burden?

<p>The consumers will bear the larger tax burden. (D)</p> Signup and view all the answers

A tariff is imposed on imported goods. From the perspective of total social welfare, what is the primary outcome?

<p>There is an overall decrease in social welfare as the market's allocative efficiency is negatively impacted. (D)</p> Signup and view all the answers

If average fixed cost (AFC) is currently $X$ and production increases by 25%, what does the new AFC equal to?

<p>$0.80X$ (A)</p> Signup and view all the answers

A firm is operating with total costs of $T$ at a production level of $Q$. If production increases by 75% and the total variable cost goes up by 50%, how would the average total cost (ATC) behave?

<p>Average total cost is likely going to decrease. (B)</p> Signup and view all the answers

Flashcards

Marginal analysis

The process of comparing the additional benefits of an action to its additional costs.

Positive statement

A statement that describes what is or what will be and can be tested. It is objective and based on facts.

Normative statement

A statement that expresses an opinion or value judgment about what should be. It cannot be tested.

Comparative advantage

The idea that individuals, businesses, or countries should specialize in producing goods or services where they have the lowest opportunity cost compared to others.

Signup and view all the flashcards

Production possibility frontier (PPF)

A graphical representation of all possible combinations of two goods that an individual or economy can produce with its given resources.

Signup and view all the flashcards

Trade and PPF

When two individuals or nations trade based on their comparative advantage, both can consume beyond their individual PPFs.

Signup and view all the flashcards

Opportunity cost

The cost of producing one good in terms of the other good that must be given up.

Signup and view all the flashcards

Break-even Point

The point at which total revenue equals total cost, resulting in zero profit.

Signup and view all the flashcards

Marginal Cost

The additional cost incurred by producing one more unit of a good.

Signup and view all the flashcards

Marginal Revenue

The revenue gained from selling one more unit of a good.

Signup and view all the flashcards

Perfect Competition

A market structure where many firms sell identical products, have no market power, and can easily enter or exit the market.

Signup and view all the flashcards

Monopoly

A market structure where a single firm controls the entire market and can set its own prices.

Signup and view all the flashcards

Factors influencing supply

Factors that directly affect the amount of a good producers are willing to sell at a given price.

Signup and view all the flashcards

Inelastic Demand

When the percentage change in quantity demanded is smaller than the percentage change in price.

Signup and view all the flashcards

Market equilibrium

The point where the quantity demanded by buyers equals the quantity supplied by sellers, resulting in a stable price and quantity traded.

Signup and view all the flashcards

Elastic Demand

When the percentage change in quantity demanded is greater than the percentage change in price.

Signup and view all the flashcards

Price Ceiling

A government-imposed maximum price for a good or service, typically set below the equilibrium price. This often leads to a shortage because producers are unwilling to supply enough at the lower price.

Signup and view all the flashcards

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price.

Signup and view all the flashcards

Elastic

The price elasticity of demand is greater than 1.

Signup and view all the flashcards

Price Floor

A government-imposed minimum price for a good or service, typically set above the equilibrium price. This often leads to a surplus because producers are willing to supply more at the higher price, but consumers are not willing to buy as much.

Signup and view all the flashcards

Decreasing Demand and Supply

When both demand and supply decrease, the equilibrium price may either increase or decrease, and the equilibrium quantity will always decrease.

Signup and view all the flashcards

Inelastic

The price elasticity of demand is less than 1.

Signup and view all the flashcards

High Price Elasticity

Goods with a high price elasticity of demand have high degrees of substitution.

Signup and view all the flashcards

Ticket Speculators

The act of buying up tickets for an event and reselling them at a higher price to profit from the difference. While criticized for potentially inflating prices, speculators can also help move the market towards equilibrium by adjusting prices based on actual demand.

Signup and view all the flashcards

Price Capping

A government-imposed price ceiling that can lead to a shortage in supply because producers are unable to sell their goods at a profitable price. Consumers may then compete for the limited supply.

Signup and view all the flashcards

Inelastic Supply

The price elasticity of supply is less than 1, meaning the percentage change in quantity supplied is smaller than the percentage change in price.

Signup and view all the flashcards

Supply Surplus

A situation where producers supply more than consumers demand at a given price. This typically occurs when a price floor is in place, forcing producers to produce more than what consumers are willing to buy.

Signup and view all the flashcards

Tax Burden and Elasticity

The burden of an indirect tax is borne more by the category with lower elasticity (less sensitivity to price changes).

Signup and view all the flashcards

Indirect Tax

A tax on a good.

Signup and view all the flashcards

Elastic Supply

The price elasticity of supply is greater than 1.

Signup and view all the flashcards

Who bears the burden of a tax?

The burden of a tax is generally borne by the group that is less responsive to price changes, meaning they are less likely to adjust their consumption or production in response to the tax.

Signup and view all the flashcards

What happens to total surplus when a tariff is imposed?

A tax on imports can lead to a decrease in total surplus, as it reduces consumer welfare and limits trade efficiency. It can also create deadweight loss in the market.

Signup and view all the flashcards

Is the statement 'Total surplus decreases' true regarding a tariff's effect?

When a tariff is imposed, the total surplus in the market decreases. This is because consumers lose surplus due to higher prices, producers also experience reductions, and there is a deadweight loss.

Signup and view all the flashcards

How does average fixed cost change when production increases?

Average fixed cost, which is calculated by dividing total fixed cost by the quantity produced, decreases as production increases. This is because fixed costs are spread over a larger number of units, making each unit's fixed cost share smaller.

Signup and view all the flashcards

How does average total cost change when production increases?

When production increases, average total cost, calculated by dividing total cost by quantity, may decrease. This occurs when the decrease in average fixed cost and average variable cost outweighs the increase in production.

Signup and view all the flashcards

What's the difference between accounting profit and economic profit?

Accounting profit considers only explicit expenses, while economic profit considers both explicit and implicit costs. Implicit costs, like opportunity cost, are the value of forgone alternatives.

Signup and view all the flashcards

Study Notes

Microeconomics Applications

  • Airline Cost Evaluation: An airline evaluates a flight's cost based on 200 seats at $100,000, resulting in a cost per seat of $500. If 10 seats are empty, the company might consider selling a ticket to a standby passenger willing to pay $300, even though the average cost is estimated at $500. The marginal cost might be minimal (e.g., sandwich and water). This decision is rational if the passenger's payment exceeds the marginal cost.
  • Marginal Analysis: This example shows a trade-off between efficiency and equity where a decision is made based on marginal analysis.
  • Comparative Advantage: Not this case.
  • Positive Statement: A positive statement describes a factual relationship, in this case, if the price of a good decreases, the quantity demanded increases, if the government raises spending, employment increases.
  • Normative Statement: A normative statement expresses an opinion or value judgment, for instance, the government must increase the minimum wage to reduce inequality, or the trade of arms must be banned.
  • Comparative Advantage Theory: A theory suggesting that economic units should specialize in producing products where they have the lowest opportunity cost.
  • Comparative Advantage and Trade: Two economic agents trading based on comparative advantage will both consume above the production possibility frontier, potentially improving their welfare.
  • Supply Factors: Factors directly affecting supply include prices of production factors, technology, and production costs. Consumer income is not a direct supply factor.
  • Equilibrium Price/Quantity: With supply function Qs = 10 + 6P and demand Qd = 90 - 10P, the equilibrium price is 5 and quantity 40. A price ceiling of 4 creates excess demand (shortage).
  • Price Floor: A government-imposed price minimum (floor) results in a supply surplus (excess supply). If the price floor is twice the equilibrium price, a supply surplus of 12 units emerges (Qd=6 Units and Qs =18 in this example).
  • Price Controls/Surplus/Shortage: Setting minimum prices by the government leads to surpluses (excess supply). When both demand and supply decrease, the equilibrium price and/or quantity may increase, decrease, or remain unchanged, depending on the rate of decrease for each.
  • Ticket Speculation: Ticket speculators disrupt markets, but they often move markets toward equilibrium.

Elasticity of Demand

  • Inelastic vs Elastic Demand: If a 30% price increase results in a 50% quantity decrease, the demand is elastic. If the price increase leads to a smaller percentage quantity decrease, the demand is inelastic.
  • Total Revenue and Elasticity: Total revenue increases by 5% if the price of an item increases by 10%. Demand is inelastic.
  • Price Elasticity of Demand: Demand is inelastic if a 10% price change results in a smaller percentage change in quantity demanded. If the change is similar in magnitude, demand is unitary elastic. If the quantity change is greater in magnitude than the price change, the demand is elastic.
  • Tax Burden: If demand is more inelastic than supply, the tax burden falls primarily on consumers.

Market Structures

  • Perfect Competition: Perfect competition is characterized by free entry and exit, homogeneous products, and price-taking firms.
  • Monopoly: A monopoly exists when one firm controls the market. A profit-maximizing monopolist sets output where marginal revenue equals marginal cost, often charging above the competitive market price.
  • Monopolistic Competition: Monopolistic competition differs from perfect competition by allowing firms to differentiate their products.
  • Oligopoly: In an oligopoly, few firms control the market, often leading to strategic interactions and interdependence. Cartels, groups of firms that collude to act like a monopolist, are not stable as individual companies have incentives to increase their profits by producing more.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Summary Microeconomics Applications PDF

Description

Explore key concepts in microeconomics through practical applications. This quiz covers airline cost evaluation, marginal analysis, and the distinction between positive and normative statements. Test your understanding of how these concepts influence economic decisions.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser