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Rapidly increasing health costs have been a major political concern since at least 1992. Suppose the government
sets the maximum price for a normal doctor's visit at $20 to control rising health costs but the current market price is $40.
What will happen?
a. More people will be able to see the doctor.
b. Fewer people will try to see the doctor.
c. More people will try to visit the doctor, but there will be fewer doctors willing to see patients at that price. <<<
d. The same number of people will try to visit the doctor, and the same number of doctors are willing to see patients at that price.
 
Rent controls usually set a price ceiling below the equilibrium price and therefore:
a. all low-income recipients will clearly be helped.
b. a surplus of rental units will result.
c. quantity demanded exceeds the quantity supplied. <<<
d. quantity supplied exceeds the quantity demanded.
 
Which of the following is a source of inefficiency from a rent-control price ceiling:
a. wasted resources of consumers searching for the good.
b. All of the answers are correct. <<<
c. inefficient allocation of the good to consumers.
d. inefficiently low quantity of the good exchanged.
 
To be binding or effective, a price floor must be set at a price:
a. higher than the equilibrium price. <<<
b. lower than the equilibrium price and at which quantity demanded exceeds quantity supplied.
c. lower than the equilibrium price.
d. at which quantity demanded exceeds quantity supplied.
 
A minimum price that the government guarantees farmers will receive for a particular crop is:
a. a price ceiling.
b. a price floor (price support). <<<
c. a deficiency price.
d. an export price (export subsidy).
 
The system of taxicab medallions in New York City is an example of a
a. price ceiling.
b. quantity control. <<<
c. price floor.
d. nonbinding price ceiling.
 
The quota rent refers to:
a. the rent received by landlords who own rent-controlled apartments.
b. the difference between the demand price and the supply price at the quota limit. <<<
c. the opportunity cost of using a quota-controlled service or of buying a good that is subject to an import quota.
d. the minimum rent that the owner of a building must receive before he or she is willing to rent out the building.
 
A price floor or a price ceiling is an example of:
a. a price control. <<<
b. a quota.
c. a quantity control.
d. market equilibrium price.
 
A price control is:
a legal restriction on how high or low a price in a market may go.
 
To be binding, a price ceiling must be set at a price:
lower than the equilibrium price.
 
A company CEO is planning an expansion of the business, and his plan involves starting a second shift. He is thinking
about the long-run time period.
False
 
In the short-run, a firm maximizes output by choosing inputs so that every dollar spend on inputs has the same _____
marginal product per dollar
 
Implicit opportunity costs are included when calculating _____.
economic profit only
 
To implement technical efficiency, a producer would choose to
minimize the amount of input resources used.
 
An example of a variable input is _______________ 
labor costs for production
 
What is price elasticity of demand?
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed
as percentage change in quantity demanded divided by the percentage change in price
 
How do you calculate price elasticity of demand using the midpoint method?
(Q2-Q1)/[(Q2+Q1)/2) / (P2-P1)/[(P2+P1)/2)
 
 
A company CEO is planning an expansion of the business, and his plan involves starting a second shift. He is thinking
about the long-run time period.
False
 
In the short run, a firm maximizes output by choosing inputs so that every dollar spent on inputs has the same ________ ______.
marginal product
 
Why is the midpoint method better for calculating elasticity?
it gives the same answer regardless of the direction of change
 
What is the relationship between slope and elasticity?
the flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity
 
What are the five types of elasticity of demand?
perfectly inelastic demand
inelastic demand
unit elastic demand
elastic demand
perfectly elastic demand
 
What are the characteristics of perfectly inelastic demand? Give an example.
elasticity = 0, consumers have no price sensitivity, D curve is vertical
 
What are the characteristics of inelastic demand? Give an example.
elasticity is less than 1, consumer price sensitivity is relative low, D curve is relatively steep
 
What are the characteristics of unit elastic demand? Give an example.
elasticity = 1, consumer price sensitivity is intermediate, D curve has an intermediate slope
 
What are the characteristics of elastic demand? Give an example.
elasticity is greater than 1, consumers have a relatively high price sensitivity, D curve is relatively flat
 
What are the characteristics of perfectly elastic demand? Give an example.
elasticity is infinity, consumer price sensitivity is extreme, D curve is horizontal
 
What are the determinants of Elasticity of Demand? How do they shape the demand curve?
price elasticity is higher when close substitutes are available. Price elasticity is higher for narrowly defined goods
than for broadly defined goods because for narrowly defined goods there are many substitutes. price elasticity
is higher for luxuries than for necessities. price elasticity is higher in the long run than it is in the short run
 
Define the relationship between total revenue and elasticity of demand.
price elasticity of demand determines whether you should raise or lower price to increase revenue elastic: fall in
price cause an increase in revenue inelastic: rise in price causes an increase in revenue
 
True or false. If an entrepreneur could start a different company with a different set of skills, the equivalent value of
those skills would be subtracted from his or her current company's accounting
profit.
false
 
Accounting profits plus implicit opportunity costs is equal to _____
economic profits
 
Fixed costs change with production only in the long term.
true
 
Implicit opportunity costs are included when calculating _____________________ 
economic profit only
 
You pay a consulting firm to determine the price elasticity of demand. They determine that an 8% change in price
will lead to a 6% change in the amount you sell. The price elasticity of demand is __________.
A price cut would _________ total revenue.
-0.75; decrease
 
If an entrepreneur could start a different company with a different set of skills, the equivalent value of those
skills would be subtracted from his or her current company’s accounting profit.
False
 
Use the numbers above to answer the next 5 questions. Q = tons / day, P=price per ton.
Assume these data hold for the long-run. TR=total revenue in $$/day.
For this question determine at which price the price elasticity of demand is closes to one in absolute value.
$20
 
If the price is $30, the price elasticity of demand is ___________ use the mid-point formula.
2.64
 
Suppose the current price is $12/ton. To increase profit, you should raise the price ______________.
a lot for sure immediately
 
Accounting profits plus implicit opportunity costs is equal to __________ __________.
economic profits.
 
Implicit (opportunity) cost is not a factor in __________ profit.
accounting
 
Fixed costs change with production only in the long term.
True
 
The average fixed cost is the
total fixed costs divided by the total units produced.
 
Suppose the current price is $16/ton. You should lower the price _______________.
only if you're insane (you want lower profits)
 
Suppose the current price is $28/ton. You should lower the price _______________.
maybe; it depends on the economic golden rule
 
As the price decreases, typically the price elasticity of demand (think absolute value):
decreases
 
Nearly always to maximize profit, a firm's price should be:
on an elastic section of the firm's demand line.
 
Typically, the price elasticity of demand is _________ for ________ time frames (again, think absolute value):
larger; longer
 
A tax on a good, say concrete, will impose a larger short-term(same long-term) burden on concrete consumers:
the lower the price elasticity of demand for concrete
 
The tax revenue yield of a tax on a good, say concrete, will be larger:
the lower the price elasticity of demand for concrete
 
All of the following curves are U-shaped, except the __________  ________   _________ curve.
average fixed costs
 
If a cost curve is increasing, the production function (as shown by a product curve) is also increasing.
False
 
Observe the following table, consisting of the number of variable inputs and resulting yields. In the table, the
average product of the third input is 20.
False
Variable Inputs: 1, 2, 3, 4                   Yield: 5, 20, 40, 55
 
When adding a new production facility leads to higher average costs, this is an example of
diseconomies of scale.
 
No costs are fixed in the 
long-run time frame.
 
A $50/ton tax increases the market equilibrium price from $300/ton to $340/ton, which means that:
a price elasticity of supply is higher than price elasticity of demand(again, think absolute value)
 
A $50/ton tax increases the market equilibrium price from $300/ton to $340/ton, which means that:
the buyers' share of the tax burden is 80%
 
A really low price elasticity of demand (again, think absolute value) for a competitively good is an indication that:
equilibrium is on the lower half of the demand line
 
A natural monopoly may be found selling its output at a price at which demand is very inelastic because:
of regulation
 
A monopoly may be found selling its output at a price at which demand is elastic because:
it maximizes profit by choosing a price on the elastic half of the demand line
 
You typically get an income elasticity of demand around 0.2 for:
"basic" goods
 
Businesses selling goods with an income elasticity of demand equal to 3.0 can expect sales to:
fluctuate much more than the business cycle
 
For sugar (A) and coffee (B), you expect a cross price elasticity of demand around:
-0.1
 
For apples (A) and oranges (B), you expect a cross price elasticity of demand around:
0.4
 
The price elasticity of demand measures the:
responsiveness of quantity demanded to a change in price
 
When a production facility is in production and running well, it adds a new worker.
You would expect this worker to produce ________.
less than prior workers
 
The average fixed cost curve has its minimum at the point where economies of scale turn into diseconomies of scale.
False
 
If the demand curve is perfectly elastic, then an increase in supply will:
increase the quantity exchanged but result in no change in the price
 
If the supply curve for a product is vertical, then the elasticity of supply is:
equal to zero
 
Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than
taxes on goods with __________ demand curves.
inelastic; elastic
 
To implement technical efficiency, a producer would choose to _____
minimize the amount of input resources used
 
An example of a variable input is _____.
labor costs for production
 
If a firm builds a plant whose size yields output equal to the minimum point on the long-run average cost curve, the firm will
maximize profitability.
 
A marginal revenue value for a firm with two or more units of production will always be   _______  ________   the total revenue.
less than   
 
A firm trying to maximize profitability should decrease production when marginal revenue is equal to marginal costs.
False
 
When production is just beginning, more efficient use of each input can be achieved by _____.
adding new variable inputs
 
You have a factory that makes an odorless spray that repels pet fur (useful for clothing, carpets, and car interiors for pet
owners). Your invention has a marginal cost of production of $12, and you sell the units for $19.95. You should
increase production.