ECON201 Study Guide - Midterm Guide: Marginal Cost, Production Function, Form 10-Q

Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A $2 increase in the excise tax on a pack of cigarettes.

c. A reduction in interest rates at each price level.

d. A major increase in Federal spending for health care.

e. The expectation of rapid inflation.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

g. A 10 percent reduction in personal income tax rates.

h. A sizable increase in labor productivity (with no change in nominal wages).

i. A 12 percent increase in nominal wages (with no change in productivity).

j. Depreciation in the international value of the dollar.

ANSWERS

(a) AD curve left, output down and price level down (assuming no ratchet effect).

(b) AS curve left, output down and price level up.

(c) AD curve right, output and price level up.

(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).

(e) AD curve right, output and price level up.

(f) AS curve right, output up and price level down.

(g) AD curve right, output and price level up.

(h) AS curve right, output up and price level down.

(i) AS curve left, output down and price level up.

(j) AD curve right (increased net exports); AS curve left (higher input prices)

A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

Question 16

1. If price is cut and demand is elastic, total revenue will rise because

   		the change in quantity demanded is greater than the percent change in price.
   		the percent change in quantity demanded is greater than the change in price.
   		the percent change in quantity demanded is greater than the percent change in price.
   		customers can't find substitutes.

3 points

Question 17

1. If price is cut and demand is inelastic, total revenue will fall because

   		the change in quantity demanded is less than the percent change in price.
   		the percent change in quantity demanded is less than the change in price.
   		the percent change in quantity demanded is less than the percent change in price.
   		customers can find substitutes.

3 points

Question 18

1. If something is addictive, then

   		price and demand are inversely related.
   		price elasticity of demand is equal to one.
   		demand is perfectly inelastic.
   		demand is perfectly elastic.

3 points

Question 19

1. In general, elasticities measure

   		the change in quantity demanded when a product attribute changes.
   		the change in consumer spending when income changes.
   		the change in an attribute for a percentage change in price.
   		the percentage change in the quantity demanded resulting from a fixed percentage change in some attribute.

3 points

Question 20

1. Average total costs are defined as

   		total costs divided by the change in output.
   		total costs divided by output.
   		the change in total costs when output changes.
   		average variable costs plus marginal costs.

3 points

Question 21

1. If a firm is experiencing economies of scale, then the long-run average cost curve is

   		falling.
   		rising.
   		horizontal.
   		shifting.

3 points

Question 22

1. If average total cost is rising

   		marginal cost is above average total cost.
   		marginal cost is rising.
   		marginal product is rising.
   		marginal cost is above average total cost and is falling.

3 points

Question 23

1. The period of time over which all inputs are variable is the

   		market horizon.
   		short run.
   		calendar year.
   		long run.

3 points

Question 24

1. The supply chain refers to

   		the supply curve.
   		the process of outsourcing.
   		the process of downsizing.
   		the process of creating and selling a product.

3 points

Question 25

1. When the capital (a fixed input) changes

   		short-run marginal costs rise.
   		short-run average total costs fall but do not shift.
   		labor inputs decline.
   		the short-run average total cost curve shifts.

3 points

Question 26

1. A market of price takers is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 27

1. A market with a single seller is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 28

1. A market that mainly stresses product differentiation is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 29

1. Entry into a competitive market will continue until

   		economic profits are zero.
   		normal profits are zero.
   		when accounting losses are zero.
   		a. and b. are true

3 points

Question 30

1. Firms in an oligopoly

   		act independently.
   		engage in strategic behavior.
   		have perfect knowledge of the behavior of others.
   		openly collude.