ECO100Y5 Study Guide - Midterm Guide: Demand Curve, Marginal Cost, Clastic Rock

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ECO100Y5 Full Course Notes

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Except the diagram in question 7, any part of your answers done in pencil will not be eligible for appeal. Do not use red-coloured pen or pencil in your answers. Show calculations in every part of question 6. You must relate your explanation in question 7 to your diagrams for full marks. Only put your answers to questions 6 and 7 in the designated page(s), and do not separate any page from this test. Assume this is a constant cost industry in which input prices are independent of the industry output level. (30 marks) 900 (a) if the short-run equilibrium price is 35, then determine the output of a representative perfectly competitive firm , economic profit or loss , and the number of firms in this short-run period. (12 marks) Competitive equilibrium occurs when the total quantity supplied by all firms equals the quantity demanded in the market.

Related Questions

1. (Law of Diminishing Marginal Utility) Some restaurants offer âall you can eatâ meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary)

2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?

3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary)

4. What is the diamonds-water paradox, and how is it explained? Use the same reasoning to explain why bottled water costs so much more than tap water.

5. Please read Jane Katzâs âThe Joy of Consumption: We Are What We Buy,â in the Federal Reserve Bank of BostonâsRegional Review at http://www.bos.frb.org/economic/nerr/rr1997/winter/katz97_1.htm and briefly discuss/summarize the evidence that Katz cites about how the rising value of time has affected consumer spending patterns.

6. Suppose that marginal utility of Good X = 100, the price of X is $10 per unit, and the price of Y is $5. Assuming that the consumer is in equilibrium and is consuming both X and Y, what must the marginal utility of Y be? (Hint: Please apply the formula: MUx/Px = MUy/Py)

7. What is consumer surplus? What happens to consumer surplus as price level falls?

8. Do you think any good which does not exhibit the law of diminishing marginal utility?

When deciding consumption levels of more than one good, the utility-maximizing rule states that you are maximizing utility when

		the marginal utility o two goods are equal
		the marginal utility of two goods are zero
		the ratio of marginal utility to price of two goods is zero
		the ratio of marginal utility to price for the two goods are equal

10 points

QUESTION 2

My brother says the law of diminishing marginal utility is nonsense because he is way happier after his sixth beer than after his first one. Pick the best response.

		He has a point, maybe this is something behavioral economists should take a look at.
		True, but marginal utility refers only to the utility gained (or lost) by drinking that last beer, not to his total utility
		There are always exceptions, but in general this law will hold.
		True, but the law of diminishing marginal utility is really just saying that eventually he will prefer a glass of wine to another beer.

10 points

QUESTION 3

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his marginal utility from the final magazine is 10 utils while his marginal utility from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

		Reallocate spending from magazines to newspapers
		Reallocate spending from newspapers to magazines
		Be satisfied because he is already maximizing his total utility
		None of the above

10 points

QUESTION 4

Marginal utility can be:

		Positive, negative, or zero
		Decreasing but not negative
		Positive or negative, but not zero
		Positive, but not negative

10 points

QUESTION 5

In economics, a product provides utility if it:

is useful

violates the law of demand

takes more and more resources to produce successive units of it

satisfies consumer wants

Which of the following is true of an indifference curve?

		Along an indifference curve utility is fixed.
		If a consumer is rational then indifference curves may cross.
		Indifference curves further from the origin are associated with lower levels of utility than those that are closer to the origin.
		Because they are indifference curves, microeconomics students should be indifferent towards them.

Michael spends all of his income on coffee and donuts. A coffee costs $2.50 and a donut costs $2.00. At his current consumption level, the marginal utility for coffee is 30 utils, and the marginal utility for a donut is 60 utils. Which statement best describes what Michael needs to do to maximize his utility?

Question 1 options:

1)	buy less of both coffee and donuts.

2)	buy less coffee and more donuts.

3)	buy more coffee and less donuts.

4)	spend the same amount on coffee as he does on donuts.

Question 2

What is it called when the marginal utility derived from the last dollar spent on each good is the same across all goods and the last dollar spent uses all of the available budget for the purchase of those goods?

Question 2 options:

1)	the optimal consumption bundle.

2)	the optimal production bundle.

3)	diminishing marginal utility.

4)	optimal point.

Question 3 (1 point)

What does the economic theory of marginal utility infer?

Question 3 options:

1)	consumers naturally know which consumption choices will maximize their utility.

2)	consumers who watch market trends are better at maximizing their utility than are those who do not watch those trends.

3)	one cannot maximize utility without taking an economics class that explains utility theory.

4)	one cannot maximize utility without doing the math of calculating the ratios of marginal utility divided by price.

Question 4

Kate is addicted to chocolate and does not care how much it costs. In fact, she spends more than $20 a week on chocolate. What can be concluded about elasticity in her buying decisions?

Question 4 options:

1)	Her income elasticity of demand for chocolate is equal to one.

2)	Her income elasticity of demand for chocolate is equal to zero.

3)	Her price elasticity of demand for chocolate is equal to one.

4)	Her price elasticity of demand for chocolate is equal to zero.

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Question 5 (1 point)

Why does the demand for a good become relatively more elastic?

Question 5 options:

1)	substitutes for the good become more available.

2)	substitutes for the good become less available.

3)	the good becomes more of a necessity.

4)	the time allowed for adjustment is shortened.

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Question 6 (1 point)

Assume the price of chicken per pound is $3.49 and that Americans purchase 10 million pounds per chicken every month. If the price of chicken increases to $5.49 per pound, identify what will occur to consumer surplus?

Question 6 options:

1)	consumer surplus increases.

2)	consumer surplus decreases.

3)	consumer surplus creates incentive to save.

4)	consumer surplus creates incentive to spend.

Question 7 (1 point)

What is another name for the difference between the price that consumers are willing to pay for a good and a lower price that they may actually have to pay?

Question 7 options:

profit.

revenue.

3)	consumer utility.

4)	consumer surplus.

Question 8

Adam, Brian, Robert, and Sam all want to attend a football game. The admission price is $48. Adam is willing to pay $59 for the ticket. Brian is willing to pay $39. Robert is willing to pay $45, and Sam is willing to pay $55. Based on this information, who will go to the game?

Question 8 options:

1)	Adam, Brian, Robert, and Sam.

2)	Brian and Robert.

3)	Adam and Sam.

4)	Brian, Robert, and Sam.

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Question 9 (1 point)

Lily is willing to pay $10 for one bracelet and $5 for a second. Patty is willing to pay $12 for one bracelet and $2 for a second. If the price is currently $8 per bracelet, identify what is the total consumer surplus after Lily and Patty make their purchases?

Question 9 options:

Question 10 (1 point)

Manfred is willing to shovel one driveway for $25, a second for $30, and a third for $35. Assume that the market rate for shoveling driveways is $32. How many driveways will Manfred shovel, what will be his total revenue, and what will be his producer surplus?

Question 10 options:

1)	Manfred will shovel two driveways for a total revenue of $64 and his producer surplus will be $9.

2)	Manfred will shovel three driveways for a total revenue of $75 and his producer surplus will be $12.

3)	Manfred will shovel three driveways for a total revenue of $96 and his producer surplus will be $5.

4)	Manfred will shovel four driveways for a total revenue of $125 and his producer surplus will be $18.

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Question 11 (1 point)

What would the difference between the price that producers receive and the lower price at which they are willing to sell the good be called?

Question 11 options:

1)	producer shortage.

2)	producer surplus.

3)	consumer shortage.

4)	consumer surplus.

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Question 12 (1 point)

What will happen when there is an increase in the price of eBook downloads?

Question 12 options:

1)	It reduces the marginal utility derived from each dollar spent on eBooks.

2)	It reduces the marginal utility derived from each hardcopy book purchased.

3)	There will not be a substitution effect.

4)	There will not be a change in the number of eBooks in the set of consumption possibilities.

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Question 13 (1 point)

When is price elasticity of demand utilized to measure how an individual changes the quantity they demand?

Question 13 options:

1)	when supply changes.

2)	when product quality changes.

3)	when marketing changes.

4)	when price changes.

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Question 14 (1 point)

Assume Mary consumes only tea and pastries. A cup of tea costs 5 euros and a pastry costs 8 euros. Her weekly income is 450 euros. Mary always drinks 2 cups of tea for every pastry she consumes. What is Maryâs optimal weekly consumption bundle?

Question 14 options:

1)	25 cups of tea and 50 pastries.

2)	50 cups of tea and 25 pastries.

3)	58 cups of tea and 20 pastries.

4)	60 cups of tea and 30 pastries.

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Question 15 (1 point)

When is producer surplus a positive value?

Question 15 options:

1)	the price the producer is willing to charge equals the market price.

2)	there is no tax applied to the good.

3)	the price the producer is willing to charge is less than the market price.

4)	the price the producer is willing to charge is greater than the market price.

ECO100Y5 Study Guide - Midterm Guide: Demand Curve, Marginal Cost, Clastic Rock

ECO100Y5 Full Course Notes

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