# Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

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2 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 2 of 9 NOTE: #1: An exam statement is not false merely because of the contents of a parenthetical comment in two contexts. First, all a.k.a. (i.e., also known as) parentheticals; second, formulas within parentheticals merely slavishly repeat text that is outside the parentheses. Thus, if what is outside of the parenthetical is true, what is inside is true; if what is outside of the parenthetical is false, what is inside is false. For other types of parentheticals the content of the parenthetical might render the exam statement false; for example, falsely an "i.e.," might be used when truth required an "e.g.,". Read carefully. #2: Bubble A for True bubble B for False. QUESTIONS: 1. T F The law of increasing opportunity costs asserts that to consume a greater amount of good ABC only can be obtained with an increasing sacrifice of good XYZ not being consumed. (1:7) 2. T F All of the Elements Functions of Capitalism private property embodies self interest; prices measure self interest; markets coordinate self interest, competition regulates self interest. (1:10) 3. T F A change in the price of Product A causes a motion on the dem curve of Product A (i.e., change in quantity demed); whereas a change in a non-price determinant of dem of Product A causes a motion of the dem curve of Product A (i.e., change in dem). (1:18)

3 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 3 of 9 4. T F Product "A" is a complement of Product "C" Product "A" is a substitute for Product "S". If the price of Product "A" increases, the quantity sold of Product "C" will increase the quantity sold of Product "S" will decrease. (1:20) 5. T F Externalities (a.k.a., spillovers) exist when some person either is not willing to or is not able to participate in a market. Externalities prevent the market price from being a genuine equilibrium price. (1:24) 6. T F The principal - agent problem never exists in private corporations. The principal - agent problem always exists with government employees. (1:25) 7. T F Both private goods public goods exhibit a strong characteristic of rivalry of consumption; but, only private goods exhibit a strong characteristic of exclusivity of possession. (1:28) 8. T F The gains from trade available from international trade are due each nation having a different absolute advantage in the total quantity of production. (1:30) 9. T F All tariffs all quotas always change the market price. (1:32) 10. T F International trade agreements focus on changing each nation's comparative advantage. (1:33) 11. T F There is a list of the non-price determinants of supply a list of the non-price determinants of dem. Those two lists share some similarities (e.g., prices of related goods; expectations), but those two lists also have major differences (e.g., technology is on dem's list but taxes are on supply's list). 12. T F The elasticity of dem describes the responsiveness of quantity demed to changes in price (i.e., E d = [%ΔQd / %ΔP] = [{1 / slope} P / Q]).

4 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 4 of T F Since the dem curve has a positive slope all elasticity of dem (E d ) numerical values always have a positive sign. 14. T F The numerical value of the elasticity of dem (E d ) ranges from E d = 0 (i.e., a perfectly inelastic vertical dem curve [i.e., slope = ]) to E d = (i.e., a perfectly elastic horizontal dem curve [i.e., slope = 0]). Most frequently, however, Ed values are between An elasticity of dem value of less than one (E d < 1) is inelastic. An elasticity of dem value of more than one (E d > 1) is elastic. 15. T F All sellers maximize total revenue at unitary elasticity (i.e., TR E d = 1). 16. T F Elasticity is a general concept that can be applied in a variety of ways. For example, a good's income elasticity distinguishes inferior goods from luxury goods. Also for example, the sign on the cross elasticity of dem (i.e., E XY = %ΔQd X / %ΔP Y ) is negative for a substitute good but is positive for a complement good. 17. T F Economics has multiple measures of efficiency. Productive efficiency is to produce at the good at its lowest cost (i.e., P = ATC min ). Allocative efficiency is to produce the least costly array of goods (i.e., P = MC). There is zero dead weight loss if the firm achieves both productive efficiency allocative efficiency. 18. T F If the market price is the equilibrium price (P e ), consumers will be both willing able to pay more, but do not have to, thus consumers get the consumer surplus; producers will be both willing able to sell for less but do not have to, thus producers get the producer surplus.

5 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 5 of T F Utils are a theoretical unit of measure for the individual's subjective value of utility. Dollar prices make objective that subjective value. In this way the inherently normative foundation of economics is transformed into a positivist fact. 20. T F The law of diminishing marginal utility gives shape to the indifference curves. The marginal rate of substitution (MRS) is the slope of the indifference curve. To maximize utility the indifference curve that is tangent to the budget line is selected. At that point of tangency, the ratio of prices will equal the ratio of marginal utilities (i.e., MRS = P B /P A = MU B / MU A ). And, with algebraic transformation, we can obtain the general rule for optimization: MU A / P A = MU B / P B. 21. T F A dem curve can be derived from the indifference curves their tangent budget lines. These also allow us to see the income effect the substitution effect. The income effect is that a change in a product's price is experienced as a change in real income. The substitution effect is that a change in a product's price changes the relative prices (i.e., opportunity costs) of substitutes thus shifts the substitute's dem curve. 22. T F Sunk costs are opportunity costs. 23. T F Accounting strives for objectivity by focusing upon explicit costs (e.g., arms' length transactions). Economics strives for a different type of objectivity by focusing upon both explicit costs (e.g., wages) implicit costs (e.g., normal profit).

6 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 6 of T F Normal profit is the value necessary to attract to keep entrepreneurial ability. The necessary mathematical relationship between accounting profit (π A ) normal profit (π N ) is that π A < π N because accounting profit does not include normal profit. 25. T F Total cost can be viewed in more than one way. Total cost can be viewed from the perspective of the economic resources purchased (e.g., l), or from the perspective of the payment made for the economic resources purchased (e.g., interest). Total cost also can viewed as fixed costs plus variable costs (TC = FC + VC). Economics views the long run as starting once fixed costs equal zero (FC = 0). 26. T F Economics focuses upon marginal analysis in the long run. Since fixed costs are sunk costs, economic analysis recommends ignoring sunk costs when making a decision about what to do next. 27. T F Economics assume all firm seek to profit maximize. Profit (π) is equal to total revenue (TR) minus total cost (TC) (i.e., π = TR - TC), If TR < TC, the firm is earning an economic loss (π L ). 28. T F Economics assume all firm seek to profit maximize. To profit maximize all firms must achieve marginal revenue equals marginal cost (i.e., to π max must achieve MR = MC). 29. T F Since total revenue equals price times quantity (i.e., TR = P * Q), the Shut Down Rule can be stated while focusing either on TR or on price. If TR < VC or if P < AVC, the firm will minimize its losses by exiting the market; otherwise, to minimize its losses the firm must remain in the market earn π L.

7 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 7 of T F Routinely, when graphing a firm's supply curve the supply curve is labeled as its marginal cost curve (S = MC). However, the firm's MC curve is much longer than its S curve. The firm's S curve only is that fraction of the firm's MC curve that is above the firm's minimum AVC. 31. T F All average values (e.g., cost; product) are optimized at the quantity where the marginal curve intersects the average curve (e.g., ATC ATC = MC). 32. T F All total values (e.g., cost; revenue) are optimized at the quantity where the marginal curve intersects the horizontal axis (e.g., TR MR = 0). 33. T F If E d = 1, MR = T F Both the law of diminishing marginal utility economies of scale both are applicable both in the short run the long run. 35. T F Economies of scale exist if all inputs are increased proportionally if total costs do not increase less proportionally; thus, average total costs decline. 36. T F Breakeven for an economist means TR = TC, thus the firm earns a normal profit (π N ). The economist's breakeven is the same as breakeven as used in accounting in finance.

8 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 8 of T F If a Firm #1 currently inside Market A is earning expects to continue to earn a normal profit (π N ) but if Firm #1 looks into Market B sees that Firm #1 can expect to earn an economic profit (i.e., π E when TR > TC) upon entry in to Market B, Firm #1 will exit Market A will enter Market B. 38. T F If a Firm #1 inside of Market A has earned expects again to earn an economic loss (i.e., π L when TR < TC), Firm #1 will exit Market A. 39. T F In a purely competitive market the industry's market price will be the equilibrium price (P e ) thus will clear the purely competitive industry's market (i.e., S = D). 40. T F In a purely competitive market all firm's sell at the industry's market equilibrium price: P e. 41. T F In a purely competitive market all firm's profit maximize at each firm's MR = MC. 42. T F In a purely competitive market all firms sell at the allocative efficiency price of P e = MC. 43. T F In a purely competitive market the industry sells at, but fewer than all firms sell at, the productive efficiency price of P e = ATC min. 44. T F In a purely competitive market the industry will profit maximize. 45. T F In a purely competitive market the competitive industry sells at unitary elasticity thus maximizes total revenue. 46. T F In a pure monopoly market the monopoly firm does not confront any close substitutes as competitors. 47. T F Barriers to entry can create monopoly power; but, not all markets with major barriers to entry contain monopolists.

9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 9 of T F In a pure monopoly market the monopoly firm sets quantity so that MR = MC. This quantity also maximizes the monopolist's total revenue. 49. T F All monopolists earn an economic profit. 50. T F If a seller sells to two different buyers at two different prices, that is economic price discrimination. 51. T F A seller can not engage in effective price discrimination unless that seller has monopoly power, the ability to segregate buyers according to their elasticities of dem, the ability to prevent arbitrage. 52. T F Both multinational corporations outsourcing jobs illegal immigration are arbitrage.

10 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 10 of 9 ANSWER KEY: Exam #2: ECON 2200: Spring true. 2. FALSE. 3. true. 4. true. 5. true. 6. FALSE. 7. FALSE. 8. FALSE. 9. FALSE. 10. FALSE. 11. FALSE. 12. true. 13. FALSE. 14. true. 15. true. 16. FALSE. 17. true. 18. true. 19. true. 20. true. 21. true. 22. FALSE. 23. true. 24. FALSE. 25. true. 26. true. 27. true. 28. FALSE. 29. true. 30. true. 31. true. 32. true. 33. true. 34. FALSE. 35. true. 36. FALSE. 37. true. 38. FALSE. 39. true. 40. true. 41. true. 42. true. 43. FALSE. 44. FALSE. 45. true. 46. true. 47. true. 48. FALSE. 49. FALSE. 50. FALSE. 51. true. 52. true.

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