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Econ 302: Exam 2
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Terms in this set (33)
Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in
the person buying ________ of the good and the income effect results in the person buying ________ of the good.
more, less
Elasticity measures
the percentage change in one variable in response to a one percent increase in another variable.
Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the marginal product of labor?
MP= 5K
The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect.
substitution
Along any downward sloping straight-line demand curve:
the price elasticity varies, but the slope is constant.
Which of the following relationships is NOT valid?
Rising marginal cost implies that average total cost is also rising
When the average product is decreasing, marginal product
is less than average product.
Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be
-.8
Which of the following costs always declines as output increases?
Average fixed cost
In the isoquant/isocost model, at the optimum combination of two inputs
the slopes of the isoquant and isocost curves are equal.
costs are minimized for the production of a given output.
the marginal rate of technical substitution equals the ratio of input prices.
The slope of the total product curve is the
marginal product
Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high."Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:
is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the fixed cost?
200
The short run is
a time period in which at least one input is fixed.
Joe's budget constraint equals 500 = 2F + 100S, where $500 is Joe's income, $2 is the price of food (F) and $100 is the price of shelter (S). If Joe buys one unit of shelter what is the maximum amount of food that he can buy?
200 units
Johnny has allocated $30 toward coffee and tea and feels that coffee and tea are perfect substitutes. Due to differences in caffeine levels, his MRS for coffee with tea equals 2. If coffee and tea sell for the same price, Johnny will
spend all $30 on coffee.
The long run average cost curve may initially slope downward due to
economies of scale.
One reason a gift card might be less desirable than cash?
A gift card requires an individual to purchase from a particular store, which restricts the opportunity set.
If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the
rate at which the firm can replace capital with labor without changing the output rate
The assumption of transitive preferences implies that indifference curves must
not cross one another
If the demand curve is horizontal then
demand is infinitely elastic
A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis
-7/15
Which of the following events will cause a leftward shift in the supply curve of gasoline?
An increase in the wage rate of refinery workers
When an isocost line is just tangent to an isoquant, we know that
output is being produced at minimum cost
Fixed costs are fixed with respect to changes in
output
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average cost function?
5 + (200/Q)
A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquant for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use.
labor, capital
In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
marginal cost is below average variable cost.
Mikey is very picky and insists that his mom make his breakfast with equal parts of cereal and apple juice - any other combination and it ends up on the floor. Cereal costs 4 cents per tablespoon and apple juice costs 6 cents per tablespoon. If Mikey's mom budgets $8 per month for Mikey's breakfast, how much cereal and juice does she buy?
80 tablespoons each of cereal and juice
From 1970 to 2010, the real price of eggs decreased. Which of the following would cause an unambiguous decrease in the real price of eggs?
A shift to the right in the supply curve and a shift to the left in the demand curve for eggs
When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that:
Joe is not consuming good Y
A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function
C= L^.5 + M^.75. This production function exhibits
decreasing returns to scale for all output levels
Use the following two statements to answer this question
I. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing
II. Diminishing returns to all factors of production implies decreasing returns to scal
Both I and II are false
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