Microeconomics - General Review
Microeconomics - General Review
Microeconomics - General Review
Set of flashcards Details
| Flashcards | 40 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 23.05.2016 / 27.06.2024 |
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Oppurtunity costs are an important concept in economics because they show that all actions involve tradeoffs
Which of the following statments about the study of economics is false?
Which of the following could be an example of a constraint?
Which of the following demand curves does NOT obey the law of demand?
Which of the following supply functions obeys the law of supply, where Q is quantity, P is price and I is income?
Which of the following would cause an unambiguous increase in the equilibrium price in a market?
Suppose that in the price of good A is $4, the price of good B is $2 an the consumer's income is $60. Which of the following baskets is not on the consumer'2 budget line?
At a consumer's interior optimum solution, which of the following will not necessarily hold true when the consumer can purchase goods x and y?
Identify the statement that is false?
Economics describe consumer choice as a constrained optimization problem. What is the consumer trying to do.
Which of the following is a correct definition?
Which of the following is incorrect?
You decide to purchase a new car for $20,000. Upon driving the car off the lot, the resale value of the car falls to $10,000. Based on this information, which of the following is true?
Average costs can never fall when marginal costs are rising.
Which of the following statements is true about the total cost function TC = aQ^bw^cr^d, where Q is output, w is the wage, r is the rental rate of capital and (a, b, c, and d) are constants?
Which of the following is NOT a characteristic of a perfectly competitive market?
Is the following true or false? "It is not possible for consumers' surplus and producers' surplus to rise and for a deadweight loss to occur, simultaneously."
When we say that the perfectly competitive market equilibrium is efficient, we mean that:
What is the difference between microeconomics and macroeconomics?
Why is economics often described as the science of constrained choice?
- Desire fore goods and services are unlimited
- but ressources to produce those goods and services are scarce (=knapp)
- The scarcity implies that we are constrained in the choices we can make about which goods and service to produce
Same model applies to consumers, they have limited sources (money) to make their optimal choice of good/service to buy.
A) How does the tool of constrained optimization help decision makers make choices? B) What roles do the objective function and constraints play in a model of constrained optimization?
A) Constrained optimization allows the decision makers to select the best alternative while accounting for any possible limitations or restrictions on the choices. The objective function represents the relationship to be maximized or minimized.
B) A firm's profit might be the objective functon and all chocies will be evaluated in the profit function to determine which yileds the highest profit. The constraints place limitations on the choice the decision maker can select and defines the set of alternatives from which the best will be chosen.
Suppose the market for wheat is competivie, with an upward-slopping supply curve, a downward slopping demand curve, and an equilibrium price of $4.00 per bushel (36,4l).
- Why would a higher price (e.g., $5.00 per bushel) not be an equilibrium price?
- Why would a lower price (e.g., $2.5 per bushel) not be an equilibrium price?
- Price of $5 would result in an excess supply
Suppliers would be forced to lower their prices to sell their excess supply - Price of $2.5 would result in an excess demand
Suppliers already have a lower price and the demand is high resulting in an excess of demand.
Both would be an "Disequilibrium".
What is the differnece between an exogenous variable and an endogenous variable in an economic model? Would it ever be useful to construct a model that contained only exogenous variables (and no endogenous variables)?
Exogenous variables are determined outside the model, endogenous variables are determined inside the model.
Examples for exogenous variables:
- income
- taste & preference
- wealth
- price of related products
Endogenous variables can be either Q or P, depending on the function.
If Q = a + bp than the endogenous would be Q.
If P = (Q-a)/b than the endogenous variable would be P.
Models without endogenous variable would determine nothing, therefore not very interesting.
Why do economists do comparative statics analysis? What role do endogenous variables and exogenous variables play in comparative statics analysis?
Comparative statics analyses are performed to determine how the levels of endogenous variables change as some exogenous variable is changed. This type of analysis is very important since in the real world the exogenous variables, such as weather, policy tools, etc. are always changing and it is useful to know how changes in these variables affect the levels of other, endogenous, variables. An example of comparative statics analysis would be asking the question: If extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply, by how much will the market price for corn (an endogenous variable) increase?
What is the difference between positive and normative analysis? Which of the following questions would entail positive analysis, and which normative analysis?
a) What effect will internet auction companies have on the profits of local automobile delarships?
b) Should the government impose special taxes on sales of merchandise made over the internet?
Positive analysis attempts to explain how an economic system works or to predict how it will change over time by asking explanatory or predictive questions. Normative analysis focuses on what should be done by asking prescriptive questions.
a) Because this question asks whether dealership profits will go up or down (and by how much) – but refrains from inquiring as to whether this would be a good thing – it is an example of positive analysis.
b) On the other hand, this question asks whether it is desirable to impose taxes on Internet sales, so it is normative analysis. Notably, this question does not ask what the effect of such taxes would be.
Explain why a situation of excess demand will result in an increase in the market price. Why will a situation of excess supply result in a decrease in the market price?
Excess demand results in increase of market price as the suppliers can ask for a higher price.
Excess supply results in decrease of market price as the suppliers have to lower the price to sell their stocks.
Use supply and demand curves to illustrate the impact of following events on the market for coffee:
a) The price of tea goes up by 100%.
b) A study is release that links consumption of caffeine to the incidence of cancer.
c) A frost kills half of the Colombian coffee bean crop.
The price of styrofoam coffee cups goes up by 300%.
Suppose we observe that the price of soybeans goes up, while the quantity of soybeans sold goes up as well. Use supply and demand curves to illustrate two possible explanations for this pattern of price and quantity changes.
A 10% increase in the price of automobiles reduce the quantity of automobiles demanded by 8%. What is the price elasticity of demand for automobiles?
A linear demand curve has the equation Q = 50 - 100P.
What is the choke price?
Explain why we might expedct the price elasticity of demand for speedboats to bem ore negative than the price elasticity of demand for light bulps.
Can be explained in two ways.
1. Luxury good vs. necessity: Luxury goods (speed boat) are elastic, necessities (light bulps) are inelastic as it is important to have light (small change in demand)
2. Size relative to budget: Speed boat will be expensive therefore elastic, change of demand will be small for lightbulps as they are cheap.
What is a basked (or a bundle) of goods?
A basket is a collection of goods and services that an individual might consume.
What does the assumption that preferences are complete mean about the consumer's ability to rank any two baskets?
Consumer always responds the same way in preference:
Product A is preferred to B
OR
Product B is preferred to A
OR
Consumer is indifferent between A and B.
A biotechnology firm purchased an inventory of test tubes at a price of $0,50 per tube at some point in the past. It plans to use these tubes to clone snake cells. Explain why the opportunity cost of using these test tubes might not equal the price at which they were acquired.
Opporunity costs are different than acquisition costs ($0,50) as they are forward looking.
What is the relationship between the solution to the firm's long-run cost-minimization problem and the long-run total cost curve?
The long-run total cost curve plots the minimized total cost for each level of output holding input prices fixed. In other words, for a given set of input prices, the long-run total cost curve represents the total cost associated with the solution to the long-run cost minimization problem for each level of output.
Explain why an increase in the price of an input typically causes an increase in the long-run total cost of producing any particular level of output?
When the price of one input increases, the isocost line for a particular level of total cost will rotate in toward the origin. Assuming the isocost line was tangent to the isoquant for the firm’s selected level of output prior to the rotation, rotated isocost line will no longer touch the original isoquant. In order for an isocost line to reach a tangency with the original isoquant, the firm would need to move to an isocost line associated with a higher level of cost, i.e. an isocost line further to the northeast.
If the price of labor increases by 20%, but all other input prices remain the same, would the long-run total cost at a particular output level go up by more than 20%, less than 20%, or exactly 20%.
If the prices of all inputs went up by 20%, would long-run total cost go up by more than 20%, less than 20%, or exactly 20%?
If the price of a single input goes up leaving all other input prices the same and the level of output constant, total cost will rise but by a smaller percentage than the increase in the input price. This occurs because the firm will substitute away from the now relatively more expensive labor to the now relatively less expensive other inputs. So, if the price of labor rises by 20% holding all other input prices constant, total cost rises by less than 20%. If the prices of all inputs go up by the same percentage, total cost will rise by exactly that same percentage. So, if input prices rise by 20%, total cost will also rise by 20%.
Discuss the following statement: "Since supply and demand curves are always shifting, markets never actually reach an equilibrium. Therefore, the concept of equilibrium is uselss."
Markets may never reach an equilibrium, but the concept provides a simple way to predict how market prices and quantities will change as exogenous variables change. It helps to predict, wether prices will be rising or falling when exogenous market factors change as we move toward equlibrium.
Which of the following statements about the study of economics is true?
A. Microeconomics is the study of the economic behavior of individual economic decision makers.
B. Microeconomics is the study of how an entire national economy performs.
C. Microeconomics deals with the allocation of limited resources to satisfy unlimited human wants.
Suppose that the market for computers is initially in equilibrium. Further suppose that there is an increase in the price of computer software (a complementary good).
Which of the following accurately describes the effects of increase in the price of computer software on the equilibrium price and the equilibrium quantity in the computer market?
