ECO 2023 Exams (Calhoun)
If most businesses in an industry are earning a 13 percent rate of return on their assets, but your firm is earning 23 percent, your rate of economic profit is
10 percent.
If firms in a competitive price-searcher market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to long-run equilibrium?
A decrease in demand for each firm and lower prices
Which of the following about price discrimination is true?
A price-discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand.
When a price floor is imposed above the equilibrium price of a commodity, which of the following is true?
A surplus of the good will develop.
Which of the following is true if education creates external benefits?
Actual market outcomes provide less than the efficient quantity of education.
When economists use the term ceteris paribus, what are they indicating?
All other variables except the ones specified are assumed to be constan
Which of the following is true if rice is an inferior good?
An increase in income will cause the demand curve for rice to shift to the left.
What is the difference between normal and inferior goods?
An increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward.
Which one of the following would most likely increase the demand for wheat?
An increase in the price of soybeans, a substitute product.
In order for the law of diminishing returns to be present, which of the following must be true?
At least one factor of production is fixed.
Why does the short-run average total cost (ATC) curve of a firm tend to be U-shaped?
At small output rates, average fixed cost (AFC) will be high, while at large output rates, marginal cost (MC) will be high.
Why do markets fail when externalities are present?
Because some of the costs and benefits of producing a good are not reflected in the market price.
Don can produce 10 pens or 20 pencils in one hour while Bob can produce 15 pens or 5 pencils in one hour. Which of the following statements is correct?
Bob has a comparative advantage over Don in the production of pens
Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result?
Both price and quantity will decrease.
Which of the following statements is true when collective decision making is utilized to resolve economic questions regarding the allocation of resources?
Central planning and political bargaining will replace market forces
Why do externalities cause the market mechanism to allocate goods and resources inefficiently?
Competitive markets fail to give producers and consumers correct price signals.
The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?
Cows can be privately owned while in many countries elephants can not
If the firms in a competitive price-searcher market are suffering short-run losses, which of the following will occur in the long run?
Customers of firms that leave the industry will switch to remaining firms
If marginal cost exceeds marginal revenue, what would be the best strategy for a profit-maximizing firm?
Decrease quantity until marginal cost equals marginal revenue
How would a decrease in consumer income affect the market for new furniture?
Demand would decrease, leading to a reduction in price and a reduction in quantity sold.
Economic analysis suggest that in a competitive market economy, which of the following is true when an entrepreneur has made a large profit?
Economic progress for society as a whole has normally been enhanced.
Which of the following is true of entrepreneurship?
Entrepreneurial discovery is an important source of economic growth and higher living standards.
Which of the following is true when entry barriers into a market are high?
Entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits
Suppose demand increases and supply increases. Which of the following will happen?
Equilibrium price will rise, fall, or stay the same while equilibrium quantity will increase.
Which of the following statements about exchange is true?
Exchange tends to move each good toward those individuals who value the good more highly.
Which of the following is an implication of the law of diminishing returns?
In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.
What is the strategy underlying price discrimination?
Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.
Why will a competitive price-taker firm be willing to remain in the industry in the long run at zero economic profit?
It is covering all costs, including the opportunity cost of capital and labor
Which of the following best describes the dynamic process of competition?
It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
Which of the following is true about the dynamic process of competition?
It puts the profit motive of sellers to work for buyers
A tax imposed on the sellers of a good will likely result in which of the following?
It will raise the price buyers pay and lower the net price received by sellers.
In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases?
It will reduce output and raise price.
If marginal revenue exceeds marginal cost, what will a profit-maximizing monopolist do to maximize profit?
Lower price and increase output
If marginal revenue exceeds marginal cost, what will a profit-maximizing monopolist do to maximize profit?
Lower price and increase output.
Which of the following statements is correct when external costs are present in a market?
More of the good will be produced than the amount consistent with economic efficiency.
When government imposes price controls in a market, which of the following is a likely result?
Non-price factors become more important in the rationing of the good.
Which of the following most clearly distinguishes between positive and normative economics?
Positive economics is the study of the facts; normative economics is concerned with what ought to be.
Which of the following is true when demand is price inelastic?
Price and total revenue move in the same direction.
Which of the following is true of private ownership?
Private ownership links responsibility with the right of control.
If consumption of education creates an external benefit, which of the following would increase efficiency relative to the outcome determined by private decisions?
Produce more education.
As firms exit a competitive price-searcher market, what happens to the profits of remaining firms and the diversity of products in the market?
Profits rise and product diversity in the market decreases
Which of the following occurs when a shortage occurs in the market for a good?
Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.
A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit
Raise price and lower output
A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?
Raise price and lower output.
Assume a competitive price-searcher firm is earning an economic profit. The marginal revenue from selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. What should the firm do to improve its profit?
Reduce its price and increase its output level
Why is the production possibilities curve usually bowed outward?
Resources are specialized, that is, some are better at producing particular goods rather than other goods.
If marginal cost exceeds marginal revenue, what will a profit-maximizing monopolist do to maximize profit?
Restrict output to increase the price even higher
Which of the following events would decrease producer surplus?
Sellers' costs increase and the price of the good stays the same.
How will a reduction in the price of cotton (a key resource to make jeans) influence the market for blue jeans
The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right.
How will a reduction in the price of cotton (a key resource to make jeans) influence the market for blue jeans?
The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right.
Which of the following is true when production of a good generates external benefits?
The demand curve for the good will understate the true social benefits from consumption of the good.
Why do airlines generally charge travelers willing to stay over Saturday night lower fares than other customers?
The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue.
Which one of the following must occur if a profit-maximizing restaurant is going to increase its revenues by charging senior citizens (persons age 65 and over) lower prices than other customers?
The demand of senior citizens for the services of the restaurant must be elastic
If there is a decrease in both the supply and demand for a good, which of the following will definitely occur?
The equilibrium quantity will decrease.
When a government subsidy is granted to the buyers of a product, how can sellers end up capturing some of the benefit?
The market price of the product will rise in response to the subsidy
Which of the following is a likely result when the free-rider problem exists?
The market will devote too few resources to the production of the good
Why is a market unlikely to provide an efficient quantity of public goods?
The nature of public goods makes it difficult for producers to withhold them from nonpaying consumers
Which of the following is true in markets characterized by oligopoly?
The oligopolists earn the highest profit when they cooperate and behave like a monopolist
Which of the following is the most likely effect of higher chicken prices on the price and quantity purchased of beef, a substitute product?
The price of beef will increase, and the quantity purchased will increase.
Which of the following is the most likely effect of lower apple juice prices on the price and quantity purchased of orange juice, a substitute product?
The price of orange juice will fall, and the quantity purchased will fall.
What does Adam Smith's invisible hand principle stress?
The tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.
Which of the following is the best definition of the opportunity cost of an action?
The value of the best opportunity that must be sacrificed in order to take the action.
Suppose the market equilibrium price of corn is $5 per bushel, and the government sets a price ceiling of $4 per bushel. What is the most likely result of this action?
There will be a shortage of corn.
In a competitive market economy, how will a resource in short supply be allocated?
Those firms that can make the most profitable use of it will get the resource.
Which of the following describes a situation in which demand must be elastic?
Total revenue decreases when the price of pens rises.
In order to prosper, what must entrepreneurs do?
Undertake projects that create wealth and increase the value of resources
What are the three basic questions faced by every economy?
What, how, and for whom will goods be produced?
When does the burden of a tax fall primarily on sellers?
When demand for the product is highly elastic and the supply is relatively inelasti
According to the Laffer curve, which of the following is true?
When marginal tax rates are high, a reduction in tax rates may increase tax revenue
When will demand be more inelastic?
When the time the consumer has to adjust to price changes is short.
The difference between a positive economic statement and a normative statement is that
a positive statement can be proved; a normative statement cannot
When oligopolistic firms collude to maximize their joint profits, in comparison with the situation in competitive markets, their actions generally lead to
a smaller output and higher prices
A good that takes up a very large percentage of the consumer's budget will tend to have
an elastic demand.
Which one of the following factors would increase the demand for oranges?
an increase in the price of grapefruit, a substitute product
Which of the following would most likely decrease the current demand for DVD players?
an increase in the prices of television sets, a complement for DVD players
An increase in the number of students graduating with a major in engineering would result in
an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed.
When the "invisible hand" guides economic activity, prices of products reflect
both the values that society places on those products and the costs to society of producing those products.
The difference between production possibilities curves that are bowed out and those that are straight lines is that
bowed-out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost.
A firm that uses price discrimination to enhance its net revenues will
charge a lower price to consumers with a more elastic demand for the firm's product
As a group, oligopolists would always earn the highest profit if they would
charge the same price that a monopolist would charge if the market were a monopoly
When profits occur in a competitive market, this indicates that
consumers value the goods more than the resources used to produce them.
The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to
cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit
The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses,
current firms will exit the market, causing the demand curves that face the remaining firms to increase
As new firms enter a competitive price-searcher market, profits of existing firms
decline and product diversity in the market increases.
The value of a good
depends on many factors, including who uses it and under what circumstances.
When policymakers impose price controls, they
distort the signals that normally guide the allocation of resources.
In the long run, firms in many industries often experience falling average total costs as a result of
economies of scale.
The traditional view of competitive price-searcher markets holds that this type of market structure is inefficient because
excessive advertising is encouraged
The traditional view of competitive price-searcher markets holds that this type of market structure is inefficient because
excessive advertising is encouraged.
If the government wants to raise tax revenue and shift most of the tax burden to the sellers it would impose a tax on a good with a
flat (elastic) demand curve and a steep (inelastic) supply curve.
The more inelastic the demand for a product, the more likely that the actual benefit of a subsidy granted on the product will
go to buyers.
A restaurant offers an "all you can eat" lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if
his marginal benefit of the additional serving is greater than zero.
If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should
increase price and reduce its rate of output
A new law requiring plumbers to pass strict certification tests that reduce the number of plumbers would
increase the wage rate of plumbers.
An increase in the expected future price of a good will cause the current demand for the good to
increase, which is a shift to the right of the demand curve.
If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
inelastic
Suppose a city that operates local electric and natural gas companies wants to raise revenues by increasing its rates for electricity and natural gas. The price rise will increase city revenues if the elasticity of demand for electricity and natural gas is
inelastic
When an economist says a firm is earning zero economic profit, this implies that the firm
is earning as high a rate of return now as could be earned in other industries.
When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years)
is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price
If a firm enlarges its factory size and realizes higher average costs of production then
it has experienced diseconomies of scale
From the standpoint of economic efficiency, markets tend to provide
less of a public good than would be efficient.
Where marginal cost is less than average cost,
marginal cost may be rising, falling, or constant.
Opportunity costs differ among nations primarily because
nations have different amounts of land, labor skills, capital, and technology.
If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should
operate during the summer but shut down during the winter months.
If the resources of an economy are being used inefficiently, it would be
possible to increase production of all goods simultaneously.
When economists say the quantity supplied of a product has increased, they mean the
price of the product has risen, and consequently, suppliers are producing more of it.
Because of a late night out with friends, Libby decided to sleep in rather than attend her 8 a.m. economics class. According to economic analysis, her choice was
rational if Libby values sleep more highly than the benefit she expects to receive from attending the class.
In an oligopolistic market, if rival sellers act independently, each will have a strong incentive to
reduce price in order to increase sales and gain a larger share of the total market.
Recent legislation provides parents with a substantial reduction in their personal income tax liability for each child that they have. The economic way of thinking indicates that legislation of this type will
reduce the after-tax cost of raising children and, therefore, increase the birth rate.
High transaction costs will tend to
reduce the number of mutually beneficial exchanges that occur
When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by
reducing their output so they can raise their price
Losses are important to a competitive price-searcher market (industry) because they send a message to the market participants that
resources can rise in value if diverted away from that particular industry
Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would
result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
For a college student who wishes to calculate the true costs of going to college, the costs of room and board
should be counted only to the extent that they are more expensive at college than elsewhere.
A 20 percent increase in the price of sugar reduces sugar consumption by about 10 percent. Such a price increase causes households to
spend more on sugar.
If the government wants to raise tax revenue and shift most of the tax burden to the consumers, it would impose a tax on a good with a
steep (inelastic) demand curve and a flat (elastic) supply curve
Consider the market for grapes. An increase in the wage paid to grape pickers will cause the
supply curve for grapes to shift to the left, resulting in a higher equilibrium price for grapes and a decrease in the quantity consumed.
In voluntary exchange, if the seller of a product gains,
the buyer must also gain; mutual gain provides the foundation for exchange.
If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which
the demand is price inelastic
A rational decision maker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
The minimum points of the average variable cost and average total cost curves occur where
the marginal cost curve intersects those curves.
A professor loves her work, teaching economics. She has been offered other positions in the corporate world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless
the marginal cost of teaching increased.
If a firm is losing money, this implies that
the value of the resources used to make the product is being reduced
The owners of a firm are earning economic profit if
they are earning a return on their capital that is higher than what can generally be earned in other markets
Competition as a dynamic process implies that individual firms in a market
use price competition as well as other forms of competition to gain the dollar votes of consumers
The fallacy of composition is the fallacious view that
what is true for the individual will also be true for the group.
