ECON 102 WOOTEN FINAL EXAM

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Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price​ floors? Why or why​ not?

Economic analysis cannot provide such an answer because it seeks to address positive questions such as​ "what is."

What do economists mean by​ scarcity?

Economists mean that unlimited wants exceed limited resources.

How do property rights affect externalities and market​ failure?

Externalities and market failure will result from the difficulty of enforcing property rights.

Microeconomics is most likely to include the study of

Firm interaction

In England during the Middle​ Ages, each village had an area of​ pasture, known as a​ commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used​ optimally?

Grazing created a negative​ externality, resulting in the commons being overused.

Which type of tax raises the most revenue for the federal​ government?

Individual Income

Briefly explain whether you agree with the following​ statement: ​"A lower price in a market always increases economic efficiency in that​ market."

I​ disagree, because economic efficiency declines if price falls below the market equilibrium.

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as

Profit=(P×Q)−(ATC×Q)​, where P is​price, Q is​output, and ATC is average total cost.

Which type of tax raises the most revenue for state and local​ governments?

Sales tax

Suppose that a large oil field is discovered in Michigan. By imposing a tax on the​ oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in​ Michigan?

The quantity of labor supplied in Michigan will decrease if the income effect is larger than the substitution effect.

Briefly explain whether you agree with the following​ statement: ​"If consumer surplusLOADING... in a market​ increases, producer surplusLOADING... must​ decrease."

The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss.

A student makes the following​ argument: ​"When a market is in​ equilibrium, there is no consumer surplusLOADING.... We know this because in​ equilibrium, the market price is equal to the price consumers are willing to pay for the​ good." Briefly explain whether you agree with the​ student's argument.

The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.

Why are firms willing to accept losses in the short run but not in the long​ run?

There are fixed costs in the short run but not in the long run.

What is the​ circular-flow diagram and what does it​ illustrate?

The​ circular-flow diagram shows how households and firms are linked through product and factor markets.

Suppose an analyst estimates the cost to businesses from family leave laws.

This is an example of positive analysis

What do most economists find to be the most persuasive argument in favor of​ protectionism?

Trade barriers protect infant industries that initially have relatively high costs. Your answer is correct. B.

Which of the following is true of the relationship between the average product of labor and the marginal product of labor​?

Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.

The marginal cost of production shows the change in a​ firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost​ curve? ​Graphically, the marginal cost curve is

a U​ shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

What is a price​ taker? A price taker is

a firm that is unable to affect the market price

A black market is

a market in which buying and selling occur at prices that violate government price regulations.

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Consider the consumption of electricity. What type of good is electricity​? Electricity is

a quasi public good

Producer surplus is equal to the area

above the supply curve and below the price for the units produced and sold.

An example of technological change is

all of the above

What must be true for the Coase TheoremLOADING... to​ hold? For the Coase Theorem to​ hold,

all parties to an agreement must have full information about the costs and benefits of the externality

Imagine that the curves shown in the accompanying figure represent two demand curves for traditional wings​ (basket of​ six) at Buffalo Wild Wings. Further assume that wings are a normal good. The movement from point A to B on D1 is caused by

an increase in the price of baskets of traditional wings A rise in veg a fall in buyer incomes

In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be −0.09. If​ so, then beer is

an inferior good

As a result of the positive change in technology​, the new equilibrium price will be lower​, and the new equilibrium quantity will be higher. Suppose instead that the demand curve shifts to the right. ​ Then, relative to the initial market​ equilibrium, A. the new equilibrium price would be lower and the new equilibrium quantity would be higher. B. the new equilibrium price would be higher and the new equilibrium quantity would be lower. C. the new equilibrium price would be lower and the new equilibrium quantity would be lower. D. the new equilibrium price would be higher and the new equilibrium quantity would be higher.

answer

What is the difference in the short run and the long​ run? In the short​ run,

at least one of the​ firm's inputs is​ fixed, while in the long​ run, the firm is able to vary all its​ inputs, adopt new​ technology, and change the size of its physical plant.

On a shopping​ trip, Sofia decided to buy a light blue coat that had a price tag of​ $79.95. When she brought the coat to the​ store's sales​ clerk, Sofia was told that the coat was on​ sale, and she would pay 20 percent less than the price on the tag. After the discount was​ applied, Sofia paid​ $63.96, $15.99 less than the original price. The value of​ Sofia's consumer surplus from this purchase is

at least​ $15.99 since this is the difference between the price Sofia is willing to pay for the coat and the actual price she​ pays, but she could have be willing to pay more than​ $79.95 for the coat.

in the short​ run, a​ firm's shutdown point is the minimum point on the

average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve.

Your company incurs a cost for machinery​, ​which, in the short​ run, is fixed. What happens to this cost in the long​ run? In the long​ run, the cost of machinery

becomes a variable cost.

If QD ​ = 0​ = ​2,500−​20P, then P=

125

Every society faces​ trade-offs because we live in a world of scarcity. Suppose a​ student-athlete has the opportunity to earn ​$200,000 next year playing for a minor league baseball​ team, $100,000 next year playing for a European professional football​ team, or​ $0 returning to college for another year The opportunity cost of the​ student-athlete returning to college next year is ​$

2000000

What is the definition of​ monopoly?

A monopoly is a firm that is the only seller of a product in a given industry.

How does consumer surplus change as the equilibrium price of a good rises or​ falls?

As the price of a good​ rises, consumer surplus decreases ​, and as the price of a good​ falls, consumer surplus increases .

How does producer surplus change as the equilibrium price of a good rises or​ falls?

As the price of a good​ rises, producer surplus increases ​, and as the price of a good​ falls, producer surplus decreases .

Sean​ Astin, who played Sam in the Lord of the Rings​ movies, wrote the following about an earlier film he had appeared​ in: ​"Now I was in a movie I​ didn't respect, making obscene amounts of money​ (five times what a teacher​ makes, and teachers do infinitely more important​ work) ..." ​Source: Sean​ Astin, with Joe​ Layden, There and Back​ Again: An​ Actor's Tale​, New​ York: St.​ Martin's, 2004, p. 35. Are salaries determined by the importance of the work being​ done? If​ not, what are they determined​ by? Salaries are determined

by the marginal revenue product of the last worker hired and the supply of labor.

MPL formula

change in quantity/change in labor

Economic surplus in a market is the sum of​ _____ surplus and​ _____ surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a​ _____ when the market is in​ _____.

consumer; producer;​ maximum; equilibrium

According to the goal of economic​ efficiency, governments tend to favor taxes that

create a small excess burden relative to revenue raised

Assume the world market for oil is competitive and that the marginal cost of producing​ (extracting and bringing to​ market) another barrel of oil is ​$82.00 and the marginal benefit is ​$80.00. If one more barrel of oil is produced and​ consumed, how will economic surplus​ change? Economic surplus will

decrease by 2

After World War II in​ 1945, the United States experienced a​ "baby boom" as birthrates rose and remained high through the early 1960s. In​ 2011, the first members of the baby boom generation became older than 65. What effect will this have on the market for doctors​? As the first baby boomers become older than​ 65, the

demand curve for doctors will shift to the right

Writing on the Baseball Prospectus Web​ site, Dan Fox​ argued, ​"What a player is really worth depends in great deal on the teams that are interested in signing​ him." ​Source: Dan​ Fox, "Schrodinger's​ Bat," baseballprospectus.com, May​ 17, 2007. Do you​ agree? Shouldn't a baseball player with a particular level of ability be worth the same to every​ team? Briefly explain. What a baseball player is worth

depends on his marginal product and the price his output sells​ for, the latter of which is different for each team.

What is​ "natural" about a natural​ monopoly? A natural monopoly

develops automatically due to economies of scale

A price ceiling

does not increase the amount of the product that consumers buy because it creates a shortage.

One reason some oppose free trade and the reduction of trade barriers is protectionism. What does​ old-fashioned protectionism seek to​ protect? Protectionism traditionally seeks to use trade barriers to protect

domestic wages

Which of the following correctly explains the effect of a variable on the labor demand​ curve?

f human capital increases​, then the labor demand curve will shift to the right.

Economies of scale

factors that cause a producer's average cost per unit to fall as output rises

n another​ example, suppose market research shows that a particular brand of truck is a normal good and a luxury. If​ so, then the income elasticity of demand for this truck is

greater than 1

compensating differentials

higher wages that compensate workers for unpleasant aspects of a job

The production possibilities frontier will shift outward

if resources are used to produce capital goods

According to​ economists, an efficient tax is one that

imposes a small deadweight loss relative to the tax revenue it raises.

Black markets may arise

in reaction to binding price ceilings

In the​ circular-flow diagram showing how a market system​ works,

income flows to households through factor markets

Suppose the price of a substitute to LCD televisions rises. What effect will this have on the market equilibrium for LCD​ TVs? The equilibrium price of LCD TVs will

increase and the equilibrium quantity will increase

Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a​ monopoly? Economists could find that a firm is a monopoly if

it earns profits in the long run

A firm is likely to be a price taker when

it represents a small fraction of the total market

A firm might experience economies of scale because

large firms may be able to purchase inputs at lower costs than smaller competitors

What are the three conditions for a market to be perfectly​ competitive? For a market to be perfectly​ competitive, there must be

many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.

Why was De Beers worried that people might resell their old​ diamonds? If people resell their old​ diamonds, then

market competition would​ increase, decreasing market prices.

How might transaction costs affect private solutions to externality​ problems? Transaction costs

may make private solutions to reduce negative externalities no longer feasible.

Compare the demand for sugar with demand for clothes. The demand for sugar is likely

more inelastic because sugar tends to represent a smaller fraction of a​ consumer's budget.

Raising taxes on​ high-earning families will cause the U.S. tax system to become

more progressive because those with higher incomes will pay a larger percentage of their incomes in tax.

Which of the following is not scarce according to the economic​ definition?

none of the above

Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargainingLOADING...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution​ reduction? If the electric utility and the people suffering the effects of the​ utility's pollution can​ bargain, then making the utility legally liable for the damages from its pollution will

not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

In​ economics, the term capital refers to

physical capital, such as machinery, that is used to produce other goods

According to the ability−to−pay ​principle, governments favor taxes that

place a greater share of the tax burden on those who have greater ability to pay.

instead, suppose pepper and salt were substitutes. If​ so, then the​ cross-price elasticity of demand between pepper and salt would be

positive

Do producers tend to favor price floors or price​ ceilings? ​ Why? Producers favor

price floors​ because, when​ binding, price floors increase price above the equilibrium and may increase producer surplus.

How might society solve problems associated with externalities and market failureLOADING...​? If an externality is​ present, resulting in market​ failure, then

private solutions may reduce or correct market failure.

How do externalitiesLOADING... in the production of electricity result in market failureLOADING...​? Because of​ externalities, the market for electricity will

provide too much electricity.

Consider a Lacoste shirt. Is the consumption of Lacoste shirts rival and excludableLOADING...​? The consumption of Lacoste shirts is

rival and non excludable

In​ 1999, at a meeting of the World Trade Organization in​ Seattle, Washington, a large number of people protested attempts to reduce trade barriers. What is a reason why some would want to prevent trade barriers from being​ reduced? Some want to prevent trade barriers from being reduced because they

seek to protect domestic jobs

A production possibilities​ frontier:

shows the maximum attainable combinations of two goods that may be produced with available resources.

Suppose Sony makes PlayStation 3 using capital. In what way is capital a derived​ demand? Capital for Sony to make PlayStation 3 is a derived demand because

t depends on consumer demand for PlayStation 3.

marginal revenue product of labor

the change in a firm's revenue as a result of hiring one more worker

Suppose a common resource—wood in a public forest—is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being​ overused? To prevent overuse of the common​ resource,

the community could establish norms where social pressure limits deforestation

Which of the following is an example of a transaction costLOADING... associated with negotiating the reduction of a negative​ externality? An example of a transaction cost is

the cost associated with drawing up a binding contract to reduce a negative externality

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer surplus is

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

Tax incidence is

the division of the burden of a tax between buyers and sellers

A marginal tax rate is

the fraction of each additional dollar of income that must be paid in​ taxes, while the average tax rate is the total tax paid divided by total income.

Why are major league baseball players on average paid substantially more than college​ professors? Explain. Major league baseball players are paid more than college professors because

the marginal revenue product of major league baseball players is high relative to college professors.

When a competitive market is in​ equilibrium, what is the economically efficient level of​ output?

the output level where marginal cost is equal to marginal benefit

Which of the following is a primary determinant of the price elasticity of supply...​? The price elasticity of supply is affected by

the passage of time

The formula for the price elasticity of supply is

the percentage change in quantity supplied divided by the percentage change in price.

How do externalities... affect​ markets? If a positive externality in consumption is present in a​ market, then

the private benefit from consumption will be different than the social benefit from consumption.

What is​ technology? Technology is

the processes a firm uses to turn inputs into outputs of goods and services.

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

What is the production​ function? The production function is the relationship between

the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs

What are the three most important variables that cause the market supply curve for labor to​ shift? The supply curve for labor shifts with changes in

the​ population, demographics, and opportunities in other labor markets.

If patents reduce​ competition, why does the federal government grant​ them? The federal government grants patents

to encourage firms to spend money on research to create new products.

Consider the market for Blackberry cell phones. Assume the market is perfectly competitive and at a​ market-clearing equilibrium. What area represents consumer​ surplus? What area represents producer​ surplus? Consumer surplus is equal to the area

under the demand curve and above the price for the units consumed.

In the diagram to the​ right, when demand decreases​, a surplus develops at the original price. Equilibrium price will fall and equilibrium quantity will fall as a new equilibrium is established.

when supply increases​, a surplus develops at the original price. Equilibrium price will fall and equilibrium quantity will rise as a new equilibrium is established

Suppose that last semester your semester GPA was 4.00 and your resulting cumulative GPA was 2.89. ​Next, suppose that this semester your semester GPA will be 3.30. If​ so, then your cumulative GPA

will increase because your​ "marginal" GPA will be above your cumulative GPA.

We can show economic​ inefficiency:

with points inside the production possibilities frontier

We can show economic​ efficiency:

with points on the production possibilities frontier.

Suppose workers have the option of working in a dangerous factory or a safe factory. Both jobs require the same productive​ characteristics, such as education and training. According to compensating differentialsLOADING...​, would a law mandating an improvement in safety for the dangerous factory make workers in that factory better​ off? Given compensating differentials​, the safety law

would not necessarily make workers in the dangerous factory better off because it would lower their wages.

When economists speak of a surplus​, they mean a situation in which A. the market price is above the equilibrium price. B. the quantity supplied exceeds quantity demanded. C. firms have unsold goods piling up. D. all of the above. Your answer is correct. E. A and B only.

D


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