Econ Midterm #1

(Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the value of wasted time if a price ceiling of $4 is implemented?

$160

(Table: Competitive Firm) Refer to the table. For the seventh unit of output, total profit is:

$160

If you are willing to pay $8 for a $6 burrito, what is your consumer surplus if you buy it?

$2

If Tom sells 500 sandwiches for $7 and has an average cost of $5, what is his total revenue?

$3,500

In the diagram, for a market price of $4, total consumer surplus equals:

$30.

A country produces and consumes 8 units of sugar cane costing $50 per unit and two iPods that cost $200 each. After specialization and trade, that country consumes 8 units of sugar cane and four iPods. With 24 units of labor, what are wages in this country?

$33.33 without trade and $50 with trade

(Figure: A Tariff on Imports) Refer to the figure. Suppose the government intervenes with a $2 tariff; the total value of deadweight loss as a result of the tariff is:

$350 million

Figure: Consumer SurplusRefer to the figure. Calculate the dollar amount of consumer surplus being earned in this market when the price is $30 and there are 300 units consumed.

$4,500

Refer to the figure. Calculate the dollar amount of consumer surplus being earned in this market when the price is $30 and there are 300 units consumed.

$4,500

Figure: Market for Plumbers If the market in this figure is in equilibrium, the hourly wage paid to plumbers is ______, and the marginal product of a plumber is ______.

$40; $40

The average tax on a professor's income of $100,000 is 18%, and the marginal tax rate above $100,000 is 45%. If the professor teaches during the summer and earns an additional $10,000 (bringing her total earnings for the year to $110,000), how much of the summer income does she keep after paying taxes?

$5,500

A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that gets washed down the drain escapes into the environment and releases allergens that cause respiratory problems for people. What is the social cost of a bottle of this cleaner?

$5.50 plus the external cost of such a bottle of bathroom cleaner

(Figure: Supply and Demand 3) Refer to the figure. If the government sets a price ceiling at $8, it will create a deadweight loss of:

$9

If the price of oil increases from $80 to $90 per barrel, the quantity supplied increases from 100 to 105 million barrels per day. What is the price elasticity of supply using the midpoint method?

0.41

Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks.

1

During the Great Depression, the U.S. unemployment rate exceeded

20%.

(Table: Production Possibilities for the United States and Mexico) Using the table on production possibilities for the United States and Mexico, assume each country specializes in the good for which it has a comparative advantage. Which of the following answers identifies a trade price that both countries would find acceptable? (Units are in tons.)

5 corns for one potato < trade price < 8 corns for one potato

(Figure: Price and Quantity 1) In the diagram, at a price of $40, the quantity demanded is ______, the quantity supplied is ______, and there is a ______.

60; 40; shortage of 20 units

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market?

85

Rent control in New York City has resulted in:

All of the answers are correct

Which of the following statements applies to the diagram?

An increase in supply causes an increase in quantity demanded.

Which of the following statements is TRUE about trade?

Everyone can benefit from trade, even people who trade with someone from a foreign country.

A decrease in demand for a good will lead to a decrease in the price of the good, but an increase in the quantity supplied.

False

A firm will attain more monopoly power as demand for its product becomes more elastic

False

A monopoly maximizes profit by finding the output level where the difference between marginal revenue and marginal costs is as large as possible

False

A reduction in the expected future supply of a good will increase the demand for substitute goods today.

False

An increase in the price of corn will lead to a decrease in the DEMAND for corn.

False

Economic benefits to tariffs and import quotas include more jobs in the protected industry, lower prices to consumers, and increased gains from trade

False

Economists believe that monopoly markets are "bad" because they raise prices for consumers

False

For countries to be wealthy, they need lots of physical and human capital per worker, which, in turn, depends on a system of private property rights, political stability, a just legal system, honest government, and competitive and open markets.

False

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity

False

If there is high inflation, individual households will be hurt but economic disruptions on the national level will not result.

False

In a large class, each student's opportunity cost of taking an exam is likely to be the same.

False

One of the limitations of economics is that the principles apply only to the American economic system and not foreign economies.

False

Suppose that supply is fixed at 100 units and demand is Q = 500 - P. A price ceiling of $100 creates a shortage of 400 units.

False

The difference between the long run and the short run is that in the long run, marginal cost equals marginal revenue for all firms in the economy

False

The labor supply curve for an individual is always upward sloping

False

The points on the production possibilities frontier show the cost of the different goods that a country can produce.

False

Vaccines benefit the person who is vaccinated, but they also create an external cost for others

False

When the market price is above the equilibrium, the price will increase over time.

False

Refer to the figures. If the figures represent the market for a popular soda, which figure shows the effect of an increase in the price of a competing energy drink?

Figure C

In the late 1980s, many argued that _____ would be a driver in many related industries, but this proved false

HDTV

Which of the following statements is TRUE? I. The presence of a union will decrease the supply of labor. II. Unions increase the wages of their members by reducing employment. III. Countries with the highest unionization rates have the highest wage levels.

II only

Many people argue that the U.S. government should control pharmaceutical prices. What would most likely happen as a result of this policy?

Lower prices would mean lower profits and hence less incentive for firms to engage in research and development of new drugs

Which statement is correct regarding the Federal Reserve?

Most economists believe that the Federal Reserve does more good than harm.

Two persons each produce two identical goods. Which of the following is TRUE about their absolute and comparative advantages in the production of these two goods?

One person can have an absolute advantage in both goods but not a comparative advantage in both goods.

(Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most elastic?

S4

In 2011, the U.S. Senate voted to end ethanol subsidies. What will be the effect of this bill in the market for ethanol?

Supply will decrease.

Which statement about taxes is INCORRECT?

Taxes in markets always cause deadweight losses

Suppose it is widely believed that the price of flat-screen, high-definition televisions will be lower next year. What will happen as a result of such beliefs?

The demand for flat-screen TVs will decrease now.

New production technology in the manufacture of plasma television screens has reduced the number of defective screens. What effect will this have in the market for plasma televisions?

The supply curve will increase.

Which of the following statements is TRUE?

Trade raises the wages of workers in low- and high-wage countries.

A market surplus can be defined as a situation in which the quantity demanded in a market is less than the quantity supplied, at the given price.

True

A tariff benefits domestic producers but hurts domestic consumers

True

An increase in income increases the demand for normal goods.

True

Countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best.

True

Drug prohibition is likely to increase drug-industry revenue because the demand for drugs is inelastic.

True

Firms in competitive industries should adhere to: (1) expanding output if MR > MC, and (2) reducing output if MC > MR.

True

If the price of a good increases from $200 to $250 and quantity supplied increases from 200 units to 400 units, the supply would be classified as elastic.

True

In a constant cost industry, many firms can expand or contract without a change in costs

True

Other things being equal, total consumer surplus falls when the market price rises.

True

Removing tariffs and quotas will ensure that goods are sold by the low-cost producers and increase the sum of consumer and producer surplus.

True

The Federal Reserve has a dual mandate to promote maximum employment and stable prices. This can be hard because attempts to reduce unemployment can cause more inflation.

True

The demand for necessary goods tends to be less elastic.

True

The free market maximizes the gains from trade, producing the level of output that maximizes consumer surplus plus producer surplus.

True

The social cost of antibiotic consumption equals the private cost of producing antibiotics plus the cost of increased bacterial resistance to antibiotics

True

The supply of U.S. housing is more inelastic if most of the timber in the United States goes to housing construction.

True

The tariff diagram illustrates that if the absolute value of the slopes of the demand and supply curves are equal, then the deadweight loss of any tariff always equals the wasted resources due to increased domestic production

True

The tragedy of the commons is an externality problem

True

Understanding economic growth is one of the most important tasks of economics.

True

What negative externality does antibiotic use create?

With greater use of antibiotics, bacteria become increasingly resistant to them, thus increasing the likelihood of people dying from drug-resistant bacteria

A compensating differential is:

a difference in wages that offsets differences in working conditions

Sarah pays county taxes, part of which are used to subsidize public schools, even though she has no children. Sarah is an example of:

a forced rider

Monopolies can arise naturally when:

a large firm can produce at lower cost than other small firms

Wealthy countries tend to have ______ physical capital per worker and _______ human capital per worker.

a lot of; a lot of

Imagine a free market in equilibrium. After a sudden increase in demand (but before the price can adjust), the market experiences:

a shortage

After a hurricane in Florida destroys half of the orange crop, economists predict:

an increase in orange prices and a decrease in orange sales.

Which option best explains why firms develop new ideas for production techniques and product features?

because they are interested in making a profit

Economists think that people are self-interested:

because they respond to incentives in predictable ways.

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities

According to the textbook, globalization:

began as far back as the Roman Empire.

The losses from trade protection include:

both deadweight loss and wasted resources

Gains from trade will be maximized at the free market equilibrium price and quantity because the supply of goods is:

bought by the buyers who have the highest willingness to pay.

Economic theory suggests that college graduates receive higher wages than those with only a high school education because:

college graduates are more productive

Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

competition among buyers will increase the current price.

Vernon Smith showed the market equilibrium concept to be:

consistent with experimental results.

When the price of wood is high:

consumers will be more likely to use wood in its most valuable uses.

The economic inefficiency of a monopolist can be measured by the:

deadweight loss involved relative to a competitive firm

When labor supply increases, the wage is expected to:

decrease

If the elasticity of demand for cigarettes is 0.75 and the elasticity of supply for cigarettes is 1.25, then a 5% decrease in the demand for cigarettes would cause the price of cigarettes to:

decrease by 2.5%.

When entrepreneurs use advertising to pay for the provision of a public good, the outcome is typically

efficient because the market price is zero and hence equal to the marginal cost of providing the public good

Free riders are people who:

enjoy public goods without paying for them

According to the theory of comparative advantage:

every country can produce some good with a lower opportunity cost

Immediately after a hurricane, it is likely that the quantity demanded for tree cutting/removal services will ______ the quantity supplied, causing the price of tree cutting/removal services to ______.

exceed; rise

There are ______ substitutes for oil, so the elasticity of demand for oil is ______ elastic.

few; not very

In many places around the world, monopolies result from:

government policies

Most developed countries:

grow at an unsteady rate.

A college education in the United States:

has been shown to earn a wage premium

If supply decreases, ceteris paribus, market price will be ______ at the new equilibrium point.

higher

If there are 100 tickets to a concert and 200 fans who would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets?

hold an auction

In several cities around the country, schools are paying cash awards to students who do well on English and math tests. This practice highlights the idea of:

incentives—the rewards and penalties that motivate behavior.

Trade tends to:

increase the wages of both high- and low-productivity countries.

In the long run, individual transferable quotas ______ the fishing catch in New Zealand.

increased

A price floor:

is a minimum price allowed by law

Discrimination by employees:

is a situation in which one group of workers doesn't want to work with another group of workers

When opportunity cost is positive, economic profit ______ accounting profit

is less than

The quantity supplied:

is the amount that sellers are willing and able to sell at a particular price.

The lower the price ceiling is relative to the market equilibrium price, the:

larger the shortage

If the economies of scale are large enough, average cost for a natural monopoly can be:

lower than the average cost under competition

Since the popular video game Grand Theft Auto IV cost more than $100 million to develop:

marginal cost pricing of $1 per game will most likely generate an unsuitable return on investment

Bees produce honey for beekeepers but also pollinate crops for farmers. In the absence of pollination compensation, this external benefit:

means that there is an inefficient number of bees because beekeepers do not receive the full social value from their bees

After Napster was introduced in 1999 as a peer-to-peer file-sharing Internet service, people could cheaply distribute music. Thanks to this and other innovations (e.g., "ripping" CDs, torrents, YouTube), music is becoming increasingly:

nonexcludable

Public goods are:

nonexcludable and nonrival.

Based on the ideas of Adam Smith, it is ______ dentists clean and repair teeth, but ______.

not out of benevolence that; from their regard for their own self-interest

The demand curve for oil slopes downward because:

oil will be used in its higher-valued uses only when the price of oil is higher.

Which of the following is an example of an implicit cost of production

opportunity cost

In competitive markets, the demand curve faced by the individual firm is:

perfectly elastic

Which statement correctly completes the definition of a demand curve? A demand curve is a function that shows the relationship between:

price and the quantity demanded.

A binding minimum wage is a(n) ______ for labor

price floor

The key condition for equilibrium to occur in a market is:

quantity demanded equals quantity supplied

Dramatic price increases, such as those seen in the markets for gas and oil in the 1970s, are typically the result of:

reductions in supply

The command and control method is a ______ solution to the externality problem

regulatory

The U.S. government's policies on foreign-made sugar:

result in U.S. consumers paying more than double the world price of sugar

Firms in a perfectly competitive industry maximize profits by:

setting a price equal to the market price

(Table: Equilibrium Adjustment) Refer to the table. If the price in the free market is $2, then a:

shortage of 50 units would exist, and price would rise.

(Figure: Supply Shifts) In the figure, the initial supply curve is S1. Producers engage in market speculation with the belief that the price of the good will increase in the near future. This would be represented in the figure by shifting the:

supply curve to S2, resulting in a lower quantity supplied at each price.

A binding price floor leads to a(n):

surplus

A tariff is a:

tax on imports

In regard to the criminalization of drugs, Nobel prize-winning economist Gary Becker suggested:

that the government should make drugs legal and then place a tax on drugs to control their usage.

Figure: Price Ceilings and Lost Consumer Surplus. Refer to the figure. The figure measures the consumer surplus associated with a price ceiling, assuming:

the best-case scenario

Producer surplus is:

the difference between the market price and the minimum price at which producers are willing to sell a good.

When employment discrimination stems from personal prejudices of employers, economic theory suggests that:

the employers who discriminate will face higher costs

Self-interest can be aligned with the social interest by

the enactment of government policies that increase incentives to work and trade.

Self-interest can be aligned with the social interest by:

the enactment of government policies that increase incentives to work and trade.

In a competitive, constant cost industry:

the long-run price is constant

Absolute advantage derives from which of the following?

the lowest cost of production

Gains from trade are maximized when:

the market price is equal to the equilibrium price

The equilibrium price is:

the price at which quantity demanded is equal to quantity supplied.

A demand curve indicates that:

the quantity demanded of a good is higher when its price is lower.

Many people who own dogs do not pick up after them in public places. This is an example of:

the tragedy of the commons

Without trade restrictions, the price of tennis shoes is $30, and with trade restrictions the price of tennis shoes is $45. The difference in the two prices reflects:

the value of the extra resources for domestic production of an additional pair of tennis shoes

A natural monopoly occurs when:

there are economies of scale over the relevant range of output

If market incentives to produce are too strong, the market will end up producing:

too much of the good.

An increase in demand shifts the demand curve:

up and to the right.

Small tribes may be able to solve the tragedy of the commons by:

using social norms to punish and ostracize those that overuse a common resource

Without trade, we would all be able to produce:

very little

Suppose all students received the average grade on exams, regardless of how well each person did. What is the most likely grade each student will get (assume a very large class)?

zero or near zero points