ECON Quiz #2

Markets always allocate resources efficiently. True False

False

If P < ATC then economic profits are positive. True False

False If P < ATC then profit per unit is negative and economic profits are negative. Average revenue is less than average costs and economic profits are negative.

Total cost is the amount a firm receives for its output, and total revenue is the market value of the inputs a firm uses in production. True False

False Total cost is the market value of the inputs a firm uses in production, and total revenue is the amount a firm receives for the sale of its output.

Which of the following is not true about patents, copyrights, and trademarks? a.They cause a firm to earn lower profit. b.They are examples of government-created monopolies. c.They are examples of barriers to entry. d.They allow their owners to charge higher prices.

a.They cause a firm to earn lower profit.

Which of the following laws is to protect market competition from cooperation among oligopolists? a.Patent laws b.Antitrust laws c.The law of diminishing marginal utility d.The law of demand

b.Antitrust laws

Which of the following is an example of a market force that can prevent firms from successfully price discriminating? a.Collusion b.Arbitrage c.High average total cost d.Anti-trust laws

b.Arbitrage

Which of the following profit scenarios is possible for a firm in a monopolistically competitive market in the long run? a.Negative economic profit b.Negative accounting profit c.Positive economic profit d.Zero economic profit

d.Zero economic profit

Forgone interest payments when the money is invested in one's business are an __________ of capital. a.accepted cost b.explicit cost c.accounting cost d.opportunity cost

d.opportunity cost

In the long run in a monopolistically competitive market firms can earn positive economic profits. True False

False

The free market will always fix the problems of adverse selection and moral hazard. True False

False

When a market experiences a positive externality, the government can internalize the externality by imposing a tax on the product. True False

False

Assuming that implicit costs are positive, economic profit is greater than accounting profit. True False

False Feedback: Incorrect. Accounting profit equals total revenues minus explicit costs. Economic profit equals total revenues minus both explicit and implicit costs. Assuming that implicit costs are positive, accounting profit is greater than economic profit.

A characteristic of monopolistic competition is a small number of firms. True False

False The characteristics of monopolistic competition include a large number of firms, product differentiation, and free entry and exit into the market.

Beatrice knows nothing about construction. She hires a contractor, who uses poor-quality materials to remodel her house. This is an example of _______. a.efficiency-wage problem b.moral hazard c.adverse selection d.signaling

Moral hazard Moral hazard is the tendency to engage in dishonest or undesirable behavior, when the agent's actions are unobservable.

Which of the following is considered a likely result from advertising? a.Signaling theory suggests that expensive testimonials from celebrities indicate a higher quality product. b.Monopolistically competitive firms advertise to misinform consumers. c.Markets with identical products see large returns to advertising. d.Brand names offer consumers no new information about product quality.

a.Signaling theory suggests that expensive testimonials from celebrities indicate a higher quality product. Signaling theory suggests that expensive testimonials from celebrities indicate a higher quality product. Consumers tend to believe that a firm's willingness to spend a substantial amount of revenue on advertising signals the quality of the product.

What is economic welfare generally measured by? a.Total surplus b.Consumer surplus c.Profit d.The market price of a good

a.Total surplus Economic welfare is generally measured by the sum of consumer surplus and producer surplus, which is equal to total surplus.

A monopolistically competitive firm is _______. a.inefficient because price is greater than marginal cost b.inefficient because marginal revenue is greater than average revenue c.efficient because marginal revenue is greater than average revenue d.efficient because price is greater than marginal cost

a.inefficient because price is greater than marginal cost

The exit decision for a firm in a competitive market in the long run depends on if _______. a.price is less than average total costs b.price is equal to marginal costs c.total revenue exceeds total costs d.price is greater than average total costs

a.price is less than average total costs A firm will exit a competitive market in the long run if economic profits are negative. Economic profits are negative when price is less than average total cost.

When a firm produces 875 units of output, the firm's average fixed cost is $0.28, the firm's average variable cost is $0.20, and the firm's marginal cost is $0.22. The firm's total cost of producing 875 units is _______. a.$175.00 b.$420.00 c.$245.00 d.$367.50

b.$420.00 Feedback: Incorrect. The sum of the firm's average variable cost and average fixed cost gives the average total cost: $0.28 + $0.20 = $0.48. Total cost is average total cost multiplied by the quantity being produced: $0.48 × 875 = $420. Without additional information, marginal cost is not helpful in determining total cost.

When an insurance company checks police records to determine if its policyholders have received traffic citations, it is trying to solve the _______. a.screening problem b.adverse selection problem c.Condorcet paradox d.moral hazard problem

b.adverse selection problem Insurance companies do not have perfect information about how cautious the policyholders are. These hidden characteristics cause an adverse selection problem. By collecting as much information about the prospective policyholders ahead of time, insurance companies seek to reduce the risk of selling a policy to reckless individuals.

A large number of people benefit from good X, and excluding an individual from those benefits is impractical. Good X will _______. a.be produced in certain seasons b.likely suffer from the free-rider problem c.be profitable for private firms d.be very expensive

b.likely suffer from the free-rider problem

Which of the following would be most likely to have monopoly power? a.A small chain of fast-food restaurants b.A national package delivery service c.A local water and sewer company d.An online toy store

c.A local water and sewer company

Who would prefer to buy a medical insurance policy with a high premium and no deductible? a.A buyer of a new car b.A healthy person c.An unhealthy person d.A safe driver

c.An unhealthy person

Area Which of the following represents a measure of the level of competition in an industry? a.Quick ratio b.Survivor ratio c.Concentration ratio d.Competitive ratio

c.Concentration ratio The concentration ratio measures the percentage of total output in the market supplied by the four largest firms. It provides a measure of the level of competition in an industry.

Which of the following correctly describes the two types of imperfectly competitive markets? a.Perfect competition and oligopoly b.Monopoly and oligopoly c.Monopolistic competition and oligopoly d.Perfect competition and monopoly

c.Monopolistic competition and oligopoly

What is the primary purpose of the Sherman Antitrust Act of 1890? a.To destroy oligopolies b.To treat agreements among oligopolists as unenforceable contracts c.To establish criminal responsibility for agreements among oligopolists d.To increase competition among oligopolists

c.To establish criminal responsibility for agreements among oligopolists

A monopolistically competitive firm in the long run will operate _______. a.at a socially efficient level b.at the intersection of average total cost and marginal cost c.at excess capacity d.at the minimum of average total cost

c.at excess capacity

If good A is a common resource and good B is a public good, private decisions about the consumption of good A and the production of good B will lead to _______. a.efficient allocation of both good A and good B b.inefficient allocation of good A but efficient allocation of good B c.inefficient allocation of both good A and good B d.efficient allocation of good A but inefficient allocation of good B d.club goods

c.inefficient allocation of both good A and good B The production of public goods generates positive externalities, and the consumption of common resources generates negative externalities. Whenever externalities exist, private decisions about consumption or production will lead to an inefficient allocation.

If a firm chooses to produce at its efficient scale, it should choose the output level where _______. a.marginal cost is minimized b.average fixed cost is minimized c.marginal cost intersects with average total cost d.average variable cost is minimized

c.marginal cost intersects with average total cost Efficient scale is the quantity of output that minimizes average total cost. Marginal cost crosses the average-total-cost curve at its minimum.

Most goods in the economy are _______. a.public goods b.common resources c.private goods

c.private goods

Suppose the equilibrium wage increases by $2 hour. How does this affect the value of the marginal product of labor? a.It increases by more than $2. b.It increases by less than $2. c.It decreases by $2. d.It increases by exactly $2.

d.It increases by exactly $2.

Larry's Lawn Care is a lawn service company that provides mowing, pruning, and weed management. Larry is trying to get a better understanding of his costs by categorizing them as fixed or variable. Which of the following costs are most likely to be considered fixed costs? a.The cost of gasoline for the lawn mowers b.The cost of fertilizer c.Wages paid to lawn care workers d.The cost of the lease on the mower storage facility

d.The cost of the lease on the mower storage facility The costs of the fertilizer, wages paid to lawn care workers, and gasoline for the lawn mowers depend on the quantity of output (variable costs). The cost of the lease on the mower storage facility does not vary with the quantity of output (fixed costs).

GianCarlo used to work as an architect for $50,000 per year but quit in order to start his own photography business. To invest in his photography business, he withdrew $20,000 from his savings, which paid 2 percent interest, and borrowed $40,000 from his brother, whom he pays 3 percent interest per year. Last year GianCarlo paid $10,000 for supplies and had revenues of $70,000. GianCarlo asked William the accountant and Henry the economist to calculate his photography business's annual profit. a.William says his profit is $60,000, and Henry says his profit is $8,400. b.William says his profit is $58,800, and Henry says his profit is $58,800. c.William says his profit is $60,000, and Henry says he lost $50,000. d.William says his profit is $58,800, and Henry says his profit is $8,400.

d.William says his profit is $58,800, and Henry says his profit is $8,400. Feedback: Incorrect. Explicit costs include cost of supplies ($10,000) and interest paid on the loan from his brother ($1,200). Implicit costs include forgone earnings as an architect ($50,000) and forgone interest on savings ($400). Accounting profit equals total revenue minus explicit costs ($70,000 - $11,200 = $58,800). Economic profit equals total revenue minus both explicit and implicit costs ($70,000 - $61,600 = $8,400).

A new burger joint opens in Springfield. Other restaurants in the area lose customers and profits because some of their customers go to the new burger joint. The firms feel the __________ externality and consumers feel the ___________ externality. a.defender; critique b.consumer-surplus; producer-surplus c.product-variety; business-stealing d.business-stealing; product-variety

d.business-stealing; product-variety The negative externality conveyed on producers when a new firm enters a monopolistically competitive market is the business-stealing externality. Other firms in the market lose customers and profits from the entry of a new competitor. The positive externality conveyed on consumers when a new firm enters a monopolistically competitive market is the product-variety externality. Consumers get some consumer surplus from the additional variety in the market.

Fixed costs that are not relevant to production decisions are known as _______. a.implicit costs b.explicit costs c.opportunity costs d.sunk costs

d.sunk costs

Which of the following would most likely endanger cow populations? a.Not allowing cows to be owned b.If cow horns were found to be a good substitute for ivory c.Overbreeding d.Increased demand for beef

a.Not allowing cows to be owned