Economics 2110 Final review
Assume that each day ten thousand children watch Sesame Street on public television and that watching Sesame Street generates a benefit of $100 per child per year. Once a year, public televisions hold a pledge drive asking viewers to make voluntary contributions in order to keep the programming available to everyone. Suppose each parent has just one child who watches Sesame Street. Each parent has a private incentive to contribute ______ during the pledge drive. A. $0 B. $100 C. $10,000 D. $1,000,000
A. $0 (Because: Since public television is nonexcludable, the free-rider problem will emerge, so every parent has an incentive to not contribute in hopes that others will.)
Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is: A. $70,000 B. $50,000 C. $20,000 D. $15,000
A. $70,000 (Because: If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. So going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.)
If the quantity demanded of a good is Q when the price for the good is P, the price elasticity of demand for that good at that point is: A. (P/Q) × (1/slope) B. (Q/P) × (1/slope) C. (P/Q) × (slope) D. Q × P × (1/slope)
A. (P/Q) × (1/slope) (Because: The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope).)
If the price elasticity of demand for pineapples is 0.75, then a 4% increase in the price of pineapples will lead to a: A. 3% decrease in the quantity of pineapples demanded. B. 3% increase in the quantity of pineapples demanded. C. 0.75% decrease in the quantity of pineapples demanded. D. 0.75% increase in the quantity of pineapples demanded.
A. 3% decrease in the quantity of pineapples demanded. (Because: The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.75 and price increases by 4 percent, then quantity demanded must fall by 3 (= 0.75 × 4) percent. Recall that price and quantity demanded move in opposite directions.)
A dominant strategy exists if: A. A player has a strategy that yields the highest payoff regardless of the other player's choice. B. Both players have the highest payoff when they make the same choice. C. Both players make the same choice. D. One strategy yields the highest possible payoff.
A. A player has a strategy that yields the highest payoff regardless of the other player's choice. (Because: A dominant strategy is one that yields a higher payoff no matter what the other players choose.)
If a nation has the lowest opportunity cost of producing a good, that nation has a(n) ______ in the production of that good. A. Comparative advantage B. Absolute advantage C. Comparative advantage and an absolute advantage D. Absolute advantage and possibly a comparative advantage.
A. Comparative advantage. (Because: Comparative advantage means having a lower opportunity cost.)
When the price of a good is below its equilibrium value: A. Consumers will bid the price up. B. Excess supply will occur. C. It will tend to stay below the equilibrium value. D. Suppliers will notice their inventories are growing.
A. Consumers will bid the price up. (Because: Consumers whose reservation price exceeds the (low) disequilibrium price have an incentive to offer greater than the disequilibrium price to obtain the good.)
When the price of NBA tickets is $25 each, 30,000 tickets are sold. After the price rises to $30 each, 20,000 tickets are sold. At the original price, the demand for NBA ticket is: A. Elastic. B. Inelastic. C. Unit elastic. D. Perfectly elastic.
A. Elastic (Because: The percentage change in quantity is 0.33 (= 10,000/30,000) and the percentage change in price is 0.2 (= $5/$25). If the percentage change in quantity demanded is greater than the percentage change in price, then the price elasticity of demand will be greater than one, implying that demand is elastic with respect to price.)
The marginal cost of providing another viewer with access to HBO is zero. Since only people who pay for HBO can watch it: A. Fewer than the socially optimal number of people will have access to HBO. B. More than the socially optimal number of people will have access HBO. C. HBO will not be profitable in the long run. D. Access to HBO is nonexcludable.
A. Fewer than the socially optimal number of people will have access to HBO. (Because: The marginal cost of providing another viewer with access to HBO is zero. Since people have to pay for access to HBO, we know that the marginal benefit of providing another viewer with access is greater than zero. Since marginal benefit is greater than marginal cost, less than the socially optimal number of people will have access to HBO.)
For which of the following products is demand likely to be least elastic with respect to price? A. Food B. Vegetables C. Green vegetables D. Green beans
A. Food. (Because: Food has no close substitutes, but there are substitutes for the other goods listed, all of which are subcategories of food.)
Cartel agreements are difficult to sustain because: A. It's a dominant strategy for each cartel member to cheat on the cartel agreement. B. The collective payoff to all the cartel members is lower when they all abide by the cartel agreement. C. Cartel members do not face the economic incentives inherent in a prisoner's dilemma. D. It's usually easy to discover if one of the members has cheated.
A. It's a dominant strategy for each cartel member to cheat on the cartel agreement. (Because: Cartels are inherently unstable because each member has an incentive to cheat on the cartel agreement.)
In many cities in the United States, a single firm provides electricity. Those firms are: A. Monopolists. B. Oligopolists. C. Monopolistic competitors. D. Perfect competitors.
A. Monopolists. (Because: A monopoly is the only supplier of a unique product with no close substitutes.)
The slope of a production possibilities curve is ______ because ______. A. Negative; producing more of one good requires producing less of the other B. Negative; producing less of one good requires producing less of the other C. Positive; producing more of one good requires producing more of the other D. Positive; producing more of one good requires producing less of the other
A. Negative; producing more of one good requires producing less of the other (Because: The downward slope of the production possibilities curve shows that having more of one good means having less of the other.)
If it is difficult, or costly, to prevent people who do not pay for a good from consuming the good, then the good is a ______ good. A. Nonexcludable B. Pure public C. Common D. Nonrival
A. Nonexcludable (Because: A nonexcludable good is a good that is difficult, or costly, to prevent nonpayers from enjoying.)
Which of the following items is an example of a good that is nonrival but excludable? A. Pay-per-view movies. B. Corn. C. National defense. D. Broadcast television.
A. Pay-per-view movies. (Because: More than one person can enjoy a per-per-view movie at one time, but people who don't pay for it can be excluded from enjoying it.)
If all taxpayers pay the same percentage of their income in taxes, the tax is termed a(n): A. Proportional tax. B. Progressive tax. C. Head tax. D. Excise tax.
A. Proportional tax. (Because: A proportional tax is a tax under which all taxpayers pay the same proportion of their income in taxes.)
Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment? A. Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. B. No, because the benefit to Ali of listening to her music is less than the cost to Kate. C. Yes, because the benefit to Ali of listening to her music is less than the cost to Kate. D. No, because the benefit to Ali of listening to her music is greater than the cost to Kate.
A. Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. (Because: The benefit to Ali of listening to her music is $300 per month (the amount you would have to pay her to give up listening to her music). The cost to Kate of listening to Ali's music is $100 per month (the amount Kate would be willing to pay to avoid hearing Ali's music). Since the benefit to Ali of listening to her music is greater than the cost to Kate of hearing her music, it is socially optimal for Ali to play her music if they live together.)
Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______. A. rise; fall B. fall; rise C. rise; rise D. rise; stay the same
A. rise; fall (Because: Entry of new firms in response to profit incentives will shift the market supply curve to the right, causing the price to fall.)
An increase in the demand for GM automobiles results in: A. A lower equilibrium price for GM automobiles. B. An increase in the quantity supplied of GM automobiles. C. An increase in the supply of GM automobiles. D. A lower equilibrium quantity of GM automobiles.
B. An increase in the quantity supplied of GM automobiles. (Because: An increase in demand raises the equilibrium price and the equilibrium quantity.)
If a firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then between 20 and 40 units of output, the marginal cost of production is: A. $20. B. $24. C. $22. D. $480.
B. $24 (Because: Total cost increased by $480 (= $880 - $400) and the number of units increased by 20, so the increase in cost per unit is $480/20, or $24.)
A firm's profit equals: A. P - MC [price minus marginal cost] B. (P - ATC) × Q [(price minus average total cost) times the quantity sold] C. P × Q [price times the quantity sold] D. (P - ATC) ÷ Q [(price minus average total cost) divided by the quantity sold]
B. (P - ATC) × Q [(price minus average total cost) times the quantity sold] (Because: Average profit per unit is P - ATC. To get total profit, you multiply that by the quantity sold, Q.)
The existence of a negative externality will result in: A. A less than optimal level of production. B. A greater than optimal level of production. C. Prices that are artificially high. D. Elimination of deadweight loss.
B. A greater than optimal level of production. (Because: A supplier will not consider external costs, and so will produce more than is socially optimal.)
If the government needs to raise revenue to pay for a public good, the ideal tax structure would tax A. All citizens by the same amount. B. All citizens in proportion to their willingness to pay for the public good. C. All citizens by the same proportion of their income. D. Only citizens who state that they will use the public good.
B. All citizens in proportion to their willingness to pay for the public good. (Because: Public goods that taxpayers value are more likely to be funded if people are taxed in proportion to their willingness to pay.)
Which of the following is NOT a characteristic of a market in equilibrium? A. Excess supply is zero. B. All consumers are able to purchase an amount equal to their quantity demanded. C. Excess demand is zero. D. The equilibrium price is stable, i.e., there is no pressure for it to change.
B. All consumers are able to purchase an amount equal to their quantity demanded. (Because: When a market is in equilibrium there is neither excess demand nor excess supply. Therefore, there is no pressure for price to change. However, some consumers will be either unwilling or unable to purchase as much of the item as they would like.)
Choosing to study for an exam until the extra benefit (e.g., improved score) equals the extra cost (e.g., the value of foregone activities) is: A. Not an economic choice. B. An application of the Cost-Benefit Principle. C. An application of the Scarcity Principle. D. Not rational because it ignores the importance of total benefits and total costs.
B. An application of the Cost-Benefit Principle. (Because: Considering the extra benefits and extra costs of an action is an example of using the Cost-Benefit Principle.)
When a slice of pizza at the student union sold for $2, Moe did not purchase any. When the price fell to $1.75, Moe purchased a slice each day for lunch. Moe's reservation price for a slice of pizza must be: A. Less than $1.75. B. At least $1.75 but less than $2. C. Exactly $1.75. D. Exactly $2.00.
B. At least $1.75 but less than $2. (Because: We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price. If Moe buys pizza at $1.75, his reservation price must be at least $1.75. But since he did not buy pizza when it was $2.00 we assume that his reservation price was less than $2.00.)
The price elasticity of demand equals 1: A. Whenever the slope of a straight-line demand curve is greater than 1 in absolute value. B. At the midpoint of a straight-line demand curve. C. Whenever the slope of a straight-line demand curve is less than 1 in absolute value. D. Whenever the slope of a straight-line demand curve equals zero.
B. At the midpoint of a straight-line demand curve. (Because: Along a straight-line demand curve, the price elasticity of demand at the midpoint is always equal to 1.)
The insight that people can always arrive at efficient solutions to the problems caused by externalities if they can negotiate the purchase and sale of the right to perform activities that cause externalities is called the _______. A. Sherman Act B. Coase Theorem C. Tragedy of the commons D. Prisoner's dilemma
B. Coase Theorem (Because: The Coase theorem states that if at no cost people can negotiate the purchase and sale of the right to perform activities cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.)
If the owners of a business are receiving total revenues just sufficient to cover all of their explicit and implicit costs, then they are: A. Doing better than their next best alternative. B. Earning a normal profit. C. Earning an economic loss. D. Doing worse than their next best alternative.
B. Earning a normal profit. (Because: If owners of a business are receiving total revenues just sufficient to cover all their explicit and implicit costs, then they are earning zero economic profit, or a normal profit.)
In order to effectively price discriminate, one requirement is that a seller must be able to: A. Resell the product. B. Identify customers with different reservation prices. C. Avoid detection because price discrimination is illegal. D. Reduce costs when producing the discounted item.
B. Identify customers with different reservation prices. (Because: To price discriminate, the firm must be able to differentiate customers by their reservation prices.)
You can spend $5 for lunch and you would like to have two double cheeseburgers. When you get to the restaurant, you find out the price for double cheeseburger has increased from $2.50 to $2.99. You decide to have just one double cheeseburger for lunch. This is best described as a(n): A. Substitution effect. B. Income effect. C. Buyer's reservation price effect. D. Seller's reservation price effect.
B. Income effect (Because: You can no longer afford your desired lunch, and so you purchase less of the good.)
According to the Incentive Principle, people will be less likely to smoke if the government: A. Increases taxes on smoking-cessation devices such as nicotine patches. B. Increases taxes on cigarettes, effectively raising the price. C. Subsidizes hospitals treating lung disease. D. Invests more money in cancer research.
B. Increases taxes on cigarettes, effectively raising the price. (Because: The Incentive Principle states that a person is more likely to take an action if its benefit rises, and less likely to do something if its cost rises.)
If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is: A. Negative. B. Inelastic. C. Elastic. D. Unit elastic.
B. Inelastic. (Because: If the percentage change in quantity is less than the percentage change in price, then the price elasticity of demand will be less than one in absolute value, implying that demand is inelastic.)
The Incentive Principle states that a person: A. Is more likely to take an action if its cost increases. B. Is more likely to take an action if its benefit increases. C. Should take an action if its cost increases. D. Should take an action if its benefit increases.
B. Is more likely to take an action if its benefit increases. (Because: The Incentive Principle states that a person is more likely to take an action if its benefit rises, and less likely to do something if its cost rises.)
National defense is an example of a good that is: A. Neither nonrival nor nonexcludable. B. Largely nonrival and nonexcludable. C. Only nonexcludable. D. Only nonrival
B. Largely nonrival and nonexcludable. (Because: One person's enjoyment of national defense does not diminish others? enjoyment of national defense, and people who don't pay for national defense can't be excluded from enjoying its benefits.)
If Les can produce two pairs of pants per hour while Eva can produce one pair per hour, then it must be true that: A. Les has a comparative advantage in producing pants. B. Les has an absolute advantage in producing pants. C. Eva has a comparative advantage in producing pants. D. Les has both comparative and absolute advantage in producing pants.
B. Les has an absolute advantage in producing pants. (Because: Absolute advantage means being able to produce more in a given time period.)
As the market price of a service increases, more potential sellers will decide to perform that service because: A. Higher prices result in higher revenue. B. More potential sellers will find that the market price exceeds their reservation price. C. It's more prestigious to produce high-priced services. D. Higher prices lead to lower opportunity costs.
B. More potential sellers will find that the market price exceeds their reservation price. (Because: A seller will supply an additional unit of output if the market price is greater than or equal to the seller's opportunity cost of producing an additional unit. Thus, as the market price rises, sellers with higher opportunity costs will enter the market.)
If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____. A. Double B. More than double C. Less than double D. Fall by one-half
B. More than double (Because: A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion.)
If you were to start your own business, your implicit costs would include the: A. Rent that you have paid in advance for the use of a building. B. Opportunity cost of the time you spend working at the business. C. Profit you earn over and above your normal profit. D. Interest that you pay on your business loans
B. Opportunity cost of the time you spend working at the business. (Because: Implicit costs are the opportunity costs of the resources supplied by the owner of the firm.)
One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that: A. Firms will have to spend money on advertising. B. Positive economic profit is only possible in the short run. C. Firms will compete on the basis of better service rather than lower prices. D. A long-run equilibrium cannot be achieved.
B. Positive economic profit is only possible in the short run. (Because: Free entry means that firms can easily enter a market in response to positive economic profit. As firms enter the market, equilibrium price falls, leading economic profit to also fall.)
A benefit of an activity received by people not participating in the activity is called a(n): A. Winner's curse. B. Positive externality. C. External cost. D. Negative externality.
B. Positive externality. (Because: An external benefit, also called a positive externality, is a benefit of an activity received by people other than those who pursue the activity.)
If the demand for electricity is inelastic, then if the local utility wants to increase its total revenue, it should _______ its price. A. Lower B. Raise C. Not change D. Frequently change
B. Raise (Because: When demand is inelastic, total revenue increases when price increases.)
Which of the following is NOT an example of an explicit cost? A. The overtime wages paid to workers. B. The income the owner could have earned in his or her next best employment opportunity. C. The salaries paid to the managers who help run the business. D. The rent the owner pays each month to lease office space.
B. The income the owner could have earned in his or her next best employment opportunity. (Because: Explicit costs are the actual payments a firm makes to its factors of production. Implicit costs are the opportunity costs of the resources supplied by the firm's owners.)
If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then: A. The market equilibrium will be socially optimal. B. The market equilibrium will not be efficient. C. The allocation of resources will be efficient. D. The market will not be in equilibrium.
B. The market equilibrium will not be efficient. (Because: If the supply and demand curves do not capture all of the costs and benefits of producing another unit of output, then the market equilibrium will not be efficient.)
The opportunity cost of an activity includes the value of: A. All of the alternatives that must be forgone. B. The next-best alternative that must be foregone. C. The least-best alternative that must be foregone. D. The chosen activity minus the value of the next-best alternative.
B. The next-best alternative that must be foregone. (Because: The opportunity cost of an activity is not the total value of all possible activities that you could have pursued, but only the value of the one alternative you give up, which is presumably the next-best one.)
The three elements of a game are: A. The firm, the consumers, and the profit. B. The players, the strategies, and the payoffs. C. The model, the graph, and the costs. D. The costs, the revenue, and the profit.
B. The players, the strategies, and the payoffs. (Because: The basic elements of a game are the players, their available strategies and the payoffs that result from all possible combinations of strategies.)
In the Nash equilibrium of a prisoner's dilemma: A. There is no cash left on the table. B. There is unrealized opportunity for both to gain. C. Total economic surplus is maximized. D. Both players have equal payoffs.
B. There is unrealized opportunity for both to gain. (Because: In the Nash equilibrium of a prisoner's dilemma both players play their dominant strategy and each earns less than if they both had played a dominated strategy.)
If the production of a good generates a positive externality, then: A. Production of the good is harmful. B. There will be deadweight loss at the market equilibrium quantity. C. Total economic surplus will be maximized at the market equilibrium quantity. D. The government should tax producers of the good.
B. There will be deadweight loss at the market equilibrium quantity. (Because: If the production of a good generates a positive externality, then total economic surplus will not be maximized at the private market equilibrium quantity.)
Last summer, real estate prices in your town soared. You started noticing more "For Sale" signs in your neighbors' yards. You conclude that: A. People don't like to live in your neighborhood anymore. B. When housing prices rose, they started to exceed some of your neighbors' reservation prices. C. The demand curve for housing in your town has shifted to the left while supply remained constant. D. The supply curve for housing in your town has shifted to the right while demand has remained constant.
B. When housing prices rose, they started to exceed some of your neighbors' reservation prices. (Because: At higher prices, some of your neighbors found that the price they could sell their house for was greater than their reservation prices.)
The government should only provide a pure public good if ______ and ______. A. the good is indeed a public good; the majority of voters want it to be provided B. the goods? benefits exceed its costs; there is no less costly way to provide it C. voters desire the good; no new taxes will be needed D. the goods? benefits exceed its costs; the government can afford to provide the good
B. the goods? benefits exceed its costs; there is no less costly way to provide it (Because: The government only should provide pure public goods if their benefits exceed their costs and there is no other less costly way if providing them.)
If all taxpayers pay the same dollar amount, the tax is termed a: A. Proportional tax. B. Progressive tax. C. Head tax. D. Per unit tax.
C. Head tax. (Because: A head tax is one that collects the same amount from every taxpayer.)
Suppose that a disease that affects people who consume beef has been discovered in the United States. One likely result is: A. An increase in buyers' reservation prices for beef. B. A decrease in demand for chicken. C. A decrease in demand for beef. D. A decrease in the quantity demanded of beef.
C. A decrease in demand for beef. (Because: Negative news will cause the demand curve to shift leftward.)
Start-up costs: A. Have no impact on the number of firms in an industry because they are sunk costs. B. Are inversely related to variable costs. C. Are the one-time costs incurred when beginning the production of a new product. D. Are always greater than marginal costs.
C. Are the one-time costs incurred when beginning the production of a new product. (Because: Start-up costs are one-time costs incurred when a new product is developed.)
Satellite TV is a close substitute for cable TV. In the 1990's, small satellite TV units were developed that made it less costly for individual consumers to subscribe to satellite TV service. This caused the price elasticity of demand for cable TV service to: A. Become more inelastic. B. Become less elastic. C. Become more elastic. D. Shift to the left.
C. Become more elastic. (Because: Goods with more substitutes have greater price elasticity because consumers can readily switch to or away from them if their price changes.)
A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n): A. Pure monopoly. B. Oligopoly. C. Cartel. D. Duopoly.
C. Cartel. (Because: A cartel is a coalition of firms that agree to restrict output in order to earn an economic profit.)
The allocative function of price is to: A. Distribute scarce goods and services to those consumers who value them the most highly. B. Ensure that firms in perfectly competitive markets earn an economic profit. C. Direct resources away from markets that are overcrowded and toward markets that are underserved. D. Provide subsidies to low-income families so they can purchase essential goods and services.
C. Direct resources away from markets that are overcrowded and toward markets that are underserved. (Because: The allocative function of price is to direct resources away from markets that are overcrowded and toward markets that are underserved.)
If a firm shuts down in the short run, then its: A. Total revenue and total cost will fall to zero. B. Profit will equal zero. C. Economic loss will equal its fixed costs. D. Economic loss will equal its variable costs.
C. Economic loss will equal its fixed costs. (Because: When a firm shuts down, its total variable costs and its total revenue shrink to zero, but the firm still must pay fixed costs whether it operates or not. So, if a firm shuts down, its economic loss is equal to its fixed cost.)
A cost-saving innovation in a perfectly competitive industry will lead to: A. Entry by new firms. B. Economic profits for new firms. C. Economic profits for a few firms for a short time. D. A leftward shift of the industry supply curve.
C. Economic profits for a few firms for a short time. (Because: The first firms to adopt a cost-saving innovation will profit for a short time, but eventually all firms will adopt the same technology.)
The marginal benefit of an activity is the: A. Same as the total benefit of an activity. B. Total benefit of an activity divided by the level of the activity. C. Extra benefit associated with an extra unit of the activity. D. Total benefit associated with an extra unit of the activity.
C. Extra benefit associated with an extra unit of the activity. (Because: Marginal benefit is the increase in total benefit that results from carrying out one additional unit of an activity.)
One implication of the shape of the demand curve facing a perfectly competitive firm is that: A. If the firm increases its price above the market price, it will earn higher revenue. B. If the firm decreases its price below the market price, it will earn higher revenue. C. If the firm increases its price above the market price, it will earn zero revenue. D. The market would be unable to reach a new equilibrium if demand changed.
C. If the firm increases its price above the market price, it will earn zero revenue. (Because: A perfectly competitive firm cannot raise its price without losing all of its customers to the many rival firms that produce the same product.)
Josh wants to go to the football game this weekend, but he has a paper due on Monday. It will take him the whole weekend to write the paper. Josh decides to stay home and work on the paper. According to the Scarcity Principle, the reason Josh doesn't go to the game is that: A. Josh prefers schoolwork to football games. B. Writing the paper is easier than going to the game. C. Josh can't go the game and finish the paper. D. Going to the game won't be fun.
C. Josh can't go the game and finish the paper. (Because: Josh has to make a trade-off: time is a scarce resource and so he must choose between the two activities.)
A cost of an activity that falls on people not engaged in the activity is called a(n): A. External benefit. B. Prisoner's dilemma. C. Negative externality. D. Positive externality.
C. Negative externality. (Because: An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity.)
If the demand for computers shifts to the right as consumers' incomes rise, computers are A. Inferior goods. B. Complement goods. C. Normal goods. D. Substitute goods.
C. Normal goods. (Because :A normal good is one for which the demand curve shifts rightward when the incomes of buyers increase.)
Assume that each day ten thousand children watch Sesame Street on public television and that watching Sesame Street generates a benefit of $100 per child per year. Once a year, public televisions hold a pledge drive asking viewers to make voluntary contributions in order to keep the programming available to everyone. If public television stations collect less than $100 per child during the pledge drive, then this is evidence: A. That the government should not subsidize public television. B. That parents do not care about their children. C. Of the free-rider problem. D. That head taxes are regressive.
C. Of the free-rider problem. (Because: Since public television is nonexcludable, the free-rider problem will emerge, so every parent has an incentive to contribute less than $100 in hopes that others will make donations.)
A shortage occurs when: A. Demand is greater than supply. B. The equilibrium price is too high. C. Quantity demanded exceeds quantity supplied. D. Quantity supplied exceeds quantity demanded.
C. Quantity demanded exceeds quantity supplied. (Because: Shortages occur when more is demanded at the price than the quantity that is supplied at that price.)
The price elasticity of demand for a good measures the responsiveness of: A. Demand to a one percent change in price of that good. B. Price to a one percent change in the demand for that good. C. Quantity demanded to a one percent change in price of that good. D. Price to a one percent change in the quantity demanded of that good.
C. Quantity demanded to a one percent change in price of that good. (Because: The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a 1 percent change in its price.)
Which of the following is an example of an activity with an external cost? A. Raising honeybees where neighbors on all sides grow apples. B. Keeping your front yard clean. C. Speeding on the interstate. D. Having to buy batteries for the new remote that came with a TV.
C. Speeding on the interstate. (Because: An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity. One person's speeding imposes costs on others.)
The economic surplus of an action is: A. The benefit gained by taking an action. B. The difference the explicit and implicit costs of taking an action. C. The difference between the benefit and the cost of taking an action. D. The money a person has left over after taking an action.
C. The difference between the benefit and the cost of taking an action. (Because: Economic surplus is defined as the benefit of an action minus its cost.)
The dilemma in a prisoner's dilemma is that: A. The outcome is random, so players are uncertain about which strategy to play. B. Only one player has a dominant strategy, but the other player is uncertain about what to do. C. The players would be better off if they both played a dominated strategy. D. The players may be trapped in a game they don't know how to play.
C. The players would be better off if they both played a dominated strategy. (Because: A prisoner's dilemma is a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if both had played a dominated strategy.)
A seller's reservation price is generally equal to: A. The buyer's reservation price. B. The seller's average cost. C. The seller's marginal cost. D. The market price.
C. The seller's marginal cost. (Because A seller's reservation price is generally equal to marginal cost.)
Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is: A. The $12 she spent on the umbrella, food and drinks. B. Only $0 because she would have spent $12 to go to the movie. C. The value she places on seeing the movie. D. The value she places on seeing the movie plus the $12 she spent on the umbrella, food and drinks.
C. The value she places on seeing the movie. (Because: Opportunity cost is the value that must be foregone to undertake an activity. By going to the beach, Jen gives up the value she places on seeing the movie. We don't include the $12 she spends at the beach because she also would have spent that money at the movies.)
If the market equilibrium quantity is less than the socially optimal quantity, one can infer that: A. The private supply curve for the activity is below the socially optimal supply curve. B. The private demand curve for the activity is above the socially optimal demand. C. There is a positive externality associated with this good. D. There is a negative externality associated with this good.
C. There is a positive externality associated with this good. (Because: Buyers and sellers do not consider external benefits, so the market will produce less than the socially optimal quantity.)
Points that lie outside the production possibilities curve are ______, and points that lie inside the production possibilities curve are ______. A. Efficient; inefficient B. Inefficient; efficient C. Unattainable; attainable D. Attainable; unattainable
C. Unattainable; attainable (Because: Points that lie outside the production possibilities curve cannot be produced with currently available resources, while those that lie inside the production possibilities curve can be produced with currently available resources.)
If the percentage change in the price of a good is equal to the percentage change in the quantity demanded of that good, then the demand for that good is: A. Elastic. B. Inelastic. C. Unit elastic. D. Perfectly elastic.
C. Unit elastic. (Because: If the percentage change in quantity demanded equals the percentage change in price, then the price elasticity of demand will equal one, implying that demand is unit elastic.)
The Scarcity Principle states that: A. People don't have enough money to buy what they want. B. Society will eventually run out of resources. C. With limited resources, having more of one thing means having less of another. D. Some countries have fewer resources than others.
C. With limited resources, having more of one thing means having less of another. (Because:The Scarcity Principle states that although we have boundless needs and wants, the resources available to us are limited. So having more of one thing means having less of another.)
If you have a comparative advantage in a particular task, then: A. You are better at it than other people. B. You give up more to accomplish that task than do others. C. You give up less to accomplish that task than do others. D. You have specialized in that task, while others have not.
C. You give up less to accomplish that task than do others. (Because: Comparative advantage means having a lower opportunity cost.)
A good or service that is rival but nonexcludable is called a ______, and a good or service that is nonrival but excludable is called a ______. A. public good; private good B. commons good; public good C. commons good; collective good D. public good; collective good
C. commons good; collective good (Because: A commons good is a good or service that is nonexcludable but rival. A collective good is a good or service that is nonrival but excludable.)
A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______. A. small; perfectly elastic B. large; perfectly inelastic C. small; relatively inelastic D. large; relatively inelastic
C. small; relatively inelastic (Because: If demand is inelastic, a tax will increase price but will not change the quantity demanded by a large amount.)
Assume that each day ten thousand children watch Sesame Street on public television and that watching Sesame Street generates a benefit of $100 per child per year. Once a year, public televisions hold a pledge drive asking viewers to make voluntary contributions in order to keep the programming available to everyone. The broadcast of Sesame Street yields a total social benefit of _____ per year. A. $0 B. $100 C. $10,000 D. $1,000,000
D. $1,000,000 (Because: $100 private benefit per child multiplied by 10,000 children equals $1,000,000.)
If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to: A. 30. B. 0.30. C. 0.333. D. 3.
D. 3. (Because: The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here +3/-1 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.)
The short run is best defined as: A. One year or less. B. A period of time sufficiently short that all factors of production are variable. C. The period of time between quarterly accounting reports. D. A period of time sufficiently short that at least one factor of production is fixed.
D. A period of time sufficiently short that at least one factor of production is fixed. (Because: The short run is a period of time sufficiently short that at least some of a firm's factors of production are fixed.)
According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result often will be: A. An incomplete allocation of resources. B. The exploitation of productive resources. C, An equitable allocation of resources. D. An efficient allocation of resources.
D. An efficient allocation of resources. (Because: Adam Smith theorized that the invisible hand of self-interest would often guide economic agents to an efficient outcome.)
The United States was unable to maintain its dominance in the production of televisions because: A. The highly technical skills necessary to produce televisions are greater in other countries. B. The raw materials necessary to build televisions became scarce in the United States. C. The product designs evolved too rapidly for engineers in the United States to keep up. D. Automated techniques allowed production to be outsourced to countries with less-skilled workers.
D. Automated techniques allowed production to be outsourced to countries with less-skilled workers. (Because: When television production required highly-paid and highly-skilled workers, the United States had a comparative advantage in producing televisions, but once production became automated, less-skilled workers in low-wage countries could produce televisions at a lower cost.)
According to the textbook, the most important and enduring source of market power is: A. Government franchises. B. Patents. C. Copyrights. D. Economies of scale.
D. Economies of scale. (Because: Economies of scale drive most instances of market power.)
A market in disequilibrium would feature: A. A stable price. B. Consumers able to purchase all they wish at the market price. C. A stable quantity. D. Either excess supply or excess demand.
D. Either excess supply or excess demand. (Because: When a market in disequilibrium displays either excess demand or excess supply.)
The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm: A. Produces a good with no close substitutes. B. Faces high barriers to entry. C. Coordinates their output decisions with other firms. D. Faces a downward-sloping demand curve.
D. Faces a downward-sloping demand curve. (Because: The essential difference between perfectly competitive firms and imperfectly competitive firms is that a perfectly competitive firm faces a horizontal demand curve while an imperfectly competitive firm faces a downward-sloping demand curve.)
Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, government sets the price for prescription drugs. One can conclude that the: A. Government has set the price too high. B. Government has set the price above the equilibrium price. C. Buyers are hoarding prescription drugs. D. Government has set the price below the equilibrium price.
D. Government has set the price below the equilibrium price. (Because: If there is excess demand in a regulated market you know that the regulated price is lower than the equilibrium price.)
In the short run, a profit-maximizing firm will not shut down if its total revenue is: A. Positive. B. Greater than or equal to its total cost. C. Greater than or equal to its fixed cost. D. Greater than or equal to its variable cost.
D. Greater than or equal to its variable cost. (Because: The firm must pay fixed costs whether it operates or not. As long as the firm is covering its variable costs in the short run it will produce a positive level of output.)
Refer to the figure above. Moving from demand curve D2(Right) to demand curve D1(To left) could be caused by a(n): A. Increase in consumers' incomes. B. Increase in quantity supplied. C. Increase in the price of a substitute. D. Increase in the price of a complement.
D. Increase in the price of a complement. (Because: An increase in the price of a complement shifts demand leftward.)
The Cost-Benefit Principle indicates that an action should be taken if: A. Its total benefits exceed its total costs. B. Its average benefits exceed its average costs. C. Its net benefit (benefit minus cost) is zero. D. Its extra benefit is greater than or equal to its extra cost.
D. Its extra benefit is greater than or equal to its extra cost. (Because: The extra benefits and extra costs from taking an action determine whether that action should be taken.)
Assume the price of gasoline doubles tonight and remains at that price for the next two years. Compared with the long-run price elasticity of demand for gasoline, the short-run price elasticity of demand for gasoline will be ______. A. Higher B. More variable C. The same D. Lower
D. Lower (Because: When consumers have less time to adjust to price changes, the price elasticity of demand will be lower.)
For all firms, the additional revenue collected from the sale of one additional unit of output is termed: A. Price. B. Average revenue. C. Marginal profit. D. Marginal revenue.
D. Marginal revenue. (Because: Marginal revenue is the change in total revenue that results from a one-unit change in output.)
The primary objective of an imperfectly competitive firm is to: A. Charge the highest possible price. B. Maximize total revenue. C. Minimize total cost. D. Maximize profit.
D. Maximize profit. (Because: All firms seek to maximize profit.)
If a good can be consumed by one person without reducing its availability to others, then it is a ______ good. A. Nonexcludable B. Pure public C. Common D. Nonrival
D. Nonrival (Because: A nonrival good is a good whose consumption by one person does not diminish its availability to others.)
Because monopolists charge a price in excess of marginal cost, it must be the case that monopolists: A. Earn a positive economic profit. B. Earn a negative economic profit. C. Produce more than the socially optimal level of output. D. Produce less than the socially optimal level of output.
D. Produce less than the socially optimal level of output. (Because: The marginal benefit to society of the last unit produced is measured by price. Thus, if price is greater than marginal cost, this implies that the marginal benefit to society of the last unit produced is greater than the marginal cost to society of the last unit produced, so that society would benefit if output were to increase.)
Individual supply curves generally slope ______ because ______. A. Downward; sellers become more efficient with practice B. Upward; profits increase with quantity C. Downward; inputs are cheaper when purchased in high volume D. Upward; of increasing opportunity costs
D. Upward; of increasing opportunity costs (Because: Consistent with the Principle of Increasing Opportunity Cost, in expanding production of any good, firms will first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.)
