Economics Exam 3
If interest goes to 10% (for $1000) how much will you make?
$100
Suppose Penny will receive $2,000 per year forever from her local bank when the prevailing interest rate is 7 percent. The present value of that income stream is approximately
$28,571
If you invest $1000 and the interest rate today is 5% what will you make on a yearly basis?
$50
Andre runs a company that yields a profit of $40,000 per year, and this profit stream is expected to continue indefinitely. If the interest rate equals 8 percent, he will be willing to sell the company at a price of:
$500,000.
net utility of work
(kind of like diminishing marginal returns), utility of the additional consumption (of work) from earnings minus disutility of the work itself (some amount of work is attractive)
Which of the following is an example of a producer taking advantage of economies of scope
A dairy farmer producing cow's milk and butter
Which of the following is a likely result of the deregulation of the airline industry that might benefit consumers?
A decrease in air fares
Industrial Union
A labor union composed of all the workers in a given industry, regardless of skill, craft, or occupation. (negotiates wages for each class)
Craft Union
A labor union composed only of people in the same craft. labor union of people of the same skilled craft.
Monopoly
A market structure characterized by a single seller, selling a unique product in the market
Which of the following resources earns the highest economic rent as a proportion of total earnings?
A resource specialized in one task
Tying contract
A seller of one good requires a buyer to purchase other goods as part of the deal
Exclusive dealing
A supplier prohibits its customers from buying from other suppliers
Which of the following explains an increase in demand for labor?
Additional training that increases the productivity of each unit of labor in a market
Dividends
After-tax corporate profit paid to stockholders rather than retained by the firm and reinvested
Retained earnings
After-tax corporate profit reinvested in the firm rather than paid to stockholders as dividends Help the firm grow
Social regulation
Aimed at improving health and safety Control over unsafe working conditions, dangerous products Health care reform
Gooey Flakes is the only ready-to-eat cereal that has chocolate syrup in each flake. The machine that injects the syrup into the flakes has no alternative uses. Which of the following is true?
All of the machine's earnings are economic rent.
Which of these principal-agent relationships is least likely to pose a problem?
An individual hiring a gardener to mow her lawn
Which of the following is an example of an effectively competitive market?
An industry that exhibits low concentration, few barriers to entry, and little or no collusion
Collateral
Asset pledged by the borrower that can be sold to pay off the loan in the event the borrower defaults
screening
Attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party
Not a form of nonmarket work?
Babysitting for a fee
Which of the following approaches borrow insights from psychology to help explain economic choices?
Behavioral economics
Behavioral Economics
Borrows insights from psychology to help explain some economic decisions
Per se illegal
Business practices deemed illegal regardless of their economic rationale or their consequences
Asymmetric Information in Insurance Markets
Buyers have more information than sellers
In which of the following ways can a government assure that a natural monopolist earns zero economic profit?
By setting the price equal to average total cost
Bond
Certificate reflecting a firm's promise To pay the lender periodic interest To repay the borrowed sum of money on the designated maturity date
Economies of scope
Cheaper to produce two or more different items in one firm than to produce them in separate firms Average costs decline Firm supplies more types of products Scope of firm increases
Which of these is an example of screening in a job market
Checking résumés for spelling and typographical errors
Which of the following didNOTlead to an increase in competition in the United States between 1958 and 1988?
Conglomerate mergers
Positive rate of time preference
Consumers value present consumption more than future consumption People must be rewarded to postpone consumption
Economic regulation
Control over price, output, entry of new firms, quality of service
Which of the following can lead to temporary differentials in resource prices?
Differences in the prices of similar resources
If the supply of a resource to a particular market is perfectly elastic
Earns the same in current and best alternative use All earnings are opportunity cost No economic rent
Adverse Selection in Labor Markets
Employers are better off offering a higher wage Higher the wage, the more attractive the job is to more-qualified workers
Vertical integration
Expansion of a firm into stages of production earlier or later than those in which it specializes
Expected rate of return on capital
Expected annual earnings divided by capital's purchase price
Optimal investment
Expected rate of return = market interest rate
Outsourcing
Firm buys products from outside suppliers
What is the marginal revenue generated if you increase your productivity vs. the marginal cost?
If MR exceeds MC then you should engage in that activity. If MC exceeds MR then you should NOT engage in that activity.
Derived demand
If a price of a resource (labor, capital) that you as a company needs goes up, what do you attempt to do? Adjust to the price increase by either replacing labor (workers) with capital (automated machines).
Which of the following is true of a natural monopoly?
If regulated, the firm will have a higher level of output than if it was unregulated
Backward-bending labor supply curve
Income effect of a higher wage eventually dominates the substitution effect
Income effect of a wage increase
Increased demand for normal goods, such as leisure Work less
Interest rate
Interest per year as a percentage of the amount saved or borrowed Reward for postponing consumption
Identify the correct statement about the market interest rate.
It represents the opportunity cost of investing with either borrowed funds or savings.
Which of the following is true of the marginal benefit curve for additional information in Stigler's search model?
It slopes downward
Effective competition
Low concentration Low barriers to entry Little or no collusion
when a firm sells in a perfectly competitve product market, MRP=?
MP x product
Which of the following is true of marginal revenue product (MRP) and marginal product (MP)?
MRP = MP × price only if the firm sells in a perfectly competitive market
monopolies and their characteristics
Market power Can raise price without losing customers to rival firms Face a downward-sloping demand curve Produce less of the good than would be socially optimal
Why do all markets set MR=MC?
Maximize profit, minimize loss
Which of the following best illustrates a vertical merger?
Microsoft merges with Dell
Minimum efficient scale
Minimum rate of output at which economies of scale are fully exploited (a firm is more likely to buy a component rather than produce it if buying the component is cheaper than making it)
If the supply of a resource to a particular market is perfectly inelastic
No alternative uses No opportunity cost All earnings are economic rent
Vertical merger
One firm combines with another firm from which it had purchased inputs or to which it had sold output
Horizontal merger
One firm combines with another firm that produces the same type of product
Pure monopoly
One firm controls the market Blocks entry
Dominant firm
One firm owns more than half the market share No close rival
Asymmetric Information in Product Markets
One side of the market has better information about the product than the other side
Market interest rate
Opportunity cost of investing
If an electric company is allowed by regulators to earn only a normal profit, it will produce at the point where
P = AC
Efficiency Wages
Paying above market wages to attract and retain more-productive workers
A physicians' professional association supports legislation seeking higher quality medical care. According to the special interest theory of regulation, which of the following groups will benefit the most from this legislation?
Physicians, through increased prices for medical care
Antitrust policy characteristics
Prevents monopoly Fosters competition in markets where competition is desirable Outlaws monopolies and cartels
Predatory pricing
Pricing tactics employed by a dominant firm to drive competitors out of business
core competency
Product or phase of production a firm supplies with greatest efficiency
Economic regulation
Promotes social welfare by keeping prices down, in the special interest of producers
National Union
Provide services to their locals, such as legal advice and leadership training as well as helping locals when they negotiate with employers.
According to William G. Shepherd, U.S. industries can be divided into:
Pure monopoly, Dominant firm
Principal-agent problem
Relationship in which one party, the principal, contracts with another party, the agent, in the expectation that the agent will act on behalf of the principal
Moral hazard
Situation in which one party, as a result of a contract, has an incentive to shirk responsibilities in a way that harms the other party to the contract
Government policies regulate firm behavior by
Social regulation Economic regulation Antitrust policy
Substitution effect of a wage increase
Substitute market work for other activities
Which of these problems is encountered in labor markets where the abilities of the workers are intangible or unmeasurable
The adverse selection problem
Which of the following is a possible outcome if a monopolist is allowed to maximize profit?
The equilibrium price-output combination is inefficient
Which of the following is a possible effect of government regulation on a natural monopolist?
The firm incurs an economic loss
A firm that produces mouthwash branches out into producing toothpaste. If this expansion reduces its average cost of production, which of the following can be concluded about this firm?
The firm is experiencing economies of scope
Suppose 15 workers produce 100 license plates, 16 workers produce 120 license plates, and 17 workers produce 130 license plates. Identify the correct statement.
The marginal product of the sixteenth worker is greater than the marginal product of the seventeenth worker.
The academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course called "Why Nerf Balls Ingest Hair." Which of the following is true?
The philosopher is an agent to both the academic dean and the students.
Term structure of interest rates:
The relationship between the duration of a loan and the interest rate charged; typically interest rates increase with the duration of the loan, because longer loans are considered more risky
Which of the following would be true if the market interest rate increases?
The reward for saving would increase, and this would increase saving
In many cities, garbage collectors earn more than social workers. What could explain this wage differential?
There is a lesser supply of trash collectors
Tight oligopoly
Top 4 firms supply more than 60% of market output
more competitive markets
Unions are less successful at raising wages (food-and-drink service, manufacturing, and wholesale and retail trade)
Less competitive product markets
Unions have greater success at raising wages (are government, transportation, construction, and utilities)
The Winner's Curse
Winners often lose money after winning the bid
A principal-agent problem is most likely to arise when:
a company outsources its tax computation to a consultancy.
market exchange
a highly organised market where brokers and traders buy and sell securities such as shares, commodities, currencies, futures and options
long run
a period in which full wage and price flexibility, and market adjustment, has been achieved, so that the economy is at the natural level of employment and potential output
A guarded barbed wire fence separates East and West Bovinia. Soccer players are paid twice as much in West Bovinia than in East Bovinia. This is an example of _____.
a permanent resource price differential
In the context of a job market, a signal is:
a proxy measure of a job applicant's skills.
Intellectual property is
a special form of capital
If Neofuture Corp. is a new, profitable company,
after-tax profits are either paid as dividends or reinvested in the corporation
If the substitution effect is always greater than the income effect, then an individual's labor supply curve will _____.
always have a positive slope
The substitution effect of an increase in the wage rate will:
always lead to an increase in the quantity of labor supplied
If the marginal product of labor increases because of a shift of the marginal product curve, it will likely cause:
an increase in labor demand.
Suppose the wage for drive through clerks is $7 an hour at Jason Burger and $6.50 at Martha's. The jobs are alike in all other aspects. We would expect:
an increase in the supply of drive through clerks at Jason Burger but no change in demand.
A tight oligopoly refers to
an industry in which the top four firms supply more than 60 percent of the market, have stable market shares, and cooperate with each other.
Labor Union
an organized association of workers formed to protect and further their rights and interests.
derived demand
arises from demand for the final product (downward curve) all demand curves
substitution effect
as prices rise or income decreases consumers will replace more expensive items with less costly alternatives.
diminishing marginal returns
as you add variable resources to fixed resources, the additional output will eventually decrease
As defined by economists, interest is:
both the amount earned by productive capital and the amount earned by lending money.
firm
business organization, such as a corporation, limited liability company or partnership, that sells goods or services to make a profit
marginal resource cost
change in total cost when hiring more units of labor
marginal product of labor
change in total product from employing one more unit of labor
marginal product
change in total product when a particular resource increases by one unit
marginal revenue product
change in total revenue when an additional unit of a resource is employed
The process by which union members and the firm's management negotiate a contract is called _____.
collective bargaining
If a court employs the rule of reason while considering whether a firm is guilty of violating antitrust laws, the court
considers the consequences of the offending practice that the firm engaged in.
The rule of reason:
considers why a certain business practice was adopted and what the effects on competition are before determining whether the practice is illegal.
two sources of utility
consumption of goods and services, enjoyment of leisure
Among the goods and services mentioned below, the marginal benefit of search is likely to be highest for
cosmetic surgery
Reliable information is:
costly for both producers and consumers
The marginal benefit of acquiring additional information tends to:
decrease as additional information is obtained
If you hold a bond at a time when the market interest rate is increasing, you will find that the bond's value will:
decrease because you will receive a lower price when you sell the bond.
The opportunity cost of producing capital goods is a(n):
decrease in the current production of consumption goods.
According to Stigler's search model, a computerized used car search service is likely to:
decrease price dispersion
what determines equilibrium wage
demand
According to the special interest theory, the licensing of beauticians would be
desired by some beauticians in order to restrict entry into their profession.
The procedure of determining the present value of payments to be received in the future is known as:
discounting.
Resource owners will supply additional units of a resource as long as:
doing so increases their utility.
capital
durable goods (cars etc)
economic rent
earnings in excess of opportunity cost (what you got)
If the supply curve of a resource to a particular market slopes upward
earnings: both opportunity cost & economic rent d&S determine equilibrium price & quantity
A natural monopoly, such as a local telephone company, is characterized by
economies of scale
as the price of a resource decreases
firms are more willing to employ that resource (cheaper compared with other resources that could produce the same output)
short run
firms are only able to influence prices through adjustments made to production levels.
A natural monopolist earns zero economic profit when:
government regulators force it to set price equal to average total cost.
For a firm which has some power in the product market, the marginal revenue product of the fifth worker is $15 and the price of the last unit of output produced is $5. The firm will hire the fifth worker if the marginal product of the fifth worker is _____.
greater than 3 units of output
The timeshare condominium in Florida bought by an individual last year ended up involving many extra costs and restrictions that were not apparent at the time of sale. This problem is a classic example of
hidden characteristics
The used car market may be inefficient because the purchase of a used car often involves:
hidden characteristics
The two types of asymmetric information situations are those with
hidden characteristics and hidden actions
If a teachers' union negotiates a wage for all college professors above the equilibrium wage rate, the market supply curve of college professors becomes _____.
horizontal, and then it slopes upward
Ten cases of spring water are sold for $6 each, and the marginal product of the last unit of labor is 5. If the price of a case increases from $6 to $8, then the marginal revenue product of the last unit of labor would
increase by $10.
If a natural monopolist switches to marginal cost pricing from charging a profit-maximizing price, there will be a(n):
increase in the level of output produced by the monopolist
Economic regulation leads to a(n):
increase in the market power of existing firms
As the interest rate increases, the opportunity cost of current consumption
increases
inelastic
insensitive to changes in price or income (things people need/ are addicted to like food, tobacco, alcohol etc.)
The market value of a bond is
inversely related to the rate of interest on the bond
According to William Shepherd's examination of competitive trends in the U.S. economy, a dominant firm:
is a firm with over half the market share and no close rival
Entrepreneurship:
is necessary for the success of any business venture.
If a firm experiences economies of scope
its average total cost falls when it produces more than one kind of product
If the supply of a resource is fixed, then the resource's total earnings equal:
its economic rent
What is diminishing marginal returns with resources in a factory at some point in time are they more efficient or less efficient if they produce more product?
less efficient
3 uses of time
market work (time sold as labor), non market work (time spent getting an education, personal consumption), leisure (non-work)
taste for work
minimize disutility, some have a preference for certain jobs that do not pay much
if interest rates go from 6% to 8% you will save more or less?
more
Does CEO pay follow the trends of inflation?
no, the pay has gone UP
Consumers generally consider the process of learning about the efficiency and durability of various brands of refrigerators
nonmarket work
If an industry currently has a Herfindahl index of 900 and a merger would raise that to 950, then the Department of Justice would:
not challenge the merger because the post-merger index would be less than 2,500.
When the expected rate of return from a purchase of equipment is less than the market interest rate, a firm should _____.
not purchase the equipment
Lemon laws
offer compensation to buyers of new or used cars that turn out to be lemons
There is less of a principal-agent problem between managers and apple pickers than between managers and secretaries because:
productivity is easier to measure in apple picking than in secretarial services
In order to organize and carry out transactions efficiently, firms alternate between
profit and revenue maximization
when marginal revenue cost equals marginal revenue product
profit is maximized
Other things equal, the supply of labor will be lower to a job that:
requires advanced skills or education.
U.S. producers faced certain disadvantages as imports rose in 13 major industries studied by Shepherd. The producers initially responded to this by:
seeking trade barriers
elastic
sensitive to changes in price or income (furniture, cars etc)
A large inheritance from a relative will tend to:
shift the individual's labor supply curve inward
antitrust policy
statutes developed by the U.S. Government to protect consumers from predatory business practices by ensuring that fair competition exists in an open-market economy
market supply curve
sum of all individual supply curves (slopes upward)
Apple Computers is more likely to continue to use input markets rather than manufacture its own inputs internally when:
switching among input suppliers is easy
the supply of labor will be higher to a job:
that offers more amenities.
income effect
the change in demand of a good or service brought on by a change in a consumer's discretionary income
According to Coase, the optimal allocation of resources is guided by
the decisions of a firm's managers when market transaction costs are greater than the firm's internal organization costs
A change in the market demand of a final good affects:
the demand for the resources used to produce it.
substitution effect
the effect of a change in the price of a good upon the amount of that good demanded by a consumer
The average work week in the United States has declined to fewer than 40 hours even though wage rates have been increasing. The best explanation for this phenomenon is that
the income effect of rising wages outweighed the substitution effect
If two accountants have had the same education, amount of experience, and they work at the same type of job for the same profit-maximizing firm, which charges its clients a uniform hourly fee, then:
the one who has a higher marginal product should be paid more
In most state-run lotteries,
the present value of the winning amount is less than the amount of dollars won
If you win $1 million in a lottery and are paid in installments,
the present value of these payments equals $1 million if the interest rate is zero
The Internet has created some special problems for intellectual property. One problem is that:
the price of intellectual property exceeds marginal cost.
equilibrium wage
the rate the equates demand and supply (when they are at the same point)
If an electricians' union is successful in its attempts to restrict entry into that craft, it will shift:
the supply curve of electricians to the left
Two workers are employed in the same job by the same firm. However, they are paid different wage rates. This could be explained by differences in:
their marginal products due to differences in ability
A natural monopoly exists when throughout the range of market demand:
there exist economies of scale.
According to Ronald Coase, firms emerge when
transaction costs in the market are more than the cost of hierarchical control
As the wage rate increases, the income effect tends to reduce the quantity of labor supplied to the market.
true
Other things constant, the supply of loanable funds curve is:
upward sloping because the reward for saving increases as the interest rate increases.
opportunity cost
what a resource could earn in its best alternative use (what you gave up)