Exam #1: Mod 1 & 17

Economic profit is: --less than accounting profit if implicit costs exist. --always equal to accounting profit. --greater than accounting profit if implicit costs exist. --less than accounting profit if implicit costs are zero.

less than accounting profit if implicit costs exist

For most firms, economic profit is: --less than accounting profit. --equal to accounting profit. --greater than accounting profit. --negative.

less than accounting profit

A "how much" decision is best made by comparing the _____ of an action to the _____ of that action. --explicit costs; implicit costs --accounting profit; economic profit --marginal benefits; marginal costs --present value; net present value

marginal benefits; marginal costs

The term used to describe a situation in which markets do not allocate resources efficiently is --economic meltdown. --market failure. --equilibrium. --the effect of the invisible hand.

market failure

If the marginal benefit received from consuming a good is less than the marginal cost of production then: --society's well-being can be improved if production increases. --society's well-being can be improved if production decreases. --society's well-being cannot be improved by changing production. --the market is producing too little of the good.

society's well-being can be improved if production decreases

Pauli's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. Sal orders two slices. From this we know that Sal's marginal benefit from the second slice must be at least _____ and the marginal benefit from the third slice must be less than _____. --$3.50; $4.50 --$3.50; $1.00 --$1.50; $1.00 --$1.50; $4.50

$1.50; $1.00

John's accountant tells him that he made a profit of $43,002 running a pottery studio in Orlando. John's wife, an economist, claims John lost $43,002 running his pottery studio. This means his wife is claiming that he incurred _____ in _____ costs. --$86,004; implicit --$43,002; implicit --$43,002; explicit --$86,004; explicit

$86,004; implicit

When a species of fish dies off due to pollution in a river where it once lived, this is an example of --A market failure caused by an externality --A market failure caused by market power --A market failure caused by equality --There is no market failure in this case

A market failure caused by an externality

The principle that trade can make everyone better off applies to --individuals. --families. --countries. --All of the above

All of the above

Which of the following is not an example of scarcity? --Only some people can afford to buy a Ferrari. --Every individual in society cannot attain the highest standard of living to which he or she might aspire. --Doug has an unlimited supply of apples in his orchard. --Each member of a household cannot get everything he or she wants.

Doug has an unlimited supply of apples in his orchard

If a paper factory does not bear the entire cost of the pollution it emits, it will --not emit any pollution so as to avoid the entire cost of the pollution --emit lower levels of pollution --emit an acceptable level of pollution --emit too much pollution

Emit too much pollution

If a paper factory does not bear the entire cost of the pollution it emits, it will --not emit any pollution so as to avoid the entire cost of the pollution. --emit lower levels of pollution. --emit an acceptable level of pollution. --emit too much pollution.

Emit too much pollution

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce --efficiency --equality --externalities --productivity

Externalities

Anytime the marginal benefit of an activity is greater than zero, more activity should be undertaken. True or False?

False

Marginal analysis should be used in "either-or" decisions. True or False?

False

Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Mark discovers that he needs to do an additional $200 of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should he do? --He should sell the cabinet now for $100. --He should keep the cabinet since it wouldn't be rational to spend $380 restoring a cabinet and then sell it for only $360. --He should complete the additional work and sell the cabinet for $360. --It does not matter which action he takes since the outcome will be the same either way.

He should complete the additional work and sell the cabinet for $360.

If at a given quantity _____, the decision maker should do _____ of the activity. --MB < MC; that amount --MB < MC; more --MB > MC; more --MB > MC; none

MB > MC; more

Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do? --He should sell the car now for $3800. --He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $5800. --He should complete the additional work and sell the car for $5800. --It does not matter which action he takes since the outcome will be the same either way.

He should sell the car now for $3800

A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand? --Yes, because cutting hair is profitable --No, because he may not be able to sell more services --It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients --It depends on the average cost of serving more clients and the average revenue he will earn from serving more clients

It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients

Which of these activities will most likely result in an external benefit? --Jake purchases a dilapidated house and cleans up the yard and exterior of the house --John purchases an iPhone and downloads new apps --Jack purchases a new SUV and drives it to work every day --Joe purchases a suit and wears it on his interviews

Jake purchases a dilapidated house and cleans up the yard and exterior of the house

Which of these activities will most likely result in an external benefit? --Jake purchases a dilapidated house and cleans up the yard and exterior of the house. --John purchases an iPhone and downloads new apps. --Jack purchases a new SUV and drives it to work every day. --Joe purchases a suit and wears it on his interviews.

Jake purchases a dilapidated house and cleans up the yard and exterior of the house.

Which of the following is a principle concerning how people interact? --Markets are usually a good way to organize economic activity. --Rational people think at the margin. --People respond to incentives. --All of the above are correct.

Markets are usually a good way to organize economic activity.

Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate? --People respond to incentives --Rational people think at the margin --Trade can make everyone better off --Markets are usually a good way to organize economic activity

People respond to incentives

The government enforces property rights by --requiring property owners to pay property taxes. --providing police and courts. --forcing people to own property. --providing public parks and recreation facilities.

Providing police and courts

Resources are a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies.

Scarce for households and scarce for economies

Economics deals primarily with the concept of --scarcity. --money. --poverty. --banking.

Scarcity

Katie is planning to sell her house, and she is considering making two upgrades to the house before listing it for sale. Replacing the carpeting will cost her $2,500 and replacing the roof will cost her $9,000. Katie expects the new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by $7,000. --She should make both improvements to her house. --She should replace the carpeting but not replace the roof. --She should replace the roof but not replace the carpeting. --She should not make either improvement to her house.

She should replace the carpeting but not replace the roof.

When calculating the cost of college, which of the following should you probably not include?

The cost of rent for your off-campus apartment.

One reason we need government, even in a market economy, is that --There is insufficient market power in the absence of government --Property rights are too strong in the absence of government --The invisible hand is not perfect --Both a and b are correct.

The invisible hand is not perfect

An "either-or" decision entails: --deciding how much of an activity to do. --a choice between two activities. --calculating marginal costs for each activity. --calculating the marginal benefits for each activity.

a choice between two activities

Market economies are distinguished from other types of economies largely on the basis of --The political affiliations of government officials. --The process by which government officials are elected or appointed --The ways in which scarce resources are allocated --The number of retail outlets available to consumers.

The ways in which scarce resources are allocated.

Any expense that is not recoverable is considered a sunk cost. True or False?

True

Economic profits can be negative, even if accounting profits are positive. True or False?

True

Part of the explicit cost of owning a restaurant is rent paid for the kitchen equipment. True or False?

True

For which of the following individuals would the opportunity cost of going to college be highest? --a promising young mathematician who will command a high salary once she earns her college degree --a student with average grades who has never held a job --a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree --a student who is the best player on his college basketball team, but who lacks the skills necessary to play professional basketball

a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree

Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that --we should agree with Senator Brown. --we should agree with Senator Johnson. --a good decision requires that we recognize both viewpoints. --there are no tradeoffs between equity and efficiency.

a good decision requires that we recognize both viewpoints

The price of diamonds is high, in part because the majority of the world's diamonds are controlled by a single firm. This is an example of --a market failure caused by an externality. --a market failure caused by market power. --a market failure caused by equality. --There is no market failure in this case.

a market failure caused by market power

One advantage market economies have over centrally-planned economies is that market economies --provide an equal distribution of goods and services to households. --establish a significant role for government in the allocation of resources. --solve the problem of scarcity. --are more efficient.

are more efficient

Senator Bright, who understands economic principles, is trying to convince workers in her district that trade with other countries is beneficial. Senator Bright should argue that trade can be beneficial --only if it allows us to obtain things that we couldn't make for ourselves. --because it allows specialization, which increases total output. --to us if we can gain and the others involved in the trade lose. --in only a limited number of circumstances because others are typically self-interested.

because it allows specialization, which increases total output

You plan to attend a movie on Saturday night. You buy a ticket for $7 and then lose it. According to marginal analysis, you should: --go home. --buy another ticket and attend the movie. --buy another ticket and attend the movie only if your marginal --benefit of seeing the movie is more than $14. --look for the lost ticket.

buy another ticket and attend the movie only if your marginal benefit of seeing the movie is more than $14

Ian is such a big Braves fan that his benefit of seeing a Braves game is $200. He pays $100 for a ticket to see one of their playoff games. Unfortunately, he left the ticket in his jeans when he laundered them and the ticket was destroyed. According to marginal analysis, Ian should: --not go to the game. --buy another ticket for $100 and attend the game. --buy another ticket and attend the game only if he can buy the ticket for less than $100. --watch the game on TV.

buy another ticket for $100 and attend the game

Communist countries worked under the premise that --markets were the best way to organize economic activity. --central planners were in the best position to determine the allocation of scarce resources in the economy. --households and firms, guided by an "invisible hand," could achieve the most efficient allocation of scarce resources. --allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources.

central planners were in the best position to determine the allocation of scarce resources in the economy.

In making an "either-or" decision: --choose the activity that results in the greater economic profit. --choose the activity that results in the greater accounting profit. --continue in an activity as long as the marginal cost is greater than the marginal benefit. --continue in an activity as long as the marginal cost is less than the marginal benefit.

choose the activity that results in the greater economic profit

As George ate pizza during one recent outing, he found that he enjoyed each additional slice less and less. This implies that his marginal benefit was: --decreasing. --increasing. --constant. --vertical

decreasing

As George ate pizza during one recent outing, he found that he enjoyed each additional slice less and less. This implies that his marginal benefit was: --decreasing. --increasing. --constant. --vertical.

decreasing

Accounting profit differs from economic profit because: of differences in the manner in which revenue is calculated. --of differences in the manner in which revenue is calculated --economic costs include explicit costs, while accounting costs do not. --accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs. --economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

Accountants use only _____ costs in their computations. --opportunity --implicit --explicit --variable

explicit

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce --efficiency. --equality. --externalities. --productivity.

externalities

Suppose the Chicago Cubs could rent out Wrigley Field (the field they play on) to local youth leagues for $11,000 per month. The $11,000 per month is the _____ cost of capital. --implicit --explicit --direct --total

implicit

Costs that are included in the economic concept of cost but are not explicit costs are: --outlay costs. --accounting profits. --implicit costs. --economic profits.

implicit costs

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of

inadequate enforcement of property rights.

If the marginal cost curve is upward sloping, as output increases, marginal costs will: --increase. --decrease. --stay constant. --become downward sloping.

increase

Marginal analysis is relevant for: --both "either-or" and "how much" decisions. --only "either-or" decisions. --only "how much" decisions. --only situations involving the time value of money.

only "how much" decisions

Market power refers to the --power of a single person or small group to influence market prices. --ability of a person or small group to successfully market new products. --power of the government to regulate a market. --importance of a certain market in relation to the overall economy.

power of a single person or small group to influence market prices

The ability of an individual to own and exercise control over scarce resources is called --market failure. --property rights. --externality. --market power.

property rights

If the marginal benefit received from consuming a good is greater than the marginal cost of production: --society's well-being can be improved if production increases. --society's well-being can be improved if production decreases. --society's well-being cannot be improved by changing production. --the market is producing too much of the good.

society's well-being can be improved if production increases

If at a given quantity MB = MC, the decision maker should do _____ of the activity. --less --that amount --more --none

that amount

Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your opportunity cost? --the cost of tuition and books to attend the graduate program --the $30,000 salary that you could have earned if you retained your job at the bank --the $45,000 salary that you will be able to earn after having completed your graduate program --the value of insurance coverage and other employee benefits you would have received if you retained your job at the bank

the $45,000 salary that you will be able to earn after having completed your graduate program

Shane receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is --the value to Shane of the option he would have chosen had Option B not been available. --the value to Shane of Options A, C and D combined. --$50. --$100.

the value to Shane of the option he would have chosen had Option B not been available.

In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic incentives for producers? --to produce good quality products so that society would benefit from the resources used --to conserve on costs, so as to maintain efficiency in the economy --to produce enough to meet the output target, without regard for quality or cost --to produce those products that society desires most

to produce enough to meet the output target, without regard for quality or cost