Exam 2 Microeconomics Final Review

Suppose the marginal utilities for the first three cans of soda are 100, 80 and 60, respectively. The total utility received from consuming 2 cans is You Answered 20 80 90 180

180

Suppose that when the price per ream of recycled printer paper rises from $4 to $4.50, the quantity demanded falls from 800 to 600 reams per day. Using the midpoint formula, what is the price elasticity of demand (in absolute value) over this range? 0.003 0.41 2.43 4

2.43

An externality refers to economic events outside a market. True False

False

If by purchasing more apples and fewer oranges you increase your total utility, then apples must be cheaper than oranges. True False

False

If there is pollution in producing a product, then the market equilibrium price is too high and equilibrium quantity is too low. True False

False

If, when price changes by 35 percent, the quantity demanded changes by 7 percent, then the absolute value of the price elasticity of demand is 5. True False

False

In the United States, imports and exports make up more than half of GDP. True False

False

Which of the following statements about the price elasticity of demand along a downward-sloping linear demand curve is true? It is inelastic at high prices and elastic at low prices. It is unit elastic throughout the demand curve. It is elastic at the highest prices and inelastic at the lowest prices. It is perfectly elastic at very high prices and perfectly inelastic at very low prices.

It is elastic at the highest prices and inelastic at the lowest prices.

If Callum is consuming his utility maximizing bundle and the price of one good rises, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Callum do? MU/P has increased and Callum should buy more of this good. MU/P has increased and Callum should buy less of this good. MU/P has decreased and Callum should buy more of this good. MU/P has decreased and Callum should buy less of this good.

MU/P has decreased and Callum should buy less of this good

A quasi-public good differs from a public good in that unlike a public good, it is possible to keep those who do not pay for the quasi-public good from enjoying the benefits of the good. True False

True

Necessities tend to have more inelastic demand than luxuries. True False

True

Results of the ultimatum game indicate that most people value fairness enough that they will refuse to participate in a transaction they consider unfair, even if they are worse off financially as a result. True False

True

The U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. True False

True

The endowment effect is the tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than they would be willing to pay to buy the good if they did not already own it. True False

True

Which of the following displays these two characteristics: rivalry and nonexcludability? a public good a private good a quasi-public good a common resource

a common resource

If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is a necessity a substitute for another good a luxury an inferior good

a luxury

The market demand for a public good can be determined by adding up the total private benefits and external benefits that each quantity provides the citizens of a country. adding up how much each citizen expects to consume at each possible price. adding up how much each consumer is willing to pay for each unit of the public good. estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

adding up how much each consumer is willing to pay for each unit of the public good.

A situation in which a country does not trade with other countries is called autarky self-actualization. autonomy independence

autarky

Eliminating a tariff on running shoes would ________ businesses that sell running shoes and ________ consumers who purchase them. benefit; benefit benefit; harm harm; benefit harm; harm

benefit; benefit

An economic principle that explains why countries produce different goods and services is absolute advantage. trade as a percentage of GDP. comparative advantage. NAFTA.

comparative advantage

Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices this means that economists believe consumers will always buy goods and services at the lowest possible prices. consumers spend their incomes to order to accumulate the most goods and services. consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them. consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others.

consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them.

Assume that you own a small boutique hotel. In an attempt to raise revenue, you reduce your rates by 20 percent. However, your revenue falls. What does this indicate about the demand for your boutique hotel rooms? Boutique hotel rooms are inferior goods. Demand is inelastic. The demand curve for your hotel rooms is vertical. Demand is elastic.

demand is inelastic

Total utility is maximized in the consumption of two goods by equating the marginal utility for each good consumed. equating the marginal utility per dollar spent for each good consumed. You Answered equating the total utility of each good divided by its price. maximizing expenditure on each good.

equating the marginal utility per dollar spent for each good consumed.

Marginal utility is the total satisfaction received from consuming a given number of units of a product. average satisfaction received from consuming a product. extra satisfaction received from consuming one more unit of a product. satisfaction achieved when a consumer has had enough of a product.

extra satisfaction received from consuming one more unit of a product.

If the quantity demanded for a good rises as income rises then the income elasticity of demand for this good is ________ than 0, and the good is ________ good. greater; an inferior less; a normal less; an inferior greater; a normal

greater; a normal

Once a country has lost its comparative advantage in producing a good, its income will be ________ and its economy will be ________ if it switches from producing the good to importing it. higher; less efficient higher; more efficient lower; less efficient lower; more efficient

higher; more efficient

A quota makes domestic consumers better off. makes both domestic producers and consumers better off. makes everyone worse off. makes domestic producers better off.

makes domestic producers better off.

Free riding refers to a situation in which people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay. the marginal cost of allowing additional consumers to consume a public good is zero. high income individuals subsidize the production of goods, such as education, that make society better off. markets fail to allocate resources efficiently when benefits outweigh costs.

people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.

Which of the following is an example of a positive externality? raising the speed limit to 60 mph in school zones planting trees along a sidewalk which add beauty and create shade permitting smoking on commercial airplanes a police department stops enforcing DUI laws

planting trees along a sidewalk which add beauty and create shade

The cost borne by a producer in the production of a good or service is called private cost public cost social cost internal cost

private cost

In the real world, we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. One reasons for this is comparative advantage works better in theory than in practice. because some countries also have an absolute advantage in the production of those goods. tastes for many traded goods are similar in many countries because of globalization. production of most goods involves increasing opportunity costs.

production of most goods involves increasing opportunity costs.

When there few close substitutes available for a good, demand tends to be perfectly inelastic. perfectly elastic. relatively inelastic. relatively elastic.

relatively inelastic

While politicians and the general public often favor a "command-and-control" approach to the reduction of greenhouse gases, many economists favor market-based policies because they completely eliminate negative externalities. rely on economic incentives rather than on administrative rules. convert all negative externalities into positive externalities. eliminate the need for government involvement in all pollution regulation.

rely on economic incentives rather than on administrative rules.

A tragedy of the commons occurs when a resource is rival and excludable. rival and non-excludable. non-rival and non-excludable. non-rival and excludable.

rival and non-excludable.

In 1995 ________, which was established in 1948, was replaced by ________. the GATT; the WTO the WTO; NAFTA the Smoot-Hawley Tariff; the GATT NAFTA; the Smoot-Hawley Tariff

the GATT; the WTO

When the price of audio books, a normal good, falls, causing your purchasing power to rise, you buy more of them due to the substitution effect. the income effect. the deadweight loss effect. the elasticity effect.

the income effect

Conceptually, the efficient level of carbon emissions is the level for which the marginal benefit of reducing carbon emissions is maximized. the marginal cost of reducing carbon emissions is minimized. the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions. the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized

the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.

To calculate the price elasticity of supply, we divide the percentage change in price by the percentage change in quantity supplied. the percentage change in quantity supplied by the percentage change in price. rise by the run. the average price by the average quantity supplied.

the percentage change in quantity supplied by the percentage change in price.

The ratio at which a country can trade its exports for imports from other countries is called a trade barrier the terms of trade autarky a free trade agreement

the terms of trade

Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions. Giffen goods; luxury goods the income effect; the substitution effect the ultimatum game; the dictator game network externalities; the endowment effect

the ultimatum game; the dictator game

A significant downside to network externalities is that there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies. firms may network with unethical suppliers or distributors. the costs of using celebrity endorsements may be very high. there may be large switching costs to firms changing technologies.

there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies.

Consumers have to make tradeoffs in deciding what to consume because not all goods give them the same amount of satisfaction. the prices of goods vary they are limited by a budget constraint. there are not enough of all goods produced

they are limited by a budget constraint.

What is the rationale behind a tradable emission allowance scheme? to create a market for externalities: the scheme brings together buyers and sellers of marketable permits to discipline polluting firms by specifying the maximum amount of emissions allowed and giving them permits to pollute up to their allowance to raise revenue for the government through the sale of emission permits and at the same time set an emissions target to provide firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance

to provide firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance

The demand curve for a Giffen good is non-linear but downward sloping. vertical upward sloping non-existent

upward sloping

Perfectly inelastic demand is represented by a demand curve which is ________, and relatively inelastic demand is represented by a demand curve which is ________. downward sloping; vertical horizontal; downward sloping vertical; downward sloping upward sloping; horizontal

vertical; downward sloping

If the slope of a demand curve is equal to -0.1 then demand is inelastic. we don't know whether the demand is elastic or inelastic. the demand is elastic at low prices and inelastic at high prices. as price increases by 10 percent quantity demanded decreases by 1 percent.

we don't know whether the demand is elastic or inelastic