Microecon Exams 1 & 2

The provision of a public good generates a

positive externality and the use of a common resource generates a negative externality.

Private companies will invest in medical research if

they will produce a specific product for which they may receive a patent.

For which of the following goods is the income elasticity of demand likely the lowest?

toilet paper

Economics can be described as the study of society's management with its

unlimited wants and limited resources.

Janine would be willing to pay up to $50 to see Les Misérables, a famous Broadway musical. She buys a ticket for only $30. Janine's consumer surplus in going to the performance is

$20.

Kelly is willing to pay $5 for a gallon of gasoline. The price of gasoline at her local gas station is $2.75. Suppose it costs the gas station $1 per gallon to supply each gallon of gasoline. If she purchases exactly ten gallons of gasoline, then Kelly's consumer surplus is

$22.50.

Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 18 workers it produces 90 units of output. Fixed cost of production are $500 and the variable cost per unit of labor is $4. The marginal product of the 19th unit of labor is 2. Given this information, what is the total cost of production when the firm hires 19 workers?

$576

Assume for the United States that the opportunity cost of each airplane is 50 cars. Which of these pairs of points could be on the United States' production possibilities frontier?

(100 airplanes, 12,500 cars) and (150 airplanes, 10,000 cars)

Suppose a firm currently produces 300 units of output per day with 9 workers. The firm is able to produce 330 units of output by hiring an additional worker. What is the marginal product of the 10th worker?

30 units of output

What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal good?

Both the equilibrium price and quantity would increase.

Tom Brady (a highly paid American football player) should pay someone else to mow his lawn instead of mowing it himself, unless

Brady has a comparative advantage over everyone else in mowing his lawn.

Which of the following statements is correct concerning the burden of a tax imposed on a market where neither supply nor demand are perfectly price inelastic or perfectly price elastic?

Buyers and sellers share the burden of the tax.

Suppose a price floor was placed into the market for a good, and the price floor is binding. Suppose also that demand is not perfectly inelastic or perfectly elastic. Which of the following is true regarding consumer surplus?

Consumer surplus must decrease compared with before the price floor.

Who among the following is a free rider?

Ernie listens to National Public Radio, but does not contribute to any fundraising efforts.

A hair stylist currently works with 50 clients each week, and she earns a profit doing so. Should she expand her business so that she can serve more clients?

It depends on whether the marginal cost of serving additional clients is less than the marginal revenue she will earn from serving more clients.

John and Mary can make either cheesecakes or apple pies. For John, he can produce 5 cheesecakes per hour or 3 apple pies per hour. For Mary, she can produce 6 cheesecakes per hour or 4 apple pies per hour. Suppose both John and Mary have the same amount of time to make cheesecakes and apple pies (the exact amount of time does not matter). Given that information, _____________ has the absolute advantage in producing cheesecakes and _____________ has the absolute advantage in producing apple pies.

Mary, Mary

Matthew and Lydia can make either brownies or pumpkin pies. For Matthew, he can produce 5 brownies per hour or 3 pumpkin pies per hour. For Lydia, she can produce 6 brownies per hour or 4 pumpkin pies per hour. Suppose both Matthew and Lydia have the same amount of time to make brownies and pumpkin pies (the exact amount of time does not matter). Given that information, _____________ has the comparative advantage in producing brownies and _____________ has the comparative advantage in producing pumpkin pies.

Matthew, Lydia

A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?

More firms are able to enter or leave a market in the long run than in the short run as the price of the product changes.

Consider two markets, the market for cheesecake and the market for spam. Suppose the equilibrium price of cheesecake is $10 and the equilibrium price for spam is $5. If the government places a $1 price floor on both markets

Neither markets will be affected, as both price floors are non-binding.

Consider the market for widgets, which is currently in equilibrium. Then, two things happen: 1) Income decreases. Assume widgets are an inferior good. 2) The price of wood increases. Wood is an input in the production of widgets. If the changes given are the only changes that happened (all other things are held constant), what will be the effect on the equilibrium?

Price of widgets increases, Change in quantity of widgets is ambiguous

Which of the following is an example of a positive (i.e. not normative) statement?

Prices rise when the government prints too much money.

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand in your neighborhood to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade in your neighborhood is price inelastic, what is your advice to her?

Raise the price to increase total revenue.

Which of the following actions is consistent with a government that is trying to maximize total surplus of a market with an externality?

Tax goods with negative externalities and subsidize goods with positive externalities.

What would happen to the equilibrium price and quantity of lattés if the cost to produce steamed milk, which is used to make lattés, increased, and scientists discovered that lattés cause heart attacks?

The equilibrium quantity would decrease, and the effect on equilibrium price would be ambiguous.

Which of the following statements is NOT correct?

The free-rider problem occurs when a good is nonexcludable. ***All goods provided by the government are public goods. The private market will tend to undersupply public goods. Medical research can be an example of a public good.

For a particular good, a 15 percent decrease in price causes a 5 percent increase in quantity demanded. Which of the following statements is most likely applicable to this good?

The good is one that is broadly defined.

Suppose an economy only produces two goods, robots and ice cream. Last month, the economy produced 10 robots and 200 gallons of ice cream. This month, the same economy produced 15 robots and 240 gallons of ice cream. Which of the following statements could explain this change?

This month, the economy experienced an improvement in technology. This month, the economy reduced the unemployment of its resources. This month, the economy experienced an increase in resources ***All of the other statements could explain this change.

Walter used to work as a high school teacher for $30,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid an annual 1 percent interest, and borrowed $30,000 from his uncle, whom he has to pay 1 percent interest per year on the loan. Last year Walter paid $25,000 for business expenses (supplies, advertisement, etc) and had revenue of $70,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs (i.e. Tyler will give Walter the accounting cost, and Greg will give Walter the economic cost).

Tyler says his costs are $25,300, and Greg says his costs are $55,500.

Which of the following statements about wearing a face covering during a pandemic best conveys the externality of such an action?

Wearing a face covering is a positive externality because those around the individual wearing the covering benefits from having a lower likelihood of catching the virus.

Which of the following statements best represents the Law of Demand?

When the price of a good decreases, buyers purchase more of the good.

Which of the following would cause a movement along the supply curve for cupcakes?

a decrease in the price of cupcakes

Which of the following would NOT shift the demand curve for surgical face masks?

a decrease in the price of surgical face masks

Suppose the government wants lower the rent for apartments in a city by imposing a price ceiling. What would you expect to happen as a result?

a shortage of apartments in that city will develop.

A supply curve slopes upward because

an increase in price gives producers an incentive to supply a larger quantity.

Suppose the government passes a law requiring that all citizens earn the same income per year regardless of work effort. This law will likely

decrease efficiency but increase equality.

Mason says that he would eat one pizza each day regardless of the price. If he is telling the truth, Mason's

demand for pizza is perfectly inelastic.

If the quantity demanded of a certain good responds greatly to a small change in the price of the good, then the

demand for the good is said to be elastic.

Marginal cost increases as the quantity of output increases. This reflects the property of

diminishing marginal product.

When average cost is greater than marginal cost, average cost must be

falling.

The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good,

has an absolute advantage in the production of that good.

A market with negative externalities will have a _______ output than the socially efficient quantity, and a market with positive externalities will have a _________ output than the socially efficient quantity.

higher, lower

If muffins and bagels are substitutes, a higher price for bagels would result in a(n)

increase in the demand for muffins.

Exceptionally favorable growing conditions in the vineyards of Napa Valley would cause a(n)

increase in the supply of wine, decreasing price.

Kara receives a promotion at work, which increases her income. We would expect Kara's demand for

inferior goods to decrease.

There is a tradeoff between having higher levels of income in society and a cleaner environment because

laws that reduce pollution raise costs of production and reduce incomes.

When a tax is placed on the buyers of a product, for each unit sold, sellers receive

less, and buyers pay more than they did before the tax.

Very talented high-school athletes who skip college to become professional athletes

likely do so because the opportunity cost of attending college is very high for them.

Remedies for a market with an externality will always try to

move the quantity of the good toward the socially optimal equilibrium.

Unemployment would cause an economy to

produce inside its production possibilities frontier.

Suppose the demand for illegal drugs in the United States is very inelastic (but not perfectly inelastic). An operation aimed at catching drug smugglers that successfully reduces the supply of illegal drugs coming into the U.S. likely will

raise the price, reduce the quantity, and increase total revenues for illegal drug dealers

Be sure to choose the best possible answer. Production possibilities frontiers (PPFs) are usually bowed outward. The reason production possibilities frontiers (PPFs) are bowed outward is because

resources are specialized; that is, some are better at producing particular goods rather than other goods.

Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 10 percent decrease in the price of peanut butter will cause the quantity of jelly purchased to

rise by 25 percent.

As a student, Anne spends 40 hours per week writing term papers and completing homework assignments. On one axis of her production possibilities frontier is measured the number of term papers written per week. On the other axis is measured the number of homework assignments completed per week. Anne's production possibilities frontier is a straight line if

she can switch between writing term papers and completing homework assignments at a constant rate.

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a

surplus to exist and the market price of roses to decrease.

Suppose you are working at a bank and are earning $30,000 annually. After two years of working at the bank (and earning the same salary), you are deciding on whether you should enroll in a one year graduate program. Enrolling in the program, however, would require you to quit your job at the bank. Which of the following should NOT be included when calculating your opportunity cost of attending the graduate program?

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

Suppose that Sam is being interviewed. The interviewer asks her what she would do if the price of her favorite toothpaste increased. Sam responded that she would switch to a different brand. The interviewer asks what she would do if the price of all toothpastes increased. Sam responds that since she must use toothpaste, she would just have to pay more to buy toothpaste. This example illustrates the importance of

the definition of a market in determining the price elasticity of demand.

A university's football stadium is always sold out, and students who wait in line for hours may be turned away. This indicates

the ticket price is below the equilibrium price.

When the price of a good increases,

there is a movement along the demand curve of that good.

It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that

weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable.