Microeconomics Final Exam
Holly spends exactly $50 on coffee each month. The price of tea decreases, while the price of coffee remains the same. Holly's cross price elasticity of demand of coffee with respect to tea is
0
There are two major Internet service providers in Corinthia. One company has a market share of 60 percent, and the other firm has a market share of 40 percent. The Herfindahl - Hirschman Index for the industry is ________
5,200
Suppose the Louis Corporation wouldn't be able to increase its profits if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are
Zero
Economists study ______; therefore, the unifying feature of economics is a focus on _________
all human behavior; choice
You observe a market where in the long run firms earn zero economic profit, consumer and producer surplus is not maximized, and when a new firm enters the market, the price of similar products decrease. You are most likely observing
A monopolistically competitive market
What types of nations would be against free trade?
A nation who wants to preserve their cultural uniqueness and a defense-oriented nation
Jeb mentions that the hog farm down the road from his house is creating a very nasty smell
A negative externality
What would not cause a shift in the supply curve for orange juice?
A new medical discovery about the benefits of citrus
Ludwig mentions that Frank, the local rancher, is inflating land prices by buying too much land. This is an example of
A pecuniary externality
What is not the example of a natural monopoly?
A pizza restaurant and a burger restaurant come together in order to reduce competition and earn higher profits
George mentions that Ms. Daisy has planted some lovely new roses in front of her store. This is an example of
A positive externality
What is the difference between accounting profit and economic profit?
Economic profit only subtracts both explicit and implicit costs from total revenue, while accounting profit only subtracts explicit costs
In an oligopoly with differentiated products
Economic profit will exist
Economics is all about making choices. The reason we have to choose one thing over another is
Economic resources are scarce
A natural monopoly may develop because _______ make it efficient to have only one provider of a good or service. It is characterized by fixed costs that are _______
Economies of scale; substantial
What is not one of the three conditions that characterizes a perfectly competitive market?
Firms have pricing power and can set their prices freely
Which of the following is a difference between a monopolistically competitive market and a monopoly in the long run?
Firms in a monopolistically competitive earn zero economic profits in the long run, while a monopolist usually earns positive economic profits in the long run
How does microeconomics differ from macroeconomics?
microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole
$100 is to be divided among two individuals - Mary and Jenna. Which of the following allocations is Pareto efficient?
Mary receives $1, and Jenna receives $99
Nikki decided to jog three miles for exercise by reasoning that a three mile jog was better than a two mile or four mile jog
Optimization using marginal analysis, since she is calculating the difference in net benefits between alternatives
New firms are free to enter the industry in the long run
Perfect competition: True Monopoly: False Monopolistic competition: True
Firms equate price and marginal cost
Perfect competition: True Monopoly: False Monopolistic: False
Firms equate marginal revenue and marginal cost
Perfect competition: True Monopoly: True Monoplistic competition: True
What is not an example of monopolistic competition?
Pharmaceuticals
A project should be undertaken if the net present value is
Positive
When economists value rewards that will be experienced in the future, they multiply the reward by a __________ factor that is __________ one to capture the idea that future rewards are worth less than current rewards
Positive; less than
What is not an example of empiricism?
Predicting human behavior
What is true about economies of scale?
The downward - sloping portion of the long - run average cost curve indicates the presence of economies of scale in production
What statements are true regarding future rewards and risky rewards?
The economic tools used to value them use weights, the value of a future reward is obtained by multiplying the reward by a positive factor that is less than 1, a current reward is worth more than a future reward
Positive externality will occur when
The marginal social benefit is greater than the marginal cost to produce at the market equilibrium
In a perfectly competitive market, what is not true?
The market supply cannot affect the retail price
How is the mean calculated from a series of observations?
The mean is the sum values of the observations divided by the number of observations
The concept of diminishing marginal benefits states that
The more you consume of a good, your willingness to pay for an additional unit declines
Example of a variable with negative correlation
The number of winter coats sold and the temperature outside
In what situation is optimization a good description of behavior?
Tia is a very fun loving person. She chooses to go on a vacation with friends instead of volunteering at NGO as a vacation is more enjoyable
Data helps establish
Whether theories match reality
The tragedy of the commons results when
Common pool resources are overused
If the total cost incurred in hiring ten workers by a firm is $45, and the total cost incurred when the eleventh worker is hired is $60, the marginal cost of hiring the eleventh worker is
$15
When economists speak of a deadweight loss, they are referring to ________ in __________ caused by a market distortion
A decrease; social surplus
What firm is most likely to have a constant marginal cost?
A firm that has extremely high fixed costs
What statement correctly indicates a property of good economic questions?
A good economic question addresses topics that are important to economic agents and/or society
You should collect _______ amount of data to create ________ to test the _________ indicated by the economic model
A large; empirical evidence; hypotheses
The congestion charge is an example of _________ to the negative externality associated with common pool resources
A market - based government solution
Expected value is
A probability-weighted value that gives the average payoff from an event
The principle of comparative advantage provides
A range of prices within which trade will occur
What best describes equilibrium?
A situation where no economic agent would benefit by changing his or her behavior
A change in the wage rate paid to the variable factor (labor) will shift the
ATC, AVC, and MC curves
For a firm, economies of scale occur when the _____ for a firm ______ as the quantity produced increases
ATC; decreases
The long-run supply curve is the portion of the MC curve
Above the ATC curve
An externality occurs when
An economic activity affects third parties not engaged in the activity
A government is an example of
An economic agent
The economic profits made by a monopolistically competitive firm decreases when there is ________ and is equal to zero _________ when in long-run equilibrium
An entry of a new firm; when in long-run equilibrium
When existing firms leave a perfectly competitive market, it causes
An increase in profitability of existing firms
A negative income elasticity would indicate ________ good. If your income increased 10% and your demand for diamond jewlery increased 15%, diamond jewlery would be considered _______ good
An inferior; a luxury
What principle of economics is false?
An investor selecting and investing in a stock or a combination of stocks that always earns him 15% returns on his investment is an example of optimization
Consider a market structure in which there are only a few firms. These firms face a downward sloping residual demand curve with some entry barriers in the long-run. These conditions are satisfied by ________ market structure. In this market, if there are zero economic profits, then it reflects a situation of ________. If there are more than zero economic profits, then it depicts a case of _________
An oligopolistic; homogeneous products in the long-run; differentiated products in the long-run
What would not cause an increase in producer surplus?
An upward shift in the marginal cost curve
Oligopolistic firms that sell differentiated products determine their prices when prices are
Determined simultaneously by the firms as best responses given other firm prices
In a competitive market, there a ________ number of buyers and a __________ number of sellers
Large; large
Why is the market demand curve for public goods calculated as a vertical summation of individual demand curves?
Because the public good is non-rival, so you and others can consume every unit of the good at the same time.
What is not a measure of elasticity?
Behavioral elasticity of demand
When the ATC curve is decreasing, we know that the MC curve is ________, and when the ATC curve is increasing, we know that MC is ________
Below the ATC curve; above the ATC Curve
Since the inputs used to produce goods are scarce, the total amount produced of most goods is _______ the amount that consumers would like to buy. To allocate the goods produced to the people who value them the most, we use ________
Below; the price mechanism
When you take out a loan from a bank, you are ________ the bank. This moves your spending from ______ later to now.
Borrowing from; later to now
Combinations of apples and loaves of bread that a consumer could purchase would represent a _________ while a __________ represents the amount of apples and bread that a consumer could choose using his or her entire budget
Budget Set; Budget Constraint
How is net present value used to decide whether a project should be undertaken or not?
By comparing the upfront cost of a project to the discounted value of the future benefits from the project
All of the following are examples of independent outcomes except
Choosing a card from a deck of cards, not replacing it, and then choosing another card
An example of an industry or service that is a natural monopoly is
City drinking water
A library's collection of e-books is a
Club good
A model is based on an assumption that an additional year of education increases a student's future wage by 20 percent. Refer to the scenario above. The hypothesis of the model is that
College graduates will earn 107 percent more than high school graduates
There are a few firms in the automobile industries in Zadima. To prevent a price war, these firms have secretly agreed to charge a price 20 percent above the marginal cost of production. This is an example of
Collusion
Radio spectrum is a
Common pool resource
In a perfectly competitive market, sellers _________ and buyers _________
Cannot charge more than the market price; cannot pay less than the market price
In a perfectly competitive market, a seller ________ choose to raise the price of its good since all sellers in the market produce ________, so raising the price would result in _________
Cannot; identical goods; losing all its customers
An experiment would be conducted to determine _______ among the chosen variables. Subjects should be assigned ________ to either test or control group in order to get the most unbiased comparison
Causation; randomly
Externalities are called market failures because they
Cause markets to produce suboptimal social outcomes
First degree price discrimination
Charges each consumer the maximum price they're willing to pay
What are necessary ingredients to the buyer's problem?
Consumer's tastes and preferences, prices of goods and services, and amount of money the consumer has to spend
Lily is granted an exclusive right to the poems written by her late father. What is this an example of?
Copyright
Richard carves sculptures, for which he is granted an exclusive right. What is this an example of?
Copyright
You decide to run an experiment. You invite 20 friends to a party. You randomly select 10 friends and tell them that there will be free food: most of them show up to the party. For the other 10 friends you do not mention the free food: none of these friends show up. Based on the correlation in your data and also assuming that the correlation is not spurious, you conclude that free food causes people to come to parties. Given this information, it can be concluded that
Correlation implies causation
The formation of a natural monopoly is practical for both producers and consumers because it offers them
Cost advantages
A monopolist should continue to increase production until marginal
Cost is equal to marginal revenue.
For a market to be characterized as monopolistically competitive, there must be
Differentiated products, zero economic profits in the long run, and many sellers
When a firm exercises its monopoly power, the cost to society is the
Deadweight loss
A deadweight loss is the ________ in social surplus that results from a market ________
Decrease; distortion
Everything else the same, as the price of the good increases, quantity demanded
Decreases
The demand curve shows
How the quantity demanded responds to changes in the price of the good
In a perfect competitive market, a firm with multiple production plants will minimize total costs of production when
Each plant produces where marginal revenue equals marginal cost
What is true about optimization?
Economic agents who optimize attempt to choose the best feasible option, given the INF that they have
What tool would you employ to analyze the relationship between gasoline prices and consumer behavior?
Economic models
Your client becomes critical of your "sloppy" technique of using a model that does not include all factors. What is the most appropriate reply to this criticism?
Economic models are meant to be approximations that predict what happens in most circumstances
What is not an item studied under microeconomics?
Economic output
What is not a characteristic of monopolistic competition?
Entry and exit is not easy and products are perfect substitutes
What approach would be the least effective way to deal with free riders?
Exclude citizens from benefitting from the good or service
A utility function exhibits diminishing marginal utility of consumption ______ as the background level of consumption ________
Falls; rises
An example of a monopolistically competitive firm is the
Fast-food industry
Economists estimate that the income elasticity of demand for women's hairstyling services is +3.5, suggesting that
Hairstyling services are a normal good and quantity demanded will increase as income increase
The interest rates on loans tend to be ________ the interest rates on investments
Higher than
In a perfectly competitive market, an individual seller sells only a negligible fraction of the total amount of the good produced. This is why
His individual choices do not affect market price
The long-run supply curve for a firm in a perfectly competitive industry is
Horizontal
The long-run supply curve in a perfectly competitive market is
Horizontal
Given the long-run adjustment process that takes place after a supply or demand shock, we know that the industry supply curve must be
Horizontal, since the supply curve shifts until price is back to its original level and profits are back to zero.
Under which of the following examples is it likely that the accounting profit is positive and the economic profit is negative?
If you use a diamond mine as a tourist attraction instead of using it for mining
The gambler's fallacy occurs when gamblers
Ignore the independence of outcomes in some games and believe they are on a hot streak
How has the pattern of trade changed in the United States since 1960?
Imports have grown faster than exports, and the United States has become a net importer
What is a key difference between perfect competition and monopoly?
In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price
The exclusitivity laws in the form of patents and copyrights make _______ better off and ________ worse off
Innovators; consumers
Which of the following economic tools can be used to solve the tragedy of the commons?
Incentives to self-regulate the use of resources, pigouvian tax, and privatization of the resource
Why is national defense better off as a natural monopoly?
Industries like national defense experience economies of scale since they have high fixed costs. Thus, it is cheaper to have a single firm provide a larger quantity
If firms in a perfectly competitive market are earning profits or incurring losses in the short run, then the long run these profits or losses will either cause new firms to enter or existing firms to leave the market. This will result in a shift in the ______ until profits are _______
Industry supply curve; zero
The market demand curve for a public good
Is found by summing all of the individual's marginal benefit at a given quantity
Markets in which the Herfindahl -Hirchman Index _______ are considered not concentrated
Is less than 1,000
What is true about pecuniary externalities?
It affects other people only through market price
If the production of a good gives rise to a negative externality
It can be internalized by taxing the producers of the good
In a perfectly competitive market, when firms enter and exit competitive markets
It is a good sign the market is working.
What is not true regarding producer surplus?
It is the area below the marginal cost curve, it is the difference between total revenue, and it is not possible to calculate the total producer surplus in the market
What is not true about producer surplus?
It is the difference between total and total revenue, it is the area below the marginal cost curve, and it is not possible to calculate the total producer surplus in the market
What statement regarding the principle of optimization is true?
It is the unifying principle that connects various seemingly unrelated decisions, and it takes into account and evaluates multiple trade-offs
For most people, one of the biggest challenges involved in studying economics is
It looks beyond simple cause and effect to many possible long term effects of an action
For an outcome to be risky
It must be random
What is true regarding the profit-maximizing price charged by a monopolist?
It occurs at the quantity where MR=MC, it occurs along the elastic part of the demand curve, it is greater than MR, and it is greater than MC
What is not true about risk
It occurs when all of the costs are predictable
A firm will maximize profits at the level of output where
Its marginal revenue equals its marginal cost
What is an example where precriptive economic analysis is necessary?
Jay chooses to go to Europe rather than China because of the huge discounts
Assume that the market for chocolates is perfectly competitive, which statement would be true?
Jill starts to produce chocolates today, but the addition of her supply into the market does not decrease the market price
Two outcomes are said to be independent when
Knowing about one outcome does not help you predict the other outcome
Maylin goes to her local sporting goods store to buy socks and jogging shorts. Socks cost $10 per pair and jogging shorts costs $15 each. At her current consumption bundle pair of 4 pairs of socks and 2 jogging shorts, her marginal benefit from the last pair of socks is 20 and the marginal benefit of the last jogging short is 30. Maylin should
Leave her consumption bundle unchanged
The process implies that future rewards are worth _________ current rewards
Less than
Natural monopolists worry _______ about potential entrants compared to the monopolies that arise through legal means since economic profits are ________ likely to attract potential market entrants
Less; less
When a monopolist sells positive levels of output, its demand curve
Lies above its marginal revenue curve
In a perfectly competitive market, if one seller chooses to charge a price for its good that is slightly higher than the market price, then it will
Lose all or almost all of its customers
Suppose a country produces only two goods: good X and good Y. The opportunity cost of producing good Y equals
Loss in good X/gain in good Y
What is considered a scarce resource for producers?
Low-skill labor, equipment and tools, and natural resources for production
When a firm exercises its monopoly power, social surplus is _____ when compared to a perfectly competitive market.
Lower
The equilibrium output produced by a monopolistic competitor in the long run after the entry of new firms is
Lower than the equilibrium output produced by the firm before the entry of new firms
Compared to a perfectly competitive market, consumer surplus is _______, producer surplus is ________, and deadweight loss is _________
Lower; higher; higher
What are the types of goods that are causing the shift in the balance of imports and exports in the United States?
Manufactured goods have played an important role in tge shift, even though the number of manufactured goods has increased
Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where
Marginal revenue equals marginal cost
What is not true about a firm's elasticity of supply
Market price
Seller A increases the price of its good by 20% and still enjoys a high market demand. Due to the high demand, there is an increase in the number of similar sellers in the long-run. This is an example of
Monopolistic competition
Suppose you and your friends decide to go to the beach during spring break. You need to fly from Kansas City to Miami and over 12 separate airlines provide service. This market can best be characterized as
Monopolistic competition
What is not true about market structures?
Monopolistic competitors practice marginal cost pricing
The Department of Justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by
Monopolizing the market by bundling its operating system secret from users and competitors
A product with no close substitutes. What type of market is it?
Monopoly
Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
Monopoly, because its demand is more inelastic
Absolute advantage is the ability of an individual, firm, or country to produce
More of a certain good than other competing producers, given the same number of resources
If two investments have the same expected return, people who are risk seeking will prefer the investment with
More risk
Compared to a monopoly that does not price discriminate, a monopolist who engages in perfect price discrimination will produce _________ output and have ________ deadweight loss
More; no
A competitive market will
Move towards equilibrium quantity because both producers and consumers act in their own best interest
Expected value is calculated by
Multiplying the probability of each possible outcome by the dollars associated with each outcome
To value the delayed benefits, economists weight the reward by
Multiplying the reward by a positive factor that is less than 1
What are subjects to the free-rider program?
National security, public libraries, and a neighborhood watch
Economies of scale in production act as a source of ______ market power
Natural
Suppose Louis Corporation could increase its profits considerably if it decided to shift fro, the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the industry are
Negative
Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through
Network externalities
Which of the following factors will not lead to zero economic profit in long-run equilibrium in a monopolistically competitive market?
No factors
Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?
No, because firms restrict output to raise price
Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist?
No, because it faces potential competition from other companies
Some people choose to live close to the city center; others choose to live away from the city center and take a longer commute to work every day. Does this mean that those who stay away from the city center are being irrational?
No, because their opportunity cost of commuting must be lower
A monopoly has _______ and _______. Price is set ________ marginal cost
One seller, many buyers, greater than
Total revenue for a monopolist is maximized
Only if marginal revenue is zero
Charley spends all of his income on soft drinks and pizza. Suppose he is currently buying these products in amounts such that his marginal benefit from an additional soft drink is $120 and his marginal benefit from an additional slice of pizza is $60. If the price of a soft drink is $1 and the price of a slice of pizza is $4, is Charley maximizing his total benefits?
No, he should shift consumption toward soft towards and away from pizza to maximize total benefits
As long as you recieve the same amount, is a sum of money worth the same today and one year later?
No, if there is a positive interest rate the same amount of money is worth more today than receiving it in the future
Can two indifference curves intersect? Explain your answer
No, intersecting indifference curves would imply that a consumer is indifferent between bundles that yield different total benefits
If a good is considered to be a luxury good, does it mean that the Law of Demand does not hold?
No, it only means that its income elasticity of demand is greater than 1.0, so the Law of Demand still holds
Does it make sense to buy extended warranties on televisions and other small home appliances?
No, the cost of the warranty will be too high compared to the cost of the item, the likelihood of a breakage, and your lifetime income
Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. During a meeting with your client, the CEO asks if your economic models include all factors that impact gasoline prices. What is your response to this question?
No, the model is a simplified representation of reality
Are all markets perfectly competitive?
No, there are other market types where firms have have considerable power to control the price
Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain your answer
No, these industries are declining not because of coordination problems but, rather, because of falling demand
In the long run, which of the following factors of production is fixed for a firm?
None of the above
John is attempting to decide on a movie. He determines that the new Batman movie is preferred to the new Spider-Man movie and that both the Batman and Spider-Man movies are preferred to the new Superman movie
Optimization using marginal analysis, since he is calculating the change in net benefits between alternatives
Lauren mentions that it is particularly windy today. This is an example of
Not an externality
Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry's HHI is 6,850. Is this information sufficient to conclude that the aluminum market is less competitive than the market for refrigerators?
Not necessarily. Although the HHI indicates a smaller number of firms, those firms may compete intensely
A firm's optimal output is 1,000 units per month, with a fixed cost of $300 per month and variable cost of $200 per month. The market price of this good is $0.40. The firm decides to shut down. In such a situation, this firm should
Not shut down production in the short run
What would not be considered one of the possible opportunity costs of a recent high school graduate starting college right away?
Nothing
Firms set market price depending on other firm's market price. What type of market is it?
Oligopoly
A good is non-rival in consumption if
One person's use of the good does not preclude consumption by others
At a yard sale, Reagan calculated that she was willing to pay $200 for a queen bed that was being sold for $100, and that she was willing to pay $220 for a king bed that was being sold for $300
Optimization using total value, since she is comparing total benefits between alternatives
Suppose a total of 2,500 students are allowed in the engineering programs at all of the colleges in a particular city. From the previous three years' record, it shows that the number of students who enroll in the entrance exam for the engineering program increases if there is an increase in the number of IT recruiters the previous year. This year there is a total of 3,200 students who have enrolled to take the entrance exam of which only up to 2,500 of those who passed would get in. Based on either the students' perspective or the college perspective, what combination of economic key concepts does the situation follow?
Optimization, equilibrium, and empiricism
What is an example of the tragedy of the commons?
Overfishing in public waters
What is true about price, P?
P=MR=MC can only be true in perfect competition
Greenaqua Corp. was given the exclusive right to produce and sell its newly introduced water purifier for 20 years. The right granted to Greenaqua is an example of a
Patent
Mr. D'Souza invented product A and is granted an exclusive right to manufacture and sell it. What is this an example of?
Patent
With loss aversion
People weight, say, a $100 loss more heavily than a $100 gain
Advances in wireless communication technology are reducing the non-financial costs of long commutes; for example, people who ride trains can get work done, and people who drive cars have more entertainment options. How will this affect people's willingness to pay for apartments near the city center?
People will be less willing to pay for these apartments since the opportunity cost of the commute time from outside the city is decreasing. This makes the more affordable housing outside the city more attractive to people
Economics can be used to predict
People's actions
Free riding occurs when ________ are out of sync with ________
People's private benefits; the public interest
A market structure in which identical goods are produced by several different firms and sold at the market-determined price is referred to as
Perfect competition
Firms with zero ability to affect price. What type of market is it?
Perfect competition
Homogeneous products are found in
Perfect competition and oligopoly market structures
Which option correctly sorts different market structures in terms of number of firms operating in them, from the most to the least?
Perfect competition, monopolistic competition, oligopoly, monopoly
Firms earn economic profits in the long run
Perfect competition: False Monopoly: True Monopolistic competition: False
Firms produce the quantity that minimizes long-run average cost
Perfect competition: True Monopoly: False Monopolistic competition: False
Mason and Jack are neighbors. Mason wants to buy a new outdoor grill so he can barbecue. Mason has two options, a charcoal grill or a gas grill. By using _________, he chooses to buy a gas grill. Mason knows that Jack would borrow his grill without asking; therefore, decides to use __________ in order to prevent his neighbor Jack from becoming a free-rider
Prescriptive economic analysis; equilibrium analysis
How to calculate the present value of a future payment?
Present value = (Payment T periods from)/(1 + interest rate)^T
What needs to be considered when lending money?
Prevailing interest rate, opportunity cost of the investment, time value of money
A perfectly competitive firm will choose to shut down when the ________ intersects the marginal cost curve below the ___________
Price (marginal revenue); average variable cost curve
Producer surplus is the difference between the _______ and the ________
Price consumers pay; supply curve
When firms charge different prices to different consumers for the same good or service, it is referred to as
Price discrimination
Price of elasticity equation
Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price
All firms in a perfectly competitive market are said to be
Price takers
The Coase Theorem states that
Private bargaining will result in an efficient allocation of resources
Health insurance is a
Private good
Is producer surplus always equal to profit?
Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve
What is not a source of natural market power?
Production of a luxury good
Equation for calculating economic profits for a monopoly
Profits = (P-ATC) x Q
An indifference curve is set of bundles that
Provide an equal level of satisfaction for the consumer
A mosquito control program in a city is a
Public good
A video on YouTube is a
Public good
National defense is a
Public good
To optimize your decision of whether or not to attend college, you should
Put all the up-front costs and future benefits of going to college into comparable units so they can be compared
If a firm is maximizing profits in the short run at a level of output where (average total cost > price > average variable cost, then the firm is
Realizing losses and will minimize losses by continuing to produce
When the price of wine is $10 per bottle, Thomas purchases 30 bottles of wine per month. Suppose the government levies a 50 percent tax on all alcoholic beverages. The burden of this tax is to be completely borne by the consumers. This reduces Thomas's consumption to 20 bottles of wine per month. After the implementation of the tax, Thomas's expenditure on wine will
Remain the same
When one of the four major factors changes, causing an increase in supply, the supply curve shifts
Rightward
Economists have done numerous studies on how much risk people are willing to take in a variety of situations. They have found that in most situations people overall are
Risk averse
Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. In your first presentation to management, how would you describe your planned methodology to preform the analysis?
Scientific method
Given that most people are risk averse and that most extended warranties that are offered on smaller electronic purchases tend to cost more than the benefits they provide it is likely true that firms
Sell many extended warranties since people are willing to pay extra to avoid the risk of a loss
The demand curve will ________ and its slope will be ________ if a firm exits the market
Shift right; steeper
In a monopolistically competitive market, a firm earning negative economic profit in the short run will
Shut down only if price is less than average variable cost
Why does a demand curve with a constant slope not have a constant elasticity?
Slope is based on absolute change and elasticity is based on percentage change
Lily wants to maximize her benefit of consuming apples and bananas, given her fixed budget of $10 for these two fruits. The price of an apple is $1, and the price of a banana is $0.50. In order to derive Lily's demand curve for bananas, we need to
Solve the buyer's problem for her multiple times and find the optimal number of bananas, when price of a bananas is at a different level each time
What is the problem with the argument that infant industries need to be protected from foreign competition?
Starting a company in isolation may deprive it of "technology spillovers" that its competitors, all located near one another, may enjoy
If cross price elasticity is positive, then the two goods are _________. If the price of coffee goes up, and as such, the demand for Coffee Mate decreases, this would indicate a _________ cross-price elasticity and that the two goods are ________
Substitutes; negative; complements
The Law of Diminishing Returns states that
Successive increases in inputs eventually lead to less additional output when one of the inputs is fixed
What are the positives of copyright and patent laws?
Such laws offer incentives to innovators, and such laws do not provide permanent protection to innovators
Holding all else constant, if the number of cell phone manufacturers suddenly decreased due to increased regulations, then
Supply would shift leftwards, equilibrium price would increase, and equilibrium quantity would decrease
He is still unconvinced about the reliability of using economic models to make business decisions. You can answer this concern by sharing that you will confirm the accuracy of the model by ______ with ____
Testing its predictions; empirical data
If an individual only consumes goods X and Y and is currently maximizing her total benefits, what must be true?
The "equal bang for the buck" rule is adhered to, no other consumption choice can make total benefits greater, MB x/P x = MB y/P y, and the marginal benefits per dollar spent are the same for both goods
What is an example of diminishing marginal return?
The additional output produced by a firm decreasing as more workers are hired
What is not a determining factor of consumers' purchase decisions?
The cost of factor inputs
What happens in a monopolistically competitive market when new firms enter the market?
The existing firm's demand curve shifts in and becomes flatter
Perfect price discrimination implies that
The firm produces a larger output than it would as a single - price monopolist
Firm A uses production technology that affects the environment. What are command and control policies to regulate firm A?
The government makes it compulsory for firm A to use environment friendly technology, and firm A is not allowed by the government to produce more than 100 units if it does not use environment-friendly technology
What theory/model about the returns to education states that an additional year of education raises future earnings, regardless of whether the student completes their degree
The human capital model
What is not a major factor that shifts a supply curve when it changes?
The income of consumers
The long-run supply curve in a perfectly competitive market states that
The long-run quantity can vary while the equilibrium price returns to the price at the minimum of the average total cost
The free-rider dilemma occurs because
The marginal benefit to a group is different than to that of the individual
Which of the following statements explains the concept of the tragedy of the commons?
The open access to common resources results in their depletion through overuse, and it results when the free market equilibrium quantity is higher than the optimal equilibrium quantity
If the production of a good involves negative externalities
The optimal price of the good is higher than the market price of the good
An outcome is described to be risky when
The outcome of either a good or bad event is not known in advance
What is not a problem associated with randomized experiments?
The participants in the treatment group and the control group are not identical in all respects
What will lead to an efficient private solution if negative externalitiesare present in a market?
The parties involved negotiating with each other and reaching an agreement
Suppose Good A belongs to a market where the firms earn zero economic profits in the long-run and entry of new firms will result in price changes that operate through shifts in the market supply curve for Good A. Which market structure does Good A belong to?
The perfectly competitive market
In the long run, the supply curve for a perfectly competitive firm is represented by
The portion of the marginal cost curve above average total cost
The short-run supply curve for a perfectly competitive firm is represented by
The portion of the marginal cost curve above average variable cost
What statements explain positive economics?
The predictions are testable, and it can be rejected or amended depending on the evidence available
What is not a common characteristic between a monopoly and monopolistic competition?
The products sold have close substitutes
What statement regarding economic questions is not correct?
The questions must have implication on individuals' choices and their budget
In equilibrium
The ratio of marginal benefits to price should be identical across all goods
The industry demand curve demonstrates
The realistic assumption that the Law of Demand holds for the good under consideration
A consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because
The reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off
In a perfectly competitive market
The sellers produce identical goods
You live in a house with eleven other college students. The kitchen is a mess since no one cleans up and the sink is overflowing with dishes. This is an example of
The tragedy of the commons
The concept of opportunity cost is a measure of
The value of the best alternative use of a resource
What does not support the concept of an economic agent?
Their decisions do not have an effect on the economy of a country, and all economic agents are individuals
Are all efficient outcomes also equitable?
There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgements are made
Why does a monopolistically competitive industry make zero economic profit in the long-run?
There is the free entry of many firms in the long-run
Which of the following is likely to happen if the government imposes a price control at $60, when the demand curve shifts to D2?
There will be a shortage of 15 units of the good in the market
What best describes network externalities?
They occur when a product's value increases as more consumers begin to use it
What is the intent of the Pigouvian tax?
To induce producers of a negative externality to reduce production to the socially optimal level
The aggregate difference between the average total cost (ATC) and average variable cost (AVC) for all units of production is the
Total fixed cost
What expression describes economic profits?
Total revenues- implicit costs - explicit costs
What would maximize social surplus?
Trade at the competitive market equilibrium
The Coarse Theroem will breakdown when
Transaction costs become high, when property rights are not clearly defined, and there are a large number of agents
The long-run average total cost curve is _______ and is found by using the _________
U-shaped; minimum point across all possible ATC curves for a given quantity
How are the products sold by a monopolistically competitive firm different from the products sold in a competitive market?
Unlike products sold in a competitive market, the products sold in a monoplistically competitive market are differentiated
What can cause a free-rider problem?
Use of public parks by locals, and the street light on the road
Which of the following is more susceptible to the free-rider problem: government-funded symphonies or street lights?
Use of street lights is more susceptible since even those who don't pay taxes still benefits, while government-funded symphonies can charge for admission, so that everyone who goes pays their share
If exit occurs from the U.S. coal industry and entry occurs into the U.S. solar panel industry, we would expect
Wages to fall in the U.S. coal industry and to rise in the solar panel industry
The costs of many food safety regulations can be calculated in dollars, but the benefits often are in terms of lives saved (mortality) or decreases in the incidence of a particular illness (morbidity). What does this imply about the cost-benefit analysis of food safety regulations?
We must first translate the mortality and morbidity data into dollars in order to compare it to the cost of the regulations
What is not an example of an issue a researcher could study to contribute to the welfare of society?
What combination of colors can one use to pain his bedroom wall?
What is not a question or study of economic concern
What is the motivation of the Red Cross?
The problem of superbugs, which are bacteria that resist all available forms of antibiotics, is becoming a serious challenge for doctors. Developing new antibitoics is very costly. Can a monopoly be good for the society in this regard?
Yes, because innovation is more likely in a monopoly
Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?
Yes, but only if price stayed above average variable cost
Suppose you had to organize a double oral auction for a good that has perfectly elastic demand. Do you expect prices to approach the competitive equilibrium?
Yes, there is no reason why price in a double oral auction for a good with perfectly elastic demand would not be expected to approach the equilibrium price
Is it possible for accounting profit to be positive and economic profit to be negative?
Yes, this could occur if explicit costs were modest and implicit costs were high
Are there real-world markets that resemble double oral auctions?
Yes, trading on the New York Stock Exchange is very similar to a double oral auction
Suppose there are three activites in which you could participate. The opportunity cost of the first activity is missing three hours of work, the opportunity cost of the second activity is missing a concert that you have tickets to, and the opportunity cost of the third activity is missing the afternoon nap that you take every day. Given this information, for which of these activities would you be able to compare opportunity costs?
You can compare all the activities after you translate all the missed activities into dollar amounts
If you were to purchase a $700 Samsung smart phone from Amazon, we could conclude all of the following except
You would rather have a laptop that costs $700
A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ used to solve an externality
command and control approach
Public goods are _______ in rivalry and ________ in excludability
low, low
A supply curve has a ________ slope due to the Law of Supply. The Law of Supply states that supplies ________ as price increases
positive; increase
Both optimization using total value and optimization using marginal analysis
provide identical answers when comparing two alternatives
