Practice Questions for Econ Exam 2

Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. n economist would calculate the total cost for one photo frame to be

$15

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's accounting profit equals

$170.

Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each. The implicit cost for one birdhouse is

$4

A firm has a fixed cost of $200 in its first year of operation. When the firm produces 99 units of output, its total costs are $4,000. The marginal cost of producing the 100th unit of output is $700. What is the total cost of producing 100 units?

$4,700

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?

$5,000

ohn lives in an apartment building and gets a $700 benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the music coming from John's stereo, bears a $1,000 cost from the noise. At which of the following offers from Mary could both Mary and John benefit from the silencing of John's stereo? a. $1,100 b. $600 c. $900 d. $200

$900

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is

10 units of output.

Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Together, Eldin and Murphy can paint five houses per week. What is Murphy's marginal product?

2 houses

The town of Isle is on a small island connected to Big City by a single bridge. Most of the residents of Isle work in Big City. As a result, the bridge becomes very congested for 2 hours each day at the typical morning and evening commute times. Which of the following policies considered by the mayor of Isle would likely be most effective in alleviating the congestion? a.Any vehicle crossing the bridge at any time must have a sticker paid for with a one-time fee of $25. b. A fixed toll for the bridge payable by every vehicle crossing the bridge at all days and times. c.A press conference in which the mayor requests that people try to cross the bridge earlier or later than the typical commute times. d.A variable toll for the bridge payable only by vehicles crossing the bridge during the congested commute times.

A variable toll for the bridge payable only by vehicles crossing the bridge during the congested commute times.

Average total cost (ATC) is calculated as follows:

ATC = (total cost)/(quantity of output).

At low levels of production, the firm benefits from increased size because it can take advantage of greater specialization. b. has the potential for economies of scale. c. is unlikely to experiences acute problems with coordination. d. All of the above are correct.

All of the above are correct

Which of the following statements about a production function is correct for a firm that uses labor to produce output? a.The production function depicts the relationship between the quantity of labor and the quantity of output. b. The slope of the production function measures marginal product. c.The slopes of the production function and the total cost curve are inversely related; if one is increasing, the other is decreasing. d. All of the above are correct.

All of the above are correct

Which of the following statements is not correct?

Average fixed costs are constant.

Many species of animals are common resources, and many must be protected by law to keep them from extinction. Why is the cow not one of these endangered species even though there is such a high demand for beef?

Cows are privately owned, whereas many endangered species are owned by no one.

Which of the following statements is not correct?

Economies of scale is a short-run concept.

In which of the following cases is the Coase theorem most likely to solve the externality? a. Polluted water runoff from farms is making residents of a nearby town sick. b. Industrialization around the world is causing global warming. c. Ed is allergic to his roommate's cat. d. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada

Ed is allergic to his roommate's cat.

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently (TRUE or FALSE)

FALSE

A good that is excludable but not rival is known as a club good (FALSE or TRUE)

TRUE

A second or third worker may have a higher marginal product than the first worker in certain circumstances. (FALSE or TRUE)

TRUE

Government agencies, such as the National Science Foundation, subsidize basic research because in the absence of a subsidy too little research would be conducted. (FALSE or TRUE)

TRUE

One possible solution to the problem of protecting a common resource is to convert that resource to a private good. (FALSE or TRUE)

TRUE

Which of the following is not a necessary condition for the Coase theorem? a. There are no bargaining costs. b. There are only a few parties involved. c. Property rights are clearly defined. d. The government intervenes to internalize the externality.

The government intervenes to internalize the externality.

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?

They are equal.

Which parable describes the problem of wild animals that are hunted to the point of extinction?

Tragedy of the Commons

Which of the following statements is not correct? a. Government policies may improve the market's allocation of resources when positive externalities are present. b. A positive externality is an example of a market failure. c. Without government intervention, the market will tend to undersupply products that produce negative externalities. d. Government policies may improve the market's allocation of resources when negative externalities are present.

Without government intervention, the market will tend to undersupply products that produce negative externalities

Did you review the questions with the graphs?

YES

Did you go over the practice problems with the table?

YES ofc

The term market failure refers to

a market that fails to allocate resources efficiently

a corrective tax is also known as

a pigovian tax

Mitch hunts deer. His shotgun is

a private good and the deer he hunts are common resources.

Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems? A. one neighbor lets his dog run through another neighbor's garden, damaging her flowers B. one neighbor doesn't mow her yard C. one neighbor plays his music loudly D. All of the above

all of the above problems could be be solved by the Coase theorem

Marginal cost tells us the

amount by which total cost rises when output is increased by one unit

Foregone investment opportunities are an example of

an implicit cost.

Fixed costs can be defined as costs that

are incurred even if nothing is produced.

The Tragedy of the Commons can be corrected by

assigning property rights to individuals.

Average total cost is very high when a small amount of output is produced because

average fixed cost is high.

Which of the following measures of cost is best described as "the cost of a typical unit of output if total cost is divided evenly over all the units produced?"

average total cost

If marginal cost is equal to average total cost, then

average total cost is minimized.

At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the

average total cost of 21 pairs of boots is $23.

A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100,

average variable cost is $3.

Market failure associated with the free-rider problem is a result of

benefits that accrue to those who don't pay.

In the long run Al's Sandwich Shop incurs total costs of $2,500 when output is 1,250 units and $3,000 when output is 1,500 units. For this range of output, Al's exhibits

constant returns to scale

When the government uses a command-and-control policy to solve an externality, it

creates policies that directly regulate behavior.

Private markets fail to account for externalities because

decisionmakers in the market fail to include the costs of their behavior to third parties.

As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters

diminishing marginal product.

When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing

diminishing marginal product.

Excessive fishing occurs because

each individual fisherman has little incentive to maintain the species for the next year.

A cable television broadcast of a movie is

excludable and not rival in consumption

Negative externalities lead markets to produce

greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic

in the short run but not in the long run.

When Lisa drives to work every morning, she drives on a congested highway. What Lisa does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Lisa's highway trip

increases the social cost above the private cost.

Private decisions about consumption of common resources and production of public goods usually lead to an

inefficient allocation of resources and external effects

a postive externality

is a benefit to someone other than the producer and consumer of the good.

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs.

A positive externality will cause a market to produce

less than is socially desirable.

The U.S. patent system

makes specific, technical knowledge excludable.

Diminishing marginal product suggests that

marginal cost is upward sloping.

When a firm's only variable input is labor, then the slope of the production function measures the

marginal product of labo

Which of the following policies is an example of a command-and-control policy? a. subsidies to education b. maximum levels of pollution that factories may emit c. tradable pollution permits d. None of the above is an example of a command-and-control policy.

maximum levels of pollution that factories may emit

Corrective taxes are unlike most other taxes because they

move the allocation of resources closer to the social optimum

all remedies for externally share the goal of

moving the allocation of resources toward the socially optimal equilibrium

Both public goods and common resources are

nonexcludable.

An AM radio transmission of a baseball game is

not excludable and not rival in consumption

The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. We might expect that

over time, the aquifer is likely to be overused.

Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to...

pay your roommate at least $25 but no more than $50 to clean up after herself.

The provision of a public good generates a

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

Because of the free-rider problem,

private markets tend to undersupply public goods.

Because there are positive externalities from higher education would private markets over or under supply college classes?

private markets will under supply college classes

A free rider is a person who

receives the benefit of a good but avoids paying for it.

At all levels of production higher than the point where the marginal cost curve crosses the average variable cost curve, average variable cost

rises.

If one person's use of a good diminishes another person's enjoyment of it, the good is

rival in consumption

Markets are often inefficient when negative externalities are present because

social costs exceed private costs at the private market solution.

The most likely explanation for economies of scale is

specialization of labor.

Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that

there are economies of scale in retail sales.

The goal of requiring licenses for hunting and fishing is

to reduce the use of a common resource.

The Coase theorem suggests that private solutions to an externality problem

will usually allocate resources efficiently if private parties can bargain without cost.