ECO 201 Macro

Public goods are efficiently provided by market forces. underprovided in the absence of government. overused in the absence of government. a type of natural monopoly.

underprovided in the absence of government.

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 resources would be used more efficiently if the government produced the weapons. national defense is rival in consumption and excludable, but weapons are not rival in consumption and not excludable. weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable. resources would be used more efficiently if private firms provided national defense.

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

Tradable pollution permits have prices that are set by the government. will be more valuable to firms that can reduce pollution only at high costs. are likely to create a higher level of total pollution. are less desirable than corrective taxes in reducing pollution.

will be more valuable to firms that can reduce pollution only at high costs. For example, an energy company that pollutes will need them much more than an arts and crafts company.

Scenario 1: Use the following information to answer this question. Kim decides to quit her old job that paid $1,000 a month to open a flower shop in downtown Lexington. Suppose she opens her shop in a building she owns, which she could be renting out to someone else for $1,000 a month. In addition, A to Z Rental required her to sign a one year lease on the coolers needed for her shop and the rent is $200 a month. Hiring three assistants costs her $1,800 a month. Finally, the flowers, vases and other material needed for making flower arrangements average $5,000 a month. Kim's long run fixed costs are:

$0 per month

A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. The firm's average revenue is___, and _____ units were sold.

$10; 50

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. What is the marginal cost of producing one additional T-shirt?

$2.30

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. The total cost to produce 100 T-shirts is: b. c. d.

$21,230

Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Raj has an accounting profit of _____ and an economic profit of ____.

$50, $10

For Local Taco, total cost is $1,800 when output equals 100 tacos, and total cost is $1,000 when output is zero tacos. What are average variable costs when output equals 100 tacos?

$8

Before considering any public project, the government should (i) compare the total cost and total benefits of the project (ii) conduct a cost-benefit analysis (iii) infer that citizens who vote for a project are willing to pay equally for it (i), (ii), and (iii) (ii) only (i) and (ii) only (i) only

(i) and (ii) only The government can do many things if the public is willing to pay for them.

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

In what sense do externalities cause the "invisible hand" of the marketplace to fail? - Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities. - Externalities result in prices that are too high for many consumers to pay. - Markets fail to produce the maximum total benefit to society when positive or negative externalities are present. - Markets produce too little of a good when positive or negative externalities are present.

- Markets fail to produce the maximum total benefit to society when positive or negative externalities are present. Because with externalities, the incorrect amount from society's point of view is produced.

If college education in Kentucky produces positive externalities, we would expect... the government to tax education. the government to subsidize education. people to realize the benefits, which would increase the demand for education. colleges to relax admission requirements.

-the government to subsidize education. The University of Kentucky is the result of the government seeking to subsidize college education.

The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result? Average total cost and marginal cost. Average total cost and average fixed cost. Average variable cost and marginal cost. Average variable cost and average fixed cost.

Average total cost and average fixed cost.

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If the firm were to increase production to 21 units, which of the following must occur? Marginal cost would decrease. Marginal cost would increase. Average total cost would decrease. Average total cost would increase.

Average total cost would decrease.

Which of the following is an example of the free-rider problem? Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Betty receives free protection from burglars because of Buster's barking. Sam purchases a burger at a fast food restaurant and gets a second burger free because the restaurant is having a buy one, get one free sale. Both Zoe and Zach receive low-cost dental care at the local dental school, so neither of them pays the full cost of the care. Alfred receives a free lunch from the local "Meals on Wheels" program because of his low monthly income. Yet his next door neighbor, Alice, is not eligible for the free lunch.

Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Betty receives free protection from burglars because of Buster's barking. Betty does not have to pay for the benefits she receives.

Which of the following statements is true about the short run and the long run? The long run refers to a production planning period of longer than one year. In the long run all costs are fixed; in the short urn some costs are fixed. The short run is a period of time less than 6 months. In the long run all inputs are variable; in the short run at least one input is fixed. Economists typically refer to the short run as a period of time in which the firm does not have sufficient time to change the amounts of any of its inputs.

In the long run all inputs are variable; in the short run at least one input is fixed.

A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm? Marginal cost is $5, and average variable cost is $8. Marginal cost is $8, and average variable cost is $5. Marginal cost is $5, and average total cost is $8. Marginal cost is $8, and average total cost is $5.

Marginal cost is $8, and average total cost is $5.

In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P , marginal cost MC, and average total cost ATC? P>MC and P>ATC. P>MC and P=ATC. P=MC and P>ATC. P=MC and P=ATC.

P=MC and P=ATC.

Suppose that a University of Kentucky MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies to the University of Kentucky for MBAs, then which of the following statements is correct? The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. There is not enough information to answer the question.

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. There will be no benefits out there to society that are not able to be earned by the holder of the MBA degree.

Which of the following is a disadvantage of government provision of a public good? The private sector can provide all public goods at a lower cost. The government lacks information about what people are willing to pay for the good. XXXThe government does not provide enough of any public good.

The government lacks information about what people are willing to pay for the good.

The tax on cigarettes is an example of a command-and-control policy. a consumption tax. an income tax. a corrective tax.

a corrective tax.

When the social cost curve is above a product's supply curve, a negative externality exists in the market. the distribution of resources is unfair. a positive externality exists in the market. the government has intervened in the market.

a negative externality exists in the market.

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

free rider

a person who receives the benefit of a good but avoids paying for it

In an agency relationship between a bank manager and a bank teller, the manager is an agent and the teller is a principal. an agent, as is the teller. a principal and the teller is an agent. a principal, as is the teller.

a principal and the teller is an agent.

cost-benefit analysis

a study that compares the costs and benefits to society of providing a public good

internalizing the externality

altering incentives so that people take account of the external effects of their actions

The impact of one person's actions on the well-being of a bystander is called an economic dilemma. an externality. deadweight loss. a multi-party problem.

an externality. Where either the cost or the benefit of an economic exchange is at least in part borne by a third party.

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could internalize the externality by subsidizing the production of sheep's wool. allow individual shepherds to choose their own flock sizes. wait until the market corrects the problem. auction off a limited number of sheep-grazing permits.

auction off a limited number of sheep-grazing permits. If someone owns something, they are much more likely to take care of it than if they do not own it.

Market failure associated with the free-rider problem is a result of market power. XXX losses that accrue to providers of the product. benefits that accrue to those who don't pay. a problem associated with pollution.

benefits that accrue to those who don't pay. A fireworks display in Triangle Park in downtown Lexington can be observed by people across the city, so it would be difficult to charge money for it.

The externality associated with technology spillovers cannot be internalized by government. can be internalized, potentially, through taxation of firms that are responsible for technology spillovers. can be internalized, potentially, through patent protection. is a negative externality.

can be internalized, potentially, through patent protection.

Emission controls on automobiles are an example of a corrective tax. command-and-control policy to increase social efficiency. policy that reduces pollution by allocating resources through market mechanisms. policy to reduce congestion on urban freeways.

command-and-control policy to increase social efficiency.

A good that is rival in consumption and not excludable is called a common resource. public good. private good. XXXclub good.

common resource.

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost. economies, falling economies, rising diseconomies, falling diseconomies, rising

economies, falling

Neither public goods nor common resources are rival in consumption, but only public goods are not excludable. excludable, but only public goods are not rival in consumption. The difference between the fish in Lake Erie and national defense in the United States is that national defense does not run out when too many people are defended. excludable, but only common resources are not rival in consumption. rival in consumption, but only common resources are not excludable.

excludable, but only common resources are not rival in consumption.

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve. average total, marginal average variable, marginal marginal, average total marginal, average variable

marginal, average variable

Which of the following is an example of a common resource? residential housing national defense restaurant meals fish in the ocean

fish in the ocean

private goods

goods that are both excludable and rival in consumption

club goods

goods that are excludable but not rival in consumption

public goods

goods that are neither excludable nor rival in consumption

common resources

goods that are rival in consumption but not excludable

Consider a good for which the number of people who benefit from the good is large and the exclusion of any one of those people is impossible. In this case, the market for this good will likely have a free-rider problem. be provided by a private firm rather than the government. be limited to a small number of units of production. not exist.

have a free-rider problem. Think of fire protection in Lexington. If you get protection, your neighbor is able to at least in part free-ride off of you.

Suppose that the president of the University of Kentucky decides to host a private fireworks show in his backyard on campus. Assuming that students love to watch fireworks, this would be an example of a positive externality because it benefits consumers because it results in a lower equilibrium price. provides an additional benefit to market participants. causes the product to be overproduced. is a benefit to a market bystander.

is a benefit to a market bystander. - the students are the bystanders

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will keep producing in the short run but exit the market in the long run. shut down in the short run but return to production in the long run. shut down in the short run and exit the market in the long run. keep producing both in the short run and in the long run.

keep producing in the short run but exit the market in the long run.

A competitive firm maximizes profit by choosing the quantity at which average total cost is at its minimum. marginal cost equals the price. average total cost equals the price. marginal cost equals average total cost.

marginal cost equals the price.

In a market economy, government intervention reduces efficiency in the presence of externalities. will always improve market outcomes. may improve market outcomes in the presence of externalities. is necessary to control individual greed.

may improve market outcomes in the presence of externalities. There must be a solution that public intervention can feasibly implement.

Which of the following is an example of a public good? residential housing national defense restaurant meals fish in the ocean

national defense

A cost imposed on someone who is neither the consumer nor the producer is called a negative externality command and control policy corrective tax positive externailty

negative externality

When New Circle Road is congested, then use of that road by an additional person would lead to a free-rider problem with rush hour drivers stuck in traffic. Pigovian externality. negative externality. positive externality

negative externality. Having one more person on New Circle leads to a little bit less space to drive for everyone else.

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run? down in the short run, no change in the long run up in the short run, no change in the long run no change in the short run, down in the long run no change in the short run, up in the long run

no change in the short run, down in the long run

Reaching an efficient bargain is difficult when the externality is large. number of interested parties is large. externality is negative. government becomes involved.

number of interested parties is large. The larger the number of parties, the larger the transaction cost necessary to apply the Coase theorem.

Common resources are efficiently provided by market forces. underprovided in the absence of government. overused in the absence of government. a type of natural monopoly.

overused in the absence of government.

Which categories of goods are excludable? private goods and club goods private goods and common resources public goods and club goods public goods and common resources

private goods and club goods

Which categories of goods are rival in consumption? private goods and club goods private goods and common resources public goods and club goods public goods and common resources

private goods and common resources

Which of the following is not a negative externality associated with driving cars on New Circle road? repairs accidents pollution congestion

repairs

A vacation home near Red River Gorge is rival in consumption and excludable. not rival in consumption and excludable. rival in consumption and not excludable. XXX not rival in consumption and not excludable.

rival in consumption and excludable.

Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. In the short run, Bob ________. In the long run, Bob should _______ the industry.

should not shut down; exit

A market is characterized by negative externalities because...

social cost is higher than private cost.

A perfectly competitive firm chooses its price to maximize profits. sets its price to undercut other firms selling similar products. takes its price as given by market conditions. picks the price that yields the largest market share.

takes its price as given by market conditions.

Without government intervention, public goods tend to be overproduced and common resources tend to be underconsumed. underproduced and common resources tend to be underconsumed. overproduced and common resources tend to be overconsumed. underproduced and common resources tend to be overconsumed.

underproduced and common resources tend to be overconsumed. The problem is that there are no property rights assigned to common resource goods.

Which of the following best represents a long run adjustment: a cutback on purchases of coke and iron ore by a steel manufacturer. the hiring of four additional cashiers by a supermarket. the construction by an automobile manufacturer of a new plant to produce small cars. the extra dose of fertilizer used by a farmer on his wheat crop.

the construction by an automobile manufacturer of a new plant to produce small cars.

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

Honey producers provide a positive externality to orchards because the honey producers get more honey. the orchard owner does not have to purchase bees to pollinate his flowers. the orchard owner frequently gets stung by the honey producer's bees. the honey producers have to rent access to the orchard grounds.

the orchard owner does not have to purchase bees to pollinate his flowers.

Diminishing marginal product explains why, as a firm's output increases, the production function and total cost curve both get steeper. the production function and total cost curve both get flatter. the production function gets steeper, while the total cost curve gets flatter. the production function gets flatter, while the total cost curve gets steeper.

the production function gets flatter, while the total cost curve gets steeper.

excludability

the property of a good whereby a person can be prevented from using it

rivalry in consumption

the property of a good whereby one person's use diminishes other people's use

Coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Externality

the uncompensated impact of one person's actions on the well-being of a bystander

Melissa engages in an activity that influences the well-being of a bystander. In order for Melissa's activity to give rise to an externality, it must be the case that... - Melissa fails to recognize the impact of her activity on the bystander's wellbeing. - the bystander fails to recognize the impact of Melissa's activity on his or her wellbeing. - the well-being of the bystander is adversely impacted by Melissa's activity. - Melissa neither pays nor receives any compensation for her activity. X(So that someone else gets/pays as a result of her activity.)

the well-being of the bystander is adversely impacted by Melissa's activity.