Econ 2000 Final

Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is.... a. -1.0, and X and Y are complements. b. -1.0, and X and Y are substitutes. c. 1.0, and X and Y are complements. d. 1.0, and X and Y are substitutes.

a. -1.0, and X and Y are complements.

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that... a. Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200. b. Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200. c. Both firms will use their own pollution permits. d. Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.

a. Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

East Lansing is a small college town in Michigan. At the end of August each year, the market demand for fast food in East Lansing.... a. Increases b. Decreases c. Remains constant, but we observe a movement downward and to the right along the demand curve d. Remains constant, but we observe a movement upward and to the left along the demand curve

a. Increases

Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives. b. Rational people think at the margin. c. Trade can make everyone better off. d. Markets are usually a good way to organize economic activity.

a. People respond to incentives.

The marginal-cost curve intersects the average-total-cost curve at the minimum point of the average-total-cost curve. a. True b. False

a. True

When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward sloping. a. True b. False

a. True

Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of... a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case.

a. a market failure caused by an externality.

Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of... a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case.

a. a market failure caused by an externality.

Ashley eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana... a. can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana. b. determines Ashley's marginal cost of the first and second bananas. c. does not depend on how many bananas Ashley has already eaten. d. cannot be determined unless we know how much she paid for the bananas.

a. can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.

Neither public goods nor common resources are... a. excludable, but only public goods are not rival in consumption. b. excludable, but only common resources are not rival in consumption. c. rival in consumption, but only public goods are not excludable. d. rival in consumption, but only common resources are not excludable.

a. excludable, but only public goods are not rival in consumption.

When a payroll tax is enacted, the wage received by workers... a. falls, and the wage paid by firms rises. b. falls, and the wage paid by firms falls. c. rises, and the wage paid by firms falls. d. rises, and the wage paid by firms rises.

a. falls, and the wage paid by firms rises.

For a market for a good or service to exist, there must be a... a. group of buyers and sellers. b. specific time and place at which the good or service is traded. c. high degree of organization present. d. All of the above are correct.

a. group of buyers and sellers.

Economics is best defined as the study of... a. how society manages its scarce resources. b. how to run a business most profitably. c. how to predict inflation, unemployment, and stock prices. d. how the government can stop the harm from unchecked self-interest.

a. how society manages its scarce resources.

A rightward shift of a demand curve is called a(n)... a. increase in demand. b. decrease in demand. c. decrease in quantity demanded. d. increase in quantity demanded.

a. increase in demand.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should... a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information with which to answer the question.

a. make more than 20 wedding cakes per month.

In the short-run, a firm's supply curve is equal to the... a. marginal cost curve above its average variable cost curve. b. marginal cost curve above its average total cost curve. c. average variable cost curve above its marginal cost curve. d. average total cost curve above its marginal cost curve.

a. marginal cost curve above its average variable cost curve.

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing, a. scarcity b. shortage c. inefficiency d. inequalities

a. scarcity

Barb's aunt gave her $100 for her birthday with the condition that Barb buy herself something. In deciding how to spend the money, Barb narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally she decides on Option B. The opportunity cost of this decision is... a. the value to Barb of the option she would have chosen had Option B not been available. b. the value to Barb of Options A, C and D combined. c. the average of the values to Barb of Options A, C, and D. d. $100.

a. the value to Barb of the option she would have chosen had Option B not been available.

Governments can grant private property rights over resources that were previously viewed as public, such as fish or elephants. Why would governments want to do so? a. to prevent overuse b. to decrease taxes c. to fight poverty d. to increase consumption

a. to prevent overuse

Consider Mandy's decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Mandy's cost of going to college is... a. 32,000 b. 42,000 c. 50,000 d. 58,000

b. 42,000

A decrease in the price of pizza will shift the supply curve for pizza to the left. a. True b. False

b. False

A linear, downward-sloping demand curve has a constant elasticity but a changing slope. a. True b. False

b. False

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic. (Here, we are assuming that drug-related crime is proportional to the total amount spent on drugs.) a. True b. False

b. False

When an individual firm in a competitive market increases its production, it is likely that the market price will fall. a. True b. False

b. False

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue a. increases if MR < ATC and decreases if MR > ATC. b. does not change. c. increases. d. decreases.

b. does not change.

When new firms have an incentive to enter a competitive market, their entry will... a. increase the price of the product. b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. increase demand for the product.

b. drive down profits of existing firms in the market.

PlayStations and PlayStation games are complementary goods. A technological advance in the production of PlayStations will.... a. increase consumer surplus in the market for PlayStations and decrease producer surplus in the market for PlayStation games. b. increase consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games. c. decrease consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games. d. decrease consumer surplus in the market for PlayStations and decrease producer surplus in the market for PlayStation games.

b. increase consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games.

Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will... a. raise both price and total revenues. b. lower both price and total revenues. c. raise price and lower total revenues. d. lower price and raise total revenues.

b. lower both price and total revenues.

Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that... a.trade can make everyone better off. b. people face trade-offs. c. rational people think at the margin. d. decisions made at the margin are not particularly important.

b. people face trade-offs.

A market demand curve shows how the total quantity demanded of a good varies as... a. income varies. b. price varies. c. price of the nearest substitute good varies. d. supply varies.

b. price varies.

A perfectly inelastic demand implies that buyers... a. decrease their purchases when the price rises. b. purchase the same amount as before when the price rises or falls. c. increase their purchases only slightly when the price falls. d. respond substantially to an increase in price.

b. purchase the same amount as before when the price rises or falls.

Suppose that in a particular market, the demand curve is highly elastic, and the supply curve is highly inelastic. If a tax is imposed in this market, then the.... a. buyers will bear a greater burden of the tax than the sellers. b. sellers will bear a greater burden of the tax than the buyers. c. buyers and sellers are likely to share the burden of the tax equally. d. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information.

b. sellers will bear a greater burden of the tax than the buyers.

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the mid point method, a. the price elasticity of demand of good A is 1.50. b. the price elasticity of demand of good A is 0.67.

b. the price elasticity of demand of good A is 0.67.

Efficiency in a market is achieved when... a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. b. the sum of producer surplus and consumer surplus is maximized. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good.

b. the sum of producer surplus and consumer surplus is maximized.

Which of the following statements is correct concerning the burden of a tax imposed on take-out food? a. Buyers bear the entire burden of the tax. b. Sellers bear the entire burden of the tax. c. Buyers and sellers share the burden of the tax. d. We have to know whether it is the buyers or the sellers that are required to pay the tax to the government in order to make this determination.

c. Buyers and sellers share the burden of the tax.

What is the difference between command-and-control policies and market-based policies toward externalities? a. Command-and-control policies provide incentives for private decisionmakers to solve the problems on their own, whereas market-based policies regulate behavior directly. b. Command-and-control policies rely on taxes, whereas market-based policies rely on quotas. c. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior. d. Command-and-control policies are efficient, whereas market-based policies are inefficient.

c. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.

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? a. Cows reproduce at a high rate and have adapted well to their environment. b. Public policies protect cows from predators and diseases. c. Cows are privately owned, whereas many endangered species are owned by no one. d. There is a natural ecological balance between the birth rate of cows and human consumption.

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

Consider the following problems: overcrowded public highways, overfishing in the ocean, polluted air, and the near-extinction of the wild rhinoceros. What do these problems have in common? a. Private markets could easily solve them if governments left the markets alone. b. They would all go away if the government sponsored an intensive public-information campaign. c. They are all the result of a failure to establish clear property rights over something of value. d. They are all the result of a failure of corrective taxes.

c. They are all the result of a failure to establish clear property rights over something of value.

Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil needs a lot of practice to earn $250, which is his share of the band's profit. Thurman gets distracted by Phil's drumming but he needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution? a. Phil offers Thurman $499 to allow Phil to continue drumming. Thurman accepts and both are better off. b. Phil offers Thurman $249 to allow Phil to continue drumming. Thurman accepts and both are better off. c. Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off. d. Thurman offers Phil $501 to stop practicing his drumming. Phil agrees and both are better off.

c. Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off.

Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar. What would we expect to observe in the caviar market? a. Equilibrium prices and quantities will increase. b. Equilibrium prices will increase by more if the demand for caviar is elastic than if demand is inelastic. c. Total revenues to caviar firms will increase if the demand for caviar is inelastic. d. All of the above are correct.

c. Total revenues to caviar firms will increase if the demand for caviar is inelastic.

If the United States decides to trade with Yemen, we know that... a. Yemen will benefit, but trade with a less developed country could not benefit the United States. b. it will not benefit Yemen because workers in the United States are more productive. c. Yemen and the United States can both benefit. d. it will not benefit either country because their cultural differences are too vast.

c. Yemen and the United States can both benefit.

According to a recent article in the Wall Street Journal, the president of Delta Airlines stated "Although by lowering our airline fares (prices) we increased the number of passengers (quantity) by 17 percent, our total revenue fell by 10 percent." On this basis of this statement assuming no other factors affecting demand or supply changed, one could conclude that Delta Airlines was: a. an inferior good b. a normal good c. a good with an inelastic demand d. a good with an elastic demand e. none of the above

c. a good with an inelastic demand Correct

A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect... a. the value of a good to society, but not the cost of making it. b. the cost of making a good to society, but not its value. c. both the value of a good to society and the cost of making it. d. neither the value of a good to society nor the cost of making it.

c. both the value of a good to society and the cost of making it.

Which of the following will not shift the demand curve for hotdogs sold at LSU football games? a. increase in income in the State of Louisiana b. increase in the price of tickets to LSU football games c. decrease in the price of hotdogs sold at LSU football games d. increase in the price of soft drinks sold at LSU football games e. none of the above

c. decrease in the price of hotdogs sold at LSU football games

Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down.

c. decrease its output but continue to produce.

Good news for farming can be bad news for farmers because the... a. supply curve for an individual farmer is usually perfectly elastic. b. supply curve for an individual farmer is usually perfectly inelastic. c. demand for basic foodstuffs is usually inelastic, meaning that factors that shift supply to the right decrease total revenues to sellers. d. demand for basic foodstuffs is usually elastic, meaning that factors that shift supply to the right increase total revenues to sellers.

c. demand for basic foodstuffs is usually inelastic, meaning that factors that shift supply to the right decrease total revenues to sellers.

In a market economy, who makes the decisions that guide most economic activity? a. firms only b. households only c. firms and households d. government

c. firms and households

If Kindle e-readers and Nook e-readers are substitutes, a higher price for Nooks would result in a(n)... a. increase in the demand for Nooks. b. decrease in the demand for Nooks. c. increase in the demand for Kindles. d. decrease in the demand for Kindles.

c. increase in the demand for Kindles.

If muffins and bagels are substitutes, a higher price for bagels would result in a(n) a. increase in the demand for bagels. b. decrease in the demand for bagels. c. increase in the demand for muffins. d. decrease in the demand for muffins.

c. increase in the demand for muffins.

A decrease in the price of a good will... a.increase demand. b. decrease demand. c. increase quantity demanded. d. decrease quantity demanded.

c. increase quantity demanded.

If the tax on a good is increased from $0.30 per unit to $0.90 per unit, the deadweight loss from the tax... a. remains constant. b. increases by a factor of 4. c. increases by a factor of 9. d. increases by a factor of 16.

c. increases by a factor of 9.

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... a. economies of scale. b. diseconomies of scale. c. increasing marginal product. d. diminishing marginal product.

c. increasing marginal product.

According to Adam Smith, the success of decentralized market economies is primarily due to... a. the basic benevolence of society. b. society's legal system. c. individuals' pursuit of self-interest. d. partnerships that are forged between business and government.

c. individuals' pursuit of self-interest.

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth a. is more efficient and more equal for society. b. is more efficient but less equal for society. c. is more equal but less efficient for society. d. is less equal and less efficient for society.

c. is more equal but less efficient for society.

Guns and butter are used to represent the classic tradeoff between spending on... a. durable and nondurable goods b. imports and exports c. national defense and consumer goods d. law enforcement and agriculture

c. national defense and consumer goods

A local park filled with picnickers is... a. excludable and rival in consumption. b. excludable and not rival in consumption. c. not excludable and rival in consumption. d. not excludable and not rival in consumption.

c. not excludable and rival in consumption.

A very hot summer in Atlanta will cause... a. the demand curve for lemonade to shift to the left. b. the demand for air conditioners to decrease. c. the demand for jackets to decrease. d. a movement downward and to the right along the demand curve for tank tops.

c. the demand for jackets to decrease.

A free rider problem arises when... a.there are very few beneficiaries and exclusion of any one of them is possible. b. there are many beneficiaries and exclusion of any one of them is possible. c. there are many beneficiaries and exclusion of any one of them is impossible. d. there are very few beneficiaries and they all try to use the good simultaneously.

c. there are many beneficiaries and exclusion of any one of them is impossible.

Total surplus in a market is equal to... a. value to buyers - amount paid by buyers. b. amount received by sellers - costs of sellers. c. value to buyers - costs of sellers. d. amount received by sellers - amount paid by buyers.

c. value to buyers - costs of sellers.

Consider Paul's decision to go to college. If he goes to college, he will spend $90,000 on tuition, $15,000 on room and board, and $7,000 on books. If he does not go to college, he will earn $22,000 working at a construction job and he will spend $11,000 on room and board. Paul's cost of going to college is (ignore any other possible cost that is not mentioned here)... a. $96,000. b. $110,000. c. $114,000. d. $123,000.

d. $123,000.

A rationale for government involvement in a market economy is.... a. markets sometimes fail to produce a fair distribution of economic well-being. b. markets sometimes fail to produce an efficient allocation of resources. c. property rights have to be enforced. d. All of the above are correct.

d. All of the above are correct.

Five hundred units of good x are currently bought and sold. The marginal buyer is willing to pay $40 for the 500th unit, and the cost to the marginal seller is $35 for the 500th unit. We know that... a. the equilibrium price of good x is somewhere between $35 and $40. b. the equilibrium quantity of good x exceeds 500 units. c. 500 units is not an efficient quantity of good x. d. All of the above are correct.

d. All of the above are correct.

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate? a. People face tradeoffs. b. The cost of something is what you give up to get it. c. Rational people think at the margin. d. People respond to incentives.

d. People respond to incentives.

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. Then the average cost per seat is $500. There is one passenger on the standby list. You would be willing to take this passanger on the plane only if he is willing to pay more than a. $50. b. $500. c. $5,000. d. This cannot be determined from the information given.

d. This cannot be determined from the information given.

A competitive market is one in which there... a. is only one seller, but there are many buyers. b. are many sellers, and each seller has the ability to set the price of his product. c. are many sellers, and they compete with one another in such a way that some sellers are always being forced out of the market. d. are so many buyers and so many sellers that each has a negligible impact on the price of the product.

d. are so many buyers and so many sellers that each has a negligible impact on the price of the product.

One economically efficient way to eliminate the Tragedy of the Commons is to... a. tax the owners of the resource. b. prevent anyone from using the resource. c. reduce the marginal social benefit of the resource. d. establish private ownership of the resource.

d. establish private ownership of the resource.

Soup is an inferior good if the demand... a. for soup falls when the price of a substitute for soup rises. b. for soup rises when the price of soup falls. c. curve for soup slopes upward. d. for soup falls when income rises.

d. for soup falls when income rises.

In a competitive market with identical firms, a. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. b. firms cannot earn positive economic profit in either the short run or long run. c. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should... a. shut down. b. reduce its output but continue operating. c. continue to produce at the current levels. d. increase its output.

d. increase its output.

An increase in the size of a tax is most likely to increase tax revenue in a market with... a. elastic demand and elastic supply. b. elastic demand and inelastic supply. c. inelastic demand and elastic supply. d. inelastic demand and inelastic supply.

d. inelastic demand and inelastic supply.

A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the firm's average total cost is $10. The firm's marginal cost curve crosses its marginal revenue curve at an output level of 9 units. The firm experiences a... a. profit of more than $27. b. profit of exactly $27. c. loss of more than $27. d. loss of exactly $27.

d. loss of exactly $27.

The phenomenon of scarcity stems from the fact that... a. most economies' production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restrict production of too many goods and services. d. resources are limited.

d. resources are limited.

You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing... a. the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs. b. the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream costs. c. the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs. d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

A downward-sloping demand curve illustrates... a. that demand decreases over time. b. that prices fall over time. c. the relationship between income and quantity demanded. d. the law of demand.

d. the law of demand.

Which of the following does not affect an individual's demand curve? a. expectations b. income c. prices of related goods d. the number of buyers

d. the number of buyers

England can benefit from trade... a. only with nations that can produce goods England cannot produce. b. only with less developed nations. c. only with nations outside of Europe. d. with any nation.

d. with any nation.

Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do? a. He should sell the car now for $3800. b. He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $6200. c. He should complete the additional work and sell the car for $6200. d.It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

d.It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

Assume Leo buys coffee beans in a competitive market. It follows that... a. Leo has a limited number of sellers from which to buy coffee beans. b. Leo will negotiate with sellers whenever he buys coffee beans. c. Leo can influence the price of coffee beans if he buys a large quantity of them. d.None of the above is correct.

d.None of the above is correct.