Econ Test #2 (MRU)

Fill in the blanks: When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _________the activity that is taxed and will tend to gravitate ________ activity that is not taxed.

away from, toward

The economic definition of profit differs from the accounting definition of profit in that the economic definition includes

opportunity costs

In our discussion of taxation, we've acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let's think for a moment about what kind of taxes are easiest to collect, just based on the basic ideas we've covered. Who will make the most effort to escape a tax?

party who is inelastic

In the long run, constant supply curves are

horizontal

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market? *

$35

When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each? *

$40

For a competitive firm supplying wheat, if the world price (P) equals the firm's min average cost (min AC), then profits will be

0

demand: P=250-4Q fixed costs=200 MC=50 total profit=

2300

demand p=1200-5Q fixed costs=1000 MC=300 profit maximizing price=

300

Why do you think iron and steel became more common around the same time as the increase in price of bronze?

An increase in the price of bronze encourages innovation to produce substitutes.

You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

Bermuda shorts

How does a free market eliminate a shortage? *

By letting the price rise

In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the federal price floors didn't apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. Which flight had a nicer meal?

Chicago-to-Cleveland flight

What is the least common cost structure for an industry?

Costs decrease as industry output increases.

suppose new farming techniques drastically increased the productivity of growing wheat. Given this change, how would the price of wheat change?

Fall, because supply would shift to the right.

If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

Fewer people will be covered because health insurance companies will supply less.

In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don't pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?

From the low cost south to the high tax North

What does it mean that elasticity equals escape?

It is easy for market participants to escape to another market if they have elastic demand or supply

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). What does the increasing price of bronze signal?

It tells people that bronze is getting harder to find and its higher price will signal consumers to conserve it more or seek substitutes.

Business leaders often say that there is a "shortage" of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply? *

Let the price of labor increase

How to maximize profit

MR=MC (choose a level of output that equals this)

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?

Meterville

Airline regulation of the 1970s produced a similar result to which of the following government interventions?

Minimum wage laws

As Ngoy started hiring more Cambodian refugees to work in his donut shop, this made it more likely that

Other Cambodians would open donut shops.

Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?

Supply curve will decrease, that is, a shift to the left (up).

After the development of iron, did the supply or demand for bronze shift? Which way did it shift? Why?

The demand for bronze shifted to the left (down) because there was now a good substitute for bronze.

Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers?

The demand for desktops decreases.

Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops? *

The price of laptops decreases.

In the competitive children's pajama industry, a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is a constant cost industry, then in the long run, what exactly happens to the price of children's pajamas?

The price of pajamas increases by exactly $2

If this is an increasing cost industry instead, will the long-run price of pajamas rise by more than $2 or less?

The price of pajamas increases by less than $2.

If you instead think of the "market for clothing" as the "market for clothing, whether it's new or used," does this shift the demand or supply of clothing, and in which direction? *

The supply of clothing shifts right: a rise in supply.

How does the change in desktop demand affect the quantity supplied of desktop computers?

The supply of desktops decreases.

Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?

There was no price control on gasoline at the time.

When a monopoly is maximizing its profits, price is greater than marginal cost.

True

President Jimmy Carter didn't just deregulate airline prices. He also deregulated much of the trucking industry, as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation?

Who do you think asked Congress and the president to keep price floors for trucking?

A competitive market has which of the following characteristics? * a. Lots of small-scale sellers b. Lots of small-scale buyers c. A product that is similar across sellers

all of the above

Fast forward 40 years: What kind of cost structure are Californian doughnut shops probably in now?

constant

Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given? *

consumer surplus decreases

If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines

create gas rations

If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:

elastic supply and elastic demand

At this point in the story, what sort of cost industry (constant, increasing, or decreasing) would you consider doughnut shops owned by Cambodians to be?

decreasing

In a rent-controlled apartment, a landlord will likely do which of the following more often:

discriminate more against applicants

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

elastic

Let's take a look at the supply side of junk food. If junk food supply is highly elastic—perhaps because it's not that hard to start selling salads with lowfat dressing instead of mayonnaise- and cheese-laden burgers—will a junk food tax have a bigger effect if supply were inelastic or elastic?

elastic

One way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries?

elastic

For a monopoly producing a certain amount of output, price is less than marginal revenue.

false

True or False: When a competitive firm maximizes profit, profits are always greater than 0.

false

Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? (lawyers who charge $800 or fast food workers who get $8 per hour)

fast food workers

Fill in the blanks: Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.

increase, decrease

If the Oklakansas government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?

inelastic

Suppose instead that because of government corruption, the insulin manufacturers convince the U.S. government to pay the insulin makers $10 per cubic centimeter of insulin, payable every month from the U.S. Treasury. Who will get most of the benefit of this subsidy?

people with diabetes buying the insulin

If a nation's government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy?

poorer

With these price controls on bread, would you expect bread quality to rise or fall? *

quality falls

The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?

quantities

When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?

quantity demanded

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread? *

quantity supplied decreases.

Let's review the basic mechanism of the elimination principle with the following questions. When demand rises in Industry X, what happens to profits? Do they rise, fall, or remain unchanged?

rise

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what will happen to the $15 of economic benefit?

stay the same

wage subsidy examples

the earned income tax credit

Fill in the blanks: When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate __________ the activity that is subsidized and will tend to gravitate ___________ activity that is not subsidized.

toward, away from

Who do you think asked Congress and the president to keep price floors for trucking?

trucking companies

when should you enter the market?

when price is greater than average cost (when there is profit to maximize)

Just based on self-interest, who is more likely to support strong patents on pharmaceuticals: Young people or old people?

young people

the more inelastic the demand curve, the _______ the markup

higher

When demand rises and capital enters, Does this tend to increase short-run supply in Industry X or reduce it?

increase

barriers of entry examples

patents, exclusive access, technological innovation, economies of scale, brand loyalty, government regulations