Test 2

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Which of the following is an example of a public good? -A weather warning system -A television set -A sofa -A bottle of soda

A weather warning system

Social demand

The demand for a good or service that reflects both the private and external benefits of its consumption.

The satisfaction or happiness one gets from consuming a good or service is called: -Price -Utility -Income _profits

Utility

normal good

a good that consumers demand more of when their incomes increase

unit elastic demand

the percentage change in quantity demanded equals the percentage change in price; the resulting price elasticity has an absolute value of 1.0

When the price of a product is increased 10%, the quantity demanded decreases by 15%. The price elasticity for demand for this product is: *-1.5 *-0.15 *-0.67 *-67

-1.5

Assume MUc and MUd represent the marginal utility that a consumer gets from products C and D, the respective prices of which are Pc and Pd. The consumer will increase his total utility from a specific money outlay by spending more on C and less on D if initially: -MUd<MUc -MUe/Pc<MUd/Pc -MUe/Pc>MUd/Pd -MUd>MUc

-MUe/Pc>MUd/Pd

External benefits in consumption refer to benefits occurring to those: -Who are selling the product to the consumers -Who bought and consumed the product -Others than the ones who consumed the product -Who are consuming the product abroad

-Others than the ones who consumed the product

When producers do not have to pay the full price of producing a product, they tend to: -Overproduce the product because of positive externality -Underproduce the product because of positive externality -Underproduce the product because of negative externality -Overproduce the product because of negative externality

-Overproduce the product because of negative externality

Which of the following defines marginal utility? -The change it total utility divided by the price of a product -The maximum amount of satisfaction or happiness derived by consuming a product -The total satisfaction or happiness from consuming a good, service, or combination of goods and services -The additional satisfaction or happiness received from the consumption of an additional unit of a good or service

-The additional satisfaction or happiness received from the consumption of an additional unit of a good or service

The price elasticity of demand for a popular sporting event is -2. If the price of a ticket for this event increases by 10%, the quantity of the tickets demanded will decrease by: -5% -20% -10% -0.2%

20%

Externality

A cost or benefit imposed on people other than the consumers and producers of a good or service.

When interpreting the Ed value as either elastic or inelastic , we look at the: -Ed coefficient with its negative sign -Absolute value of the Ed coefficient (dropping the negative sign) -Percent change in price -Percent change in quantity

Absolute value of the Ed coefficient (dropping the negative sign)

which of the following is an example of a positive externality (additional social benefit)? -An increase in the value of land you own when a nearby development is completed -The costs paid by a company to build an automated factory -Falling property values in a neighborhood where a disreputable nightclub is operating -The higher price that you pay when you buy a heavily advertised product

An increase in the value of land you own when a nearby development is completed

In a situation where an externality occurs, the "third party" refers to those who: -Buy the product from others -Produce the product for others -Trade the product with others outside the country or community -Are not directly involved in the transaction or activity

Are not directly involved in the transaction or activity

Graphically, producer surplus is measured as the area: -Under the demand curve and below the actual price -Under the demand curve and above the actual price -Above the supply curve and above the actual price -Below the supply curve and below the actual price

Below the supply curve and below the actual price

A public good: -Generally results in substantial negative externalities -Can never be provided by a nongovernmental organization -Costs essentially nothing to produce and is thus provided by the government at a zero price -Cannot be provided to one person without making it available to others as well

Cannot be provided to one person without making it available to others as well

When a competitive market maximizes economic surplus , it implies that: -The marginal benefit of having the product is greater than the marginal cost -Buyers are getting the maximum consumer surplus from the product - Combined consumer and producer surplus is maximized. -Quantity demanded is lower than quantity supplied

Combined consumer and producer surplus is maximized.

The difference between the maximum price that a consumer is willing to pay for a product and the actual price the consumer pays is called: -Utility -Consumer surplus -Consumer demand -Market failure

Consumer surplus

The decision making process followed by consumers to maximize utility assumes that: -Consumers behave rationally, attempting to maximize their satisfaction -Consumers have unlimited incomes -Consumers do not know how much marginal utility they obtain from consuming additional units of various products -Consumers are unable to rank their preferences

Consumers behave rationally, attempting to maximize their satisfaction

If the demand for product X is inelastic, a 4 percent increase in the price of X will_____ the quantity demanded of X by ____ than 4%: -Decrease, more -Decrease, less -Increase, more -Increase, less

Decrease, less

Total revenue decreases as the price of a good increase, if the demand for the good is: -Elastic -Inelastic -Unitary Elastic -Perfectly Elastic

Elastic

The price elasticity of demand of a linear demand curve is: -Elastic in high price ranges, and inelastic in low price ranges -Elastic but does not change at various parts on the curve -Inelastic but does not change at various parts on the curve -1 at all points on the curve

Elastic in high price ranges, and inelastic in low price ranges

Which of the following is an example of a negative externality (additional social cost)? -An increase in the value of land you own when a nearby development is completed -The costs paid by a company to build an automated factory -Failing property values in a neighborhood where a disreputable nightclub is operating -The higher price you pay when you buy a heavily advertised product

Failing property values in a neighborhood where a disreputable nightclub is operating

If the equilibrium wage for fast food restaurants is $8 and the government enforces a minimum wage of $15: -Fast food restaurants will hire fewer people -Workers will be able to find more jobs -Workers will get paid less -Overall, society will be better off

Fast food restaurants will hire fewer people

Time period

Firms have difficulty increasing quantity they supply during short time periods

Unlike a private good, a public good: -Has no opportunity costs -Has benefits available to all, including nonpayers -Produces no positive or negative externalities -Is characterized by rivalry and excludability

Has benefits available to all, including nonpayers

Assume that the product alpha and the product beta are both priced at $1 per unit and that Ellie has $20 to spend on both alpha and beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utilities of the last unit of alpha and beta that she purchases are 40 units and 20 units, respectively. This indicates that: -Ellie should make no change in consumption -Given another dollar, Ellie should buy an additional unit of beta -In order to maximize utility, Ellie should buy more beta and less Alpha -In order to maximize utility, Ellie should buy more alpha and less beta

In order to maximize utility, Ellie should buy more alpha and less beta

Oscar makes purchases of an existing product (X) such that the marginal utility of the last unit he consumes is 10 utils and the price is $5. He also tries a new product (Y) and the marginal utility of the last unit he consumes is 8 utils and the price is $1. The equal marginal principle suggests that Oscar should: -Increase the consumption of product X and decrease his consumption of product Y -Increase his consumption of Product X and Y -Increase his production of product Y, and decrease the production of product X -Decrease his consumption of Product X and Y

Increase his production of product Y, and decrease the production of product X

You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues from that product, you should: -Increase the price of the software -Decease the price of the software -Hold the price of the software constant -Increase the supply of the software

Increase the price of the software

A negative income elasticity of demand indicates that the product: -Is an inferior good -Is a normal good -Is a complimentary good -Is a substitute good

Is an inferior good

Sharon purchases two products with a given fixed budget, orange juice and soda. Her marginal utility from orange juice is 60, and her marginal utility from soda is 30. The price of a bottle of orange juice is $2.00, and the price of soda is $1.00. These data suggest that: -Is maximizing her total utility from the given fixed budget -Should buy more X and less Y -Should but more Y and less X -Should buy less Y and X

Is maximizing her total utility from the given fixed budget

Producer surplus: -Is the difference between the maximum price consumers are willing to pay for a product and the lower equilibrium price -Rises as equilibrium price falls -Is the difference between the maximum price consumers are willing to pay for a product and the minimum price producers are willing to accept -Is the difference between the minimum price producers are willing to accept for a product and the higher equilibrium price

Is the difference between the minimum price producers are willing to accept for a product and the higher equilibrium price

Deadweight losses occur when the quantity of an output produced is: -Less than the competitive equilibrium quantity -Greater than the competitive equilibrium quantity -Less than or grater than the competitive equilibrium quantity -such as the marginal benefit of the output is just equal to the marginal cost

Less than or grater than the competitive equilibrium quantity

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Which policy is most appropriate for dealing with this problem? -Levy a tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources -Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products -Levy a tax on the producers of electricity and use the tax revenues to clean up the river -Levy a tax on the producers of paper products and use the tax revenues to clean up the river

Levy a tax on the producers of paper products and use the tax revenues to clean up the river

After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the: -Marginal utility for four slices of pizza is negative -Total utility for five slices is negative -Marginal utility is positive for the fourth slice and negative for the fifth -Marginal utility for the fourth slice is the largest amongst all the slices

Marginal utility is positive for the fourth slice and negative for the fifth

A consumer with a limited income will maximize utility when each good is purchased in amounts such that the -Total utility is the same for each good in a bundle -Marginal utility of each good in a bundle is maximized -Marginal utility per dollar spent on each of the final choices in a bundle is equal -Marginal utility per dollar spent on each of the final choices in a bundle is maximized for each good

Marginal utility per dollar spent on each of the final choices in a bundle is equal

Assume that a 3% increase in income across the economy produces a 1% decrease in the quantity of fast food demanded. The income elasticity of demand for fast food is ____________, and therefore fast food is _______________ -Negative, an inferior good -Negative, a normal good -Positive, an inferior good -Positive, a normal good

Negative, an inferior good

inelastic demand

Percent change in quality is less than percent change in price

The basic formula for the price elasticity of demand is: -Absolute decline in quantity demanded/percentage change in price -Percentage change in quantity demanded/percentage change in price -Absolute decline in price/absolute increase in quantity demanded -Percentage change in price/percentage change in quantity demanded

Percentage change in quantity demanded/percentage change in price

We would expect the cross price elasticity of demand between pepsi can coke to be: -Positive, indicating secondary goods -Positive, indicating general goods -Positive, indicating substitute goods -Negative, indicating substitute goods

Positive, indicating substitute goods

Marginal utility can be: -Positive, but not negative -Positive or negative, but not equal to zero -Positive, negative, or equal to zero -Decreasing, but not negative

Positive, negative, or equal to zero

In which instance will total revenues decline? -Price increases and Ed equals -.41 -Price increase and demand is unit elastic -Price decreases and demand is elastic -Price increase and Ed equals -2.47

Price increase and Ed equals -2.47

total revenue

Price x Quantity

The market system does not produce public goods because: -There is no need or demand for such goods -Private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them -Public enterprises can produce such goods at lower costs than can private enterprises -Their production seriously distorts the distribution of income

Private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them

When the marginal benefit of a output exceeds the marginal cost: -Production of that output should be increased, in order to maximize economic surplus -Production of that output should be decreased, in order to maximize economic surplus -increasing the production of that output would increase the missing surplus -Reducing the production of that output would reduce the missing surplus

Production of that output should be increased, in order to maximize economic surplus

If the consumption of a product or service involves external benefits, then the government can improve efficiency in the market by: -Providing a subsidy to correct for an overallocation of resources -Providing a subsidy to correct for an underallocation of resources -Imposing a corrective tax to correct for an overallocation of resources -Imposing a corrective tax to correct for an underalloaction of resources

Providing a subsidy to correct for an underallocation of resources

elastic demand

Quantity demanded is greater than percent change in price

perfectly inelastic demand

Quantity demanded is non responsive to price change

perfect elastic demand

Quantity demanded is so responsive to change in price, if price goes up or down by 1% quantity decreases to 0

perfectly elastic supply

Quantity supplied is responsive to price = infinity

perfectly inelastic supply

Quantity supplies is unresponsive to price =0

What are the two characteristics that differentiate private goods from public goods: -Rivalry and excludability -Negative externality and positive externality -Marginal cost and marginal benefit -Ownership and usage

Rivalry and excludability

Assume that Clara purchases a combination of products Y and Z such that, after she is done spending her limited income, MUy/Py = 25 and MUz/Pz= 15. Based on the equal marginal principle, Clara: -Is maximizing her total utility -Should have purchased more Y and less Z -Should have purchased less Y and more Z -Should have purchased less Y and less Z

Should have purchased more Y and less Z

If some activity creates external benefits as well as private benefits, the economic theory suggests that the activity ought to be: -Taxed -Prohibited -Subsidized -Left Alone

Subsidized

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to accept it called the producer: -Revenues -Surplus -Costs -Utility

Surplus

Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following except: -Subsidizing the buyers of the product -Taxing the sellers of the product -subsidizing the sellers of the product -Providing the product itself

Taxing the sellers of the product

A positive externality or spillover benefit (additional social benefit) occurs when: -Product differentiation increase the variety of products available to consumers -The benefits associated with a product exceed those occurring to people who consume it -A firm does not bear all the costs of producing a good or service -Firms earn positive economic profits

The benefits associated with a product exceed those occurring to people who consume it

Which of the following is not an assumption of the decision making process followed by consumers to maximize utility? -The consumer behaves rationally -The consumer can rank his preferences -The consumer does not consider the prices of the products -The consumer has a limited income

The consumer does not consider the prices of the products

Consumer surplus arises in a market because: -At the current market price, quantity supplied is greater than quantity demanded. -At the current market price, quantity demanded is greater than quantity supplied. -The market price is below what some consumers are willing to pay for the product. -The market price is higher than what some consumers are willing to pay for the product.

The market price is below what some consumers are willing to pay for the product.

Which situation is consistent with the law of diminishing marginal utility: -The more pizza joe eats, the more he enjoys an additional slice -The more pizza Joe eats, the less he enjoys an additional slice -Joes marginal utility from eating pizza becomes positive after eating 3 slices -Joes marginal utility from eating pizza reaches a maximum when total utility is zero

The more pizza Joe eats, the less he enjoys an additional slice

Which is not a characteristic of a product with relatively inelastic demand? -The good is regarded by consumers as a necessity -There a large number of good substitutes for the good -Buyers spend a small percentage of their income on the product -Consumers have had only a short time period to adjust to changes in price

There a large number of good substitutes for the good

When diminishing marginal utility starts happening as a person consumes more and more of a given good: -Total utility will decrease at at diminishing rate -Total utility will increase at a diminishing rate -Marginal utility will increase at a diminishing rate -Total utility will become negative

Total utility will increase at a diminishing rate

In a free market economy, a product that entails a positive externality (additional social benefit) will be: -Overproduced -Underproduced -Produced at the optimal level -Provided solely the government

Underproduced

Which of the following statements is correct? -When marginal utility is decreasing, an increase in the quantity consumed will decrease total utility -When marginal utility is positive, an increase in the quantity consumed will decrease total utility -When marginal utility is positive, an increase in the quantity consumed will increase total utility -When marginal utility is zero, an increase in the quantity consumed will make total utility zero

When marginal utility is positive, an increase in the quantity consumed will increase total utility

inferior good

a good that consumers demand less of when their incomes increase

economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

positive externality

demand curve fails to include external benefits, the equilibrium price is artificially low and the equilibrium quantity is artificially low

market failure

market fails to allocate resources efficiently

social marginal benefit

private marginal benefit + external marginal benefit

social marginal cost

private marginal cost + external marginal cost

Assume that Alex would like to purchase a combination of product A and product B such that, after he is done spending his limited income, the MUa / Pa = 8 and MUb / Pb = 4. To maximize utility without spending more money, Alex should: -Purchase less of product A and more of B -purchase more of product A and less of B -Purchase more of both product A and B -Make no change in purchases for both product A and B

purchase more of product A and less of B

4 categories of goods

rivalry, non rivalry, excludability, non excludable

cross price elasticity for substitutes, complements, and unrelated

substitutes=positive, Complements=negative, Unrelated=Zero

private marginal benefit

the benefit to the consumer of an additional unit of a good or service

Allocatively efficiency occurs only at that output where: -Marginal benefit exceeds marginal cost by the greatest amount -Consumer surplus exceeds producer surplus by the greatest amount -the combined amount of consumer and producer surplus are maximized -The areas of consumer and producer surplus are equal

the combined amount of consumer and producer surplus are maximized

private marginal cost

the cost to the producer of an additional unit of a good or service

private demand

the demand for a good or service that considers only the private benefits of its consumption

Consumer Surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

Producer Surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

allocative efficiency

the particular mix of goods and services most highly valued by society where marginal benefit = marginal cost

productive efficiency

the production of any particular good in the least costly way

dead weight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

Economic Surplus

the sum of consumer surplus and producer surplus

social supply

the supply of a good or service that reflects both the private and external costs of its production

private supply

the supply of a good or service that reflects only the private costs of its production

social cost

the total cost of producing a good or service, including both the private cost and any external cost

negative externality

when supply curve fails to include external costs, the equilibrium price is artificially low, the equilibrium quantity is artificially low


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