Basic ECON Final

Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in six weeks. Funsters should

a. "fight fire with fire" by decreasing supply of its doll for six weeks and then increasing the supply. b. increase the supply of its doll now before the other doll hits the market. c. increase the price of its doll now. d. discontinue its doll. ANS: B

Assume for Namibia that the opportunity cost of each hut is 200 bowls. Which of these pairs of points could be on Namibia's production possibilities frontier?

a. (200 huts, 30,000 bowls) and (150 huts, 35,000 bowls) b. (200 huts, 40,000 bowls) and (150 huts, 30,000 bowls) c. (300 huts, 50,000 bowl) and (200 huts, 60,000 bowls) d. (300 huts, 60,000 bowls) and (200 huts, 80,000 bowls) ANS: D

A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market.

a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii)

Suppose a firm currently produces 225 units of output per day with 15 workers. The firm is able to produce 235 units of output with a 16th worker. What is the marginal product of the 16th worker?

a. 10 units of output b. 15 units of output c. 16 units of output d. 25 units of output ANS: A

Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 176 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is

a. 10 units of output. b. 11 units of output. c. 16 units of output. d. 176 units of output. Ans: B

Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy?

a. 2 houses b. 3 houses c. 5 houses d. 8 houses ANS: D

Which of the following statements is correct?

a. Assuming that explicit costs are positive, economic profit is greater than accounting profit. b. Assuming that implicit costs are positive, accounting profit is greater than economic profit. c. Assuming that explicit costs are positive, accounting profit is equal to economic profit. d. Assuming that implicit costs are positive, economic profit is positive. ANS: B

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

a. Both the mayor and city manager would be correct if demand were price elastic. b. Both the mayor and city manager would be correct if demand were price inelastic. c. The mayor would be correct if demand were price elastic; the city manager would be correct if demand were price inelastic. d. The mayor would be correct if demand were price inelastic; the city manager would be correct if demand were price elastic. ANS: D

Suppose that demand for a good decreases and, at the same time, supply of the good decreases. What would happen in the market for the good?

a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. ANS: C

Consider two individuals — Marquis and Serena — each of whom would like to wear sweaters and eat tasty food. The gains from trade between Marquis and Serena are most obvious in which of the following cases?

a. Marquis is very good at knitting sweaters and at cooking tasty food, but Serena's skills in both of these activities are very poor. b. Marquis and Serena both are very good at cooking tasty food, but neither has the necessary skills to knit a sweater. c. Marquis's cooking and knitting skills are very poor, and Serena's cooking and knitting skills are also very poor. d. Marquis's skills are such that he can produce only sweaters, and Serena's skills are such that she can produce only tasty food. ANS: D

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that

a. Mike has an absolute advantage in chairs. b. Mike has a comparative advantage in tables. c. Sandy has an absolute advantage in chairs. d. Sandy has a comparative advantage in chairs. ANS: A

In which of the following circumstances would a buyer be indifferent about buying a good?

a. The amount of consumer surplus the buyer would experience as a result of buying the good is zero. b. The price of the good is equal to the buyer's willingness to pay for the good. c. The price of the good is equal to the value the buyer places on the good. d. All of the above are correct. ANS: D

Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become popular, then how will this affect the market for saddle shoes?

a. The supply curve for saddle shoes will shift right, which will create a shortage at the current price. Price will increase, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity. b. The supply curve for saddle shoes will shift right, which will create a surplus at the current price. Price will decrease, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity. c. The demand curve for saddle shoes will shift right, which will create a shortage at the current price. Price will increase, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity. d. The demand curve for saddle shoes will shift right, which will create a surplus at the current price. Price will decrease, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity. ANS: C

Which of the following is an example of a barrier to entry?

a. Tom charges a higher price than his competitors for his house-painting services. b. Dick obtains a copyright for the new computer game that he invented. c. Harry offers free concerts on Sunday afternoons as a form of advertising. d. Larry charges a lower price than his competitors for his lawn-mowing services. Ans: B

Which of these statements best represents the Law of supply?

a. When input prices increase, sellers produce less of the good. b. When production technology improves, sellers produce less of the good. c. When the price of a good decreases, sellers produce less of the good. d. When sellers' supplies of a good increase, the price of the good increases. ANS: C

An example of an opportunity cost that is also an implicit cost is

a. a lease payment. b. the cost of raw materials. c. the value of the business owner's time. d. All of the above are correct. ANS: C

Which of the following phrases best captures the notion of efficiency?

a. absolute fairness b. equal distribution c. minimum waste d. equitable outcome ANS: C

The "Invisible hand" directs economic activity through...

a. advertising. b. prices. c. central planning. d. government regulations. ANS: B

Suppose the demand for macaroni is inelastic, the supply of macaroni is elastic, the demand for cigarettes is inelastic, and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of

a. both taxes would fall more heavily on the buyers than on the sellers. b. the macaroni tax would fall more heavily on the sellers than on the buyers, and the burden of the cigarette tax would fall more heavily on the buyers than on the sellers. c. the macaroni tax would fall more heavily on the buyers than on the sellers, and the burden of the cigarette tax would fall more heavily on the sellers than on the buyers. d. both taxes would fall more heavily on the sellers than on the buyers. ANS: A

If a tax is imposed on a market with inelastic demand and elastic supply, then

a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared. ANS: A

The mayor of Workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the

a. demand for labor is more elastic than the supply of labor. b. supply of labor is more elastic than the demand for labor. c. demand for labor and supply of labor are equally elastic. d. It is not possible for the tax burden to fall equally on firms and workers. ANS: C

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

a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product. ANS: C

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

a. economies of scale. b. diseconomies of scale. c. coordination problems arising from the large size of the firm. d. fixed costs greatly exceeding variable costs. Ans: A

A congested side street in your neighborhood 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. ANS: C

Rational people make decisions at the margin by...

a. following marginal traditions. b. behaving in a random fashion. c. thinking in black-and-white terms. d. comparing marginal costs and marginal benefits. ANS: D

If a sawmill creates too much noise for local residents,

a. noise restrictions will force residents to move out of the area. b. a sense of social responsibility will cause owners of the mill to reduce noise levels. c. the government can raise economic well-being through noise-control regulations. d. the government should avoid intervening because the market will allocate resources efficiently. Ans: C

An advance in farm technology that results in an increased market supply is

a. good for farmers because it raises prices for their products but bad for consumers because it raises prices consumers pay for food. b. bad for farmers because total revenue will fall but good for consumers because prices for food will fall. c. good for farmers because it raises prices for their products and also good for consumers because more output is available for consumption. d. bad for farmers because total revenue will fall and bad for consumers because farmers will raise the price of food to increase their total revenue. ANS: B

The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by

a. government actions that distort prices. b. increased competition in markets. c. enforcement of property rights. d. too much attention paid to efficiency. ANS: A

Negative externalities lead markets to produce

a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. b. smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. c. greater than efficient output levels and positive externalities lead markets to produce efficient output levels. d. efficient output levels and positive externalities lead markets to produce greater than efficient output levels. ANS: A

A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between...

a. guns and butter. b. efficiency and equality. c. inflation and unemployment. d. work and leisure. ANS: B

In a competitive market, the actions of any single buyer or seller will

a. have a negligible impact on the market price. b. have little effect on market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price. d. adversely affect the profitability of more than one firm in the market. ANS: A

Suppose that when the price of wheat is $2 per bushel, farmers can sell 10 million bushels. When the price of wheat is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? The demand for wheat is

a. income inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers. b. income elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers. c. price inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers. d. price elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers. ANS: C

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. ANS: B

A tax on the sellers of coffee will increase the price of coffee paid by buyers,

a. increase the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee. b. increase the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee. c. decrease the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee. d. decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee. ANS: D

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes

a. increases, and the consumer surplus in the market for red wine increases. b. increases, and the consumer surplus in the market for red wine decreases. c. decreases, and the consumer surplus in the market for red wine increases. d. decreases, and the consumer surplus in the market for red wine decreases. ANS: D

If the demand for leather decreases, producer surplus in the leather market

a. increases. b. decreases. c. remains the same. d. may increase, decrease, or remain the same. ANS: B

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by...

a. making it illegal to "disturb the peace." b. having a well-funded animal control department. c. subsidizing local animal shelters. d. encouraging people to adopt cats. ANS: A

In the housing market, supply and demand are

a. more elastic in the short run than in the long run, and so rent control leads to a larger shortage of apartments in the short run than in the long run. b. more elastic in the short run than in the long run, and so rent control leads to a larger shortage of apartments in the long run than in the short run. c. more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the short run than in the long run. d. more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the long run than in the short run. ANS: D

The national defense of the United States is not rival because

a. my enjoyment of the national defense does not diminish your enjoyment of the national defense of the United States. b. my enjoyment of the national defense does diminish your enjoyment of the national defense of the United States. c. once the nation is defended, it is impossible to prevent any single person from enjoying the benefit of this defense. d. once the nation is defended, it is possible to prevent any single person from enjoying the benefit of this defense. ANS: A

Suppose that the market price for pizzas increases. The increase in producer surplus comes from the benefit of the higher prices to

a. only existing sellers who now receive higher prices on the pizzas they were already selling. b. only new sellers who enter the market because of the higher prices. c. both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices. d. Producer surplus does not increase; it decreases. ANS: C

In a competitive market, each seller has limited control over the price of his product because...

a. other sellers are offering similar products. b. buyers exert more control over the price than do sellers. c. these markets are highly regulated by the government. d. sellers usually agree to set a common price that will allow each seller to earn a comfortable profit. ANS: A

Without government intervention, public goods tend to be

a. overproduced and common resources tend to be overconsumed. b. overproduced and common resources tend to be underconsumed. c. underproduced and common resources tend to be overconsumed. d. underproduced and common resources tend to be underconsumed. ANS: C

The provision of a public good generates a

a. positive externality, as does the use of a common resource. b. positive externality and the use of a common resource generates a negative externality. c. negative externality, as does the use of a common resource. d. negative externality and the use of a common resource generates a positive externality. Ans: B

A view of a spectacular sunset along a private beach is an example of a

a. private good. b. public good. c. nonrival but excludable good. d. rival but nonexcludable good. ANS: C

The government provides public goods because

a. private markets are incapable of producing these types of goods. b. free-riders make it difficult for private markets to supply the socially optimal quantity. c. markets are always better off with some government oversight. d. external benefits will accrue to private producers. ANS: B

The idea that "externalities arise because something of value has no price attached to it" is associated with

a. public goods, but not with common resources. b. common resources, but not with public goods. c. both public goods and common resources. d. neither public goods nor common resources. Ans: C

The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not choose the

a. quantity of milk to produce. b. price at which it sells its milk. c. profits it earns. d. All of the above are correct. Ans: B

When a surplus exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated. b. raise price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated. c. lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated. d. lower price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated. ANS: C

Explicit costs

a. require an outlay of money by the firm. b. include all of the firm's opportunity costs. c. include the value of the business owner's time. d. Both b and c are correct. ANS: A

At the local park there is a playground that anyone may use. There is rarely anyone using the playground, so children who use the playground receive full enjoyment from its use. The playground is

a. rival in consumption and is excludable. b. not rival in consumption, but is excludable. c. rival in consumption, but is not excludable. d. not rival in consumption nor is it excludable. Ans: D

Which of the following is an example of an implicit cost?

a. salaries paid to owners who work for the firm b. interest on money borrowed to finance equipment purchases c. cash payments for raw materials d. foregone rent on office space owned and used by the firm ANS: D

If Miguel expects to earn a higher income next month, he may choose to...

a. save more now and spend less of his current income on goods and services. b. save less now and spend more of his current income on goods and services. c. decrease his current demand for goods and services. d. move along his current demand curves for goods and services. ANS: B

When a tax is placed on the buyers of lemonade, the

a. sellers bear the entire burden of the tax. b. buyers bear the entire burden of the tax. c. burden of the tax will be always be equally divided between the buyers and the sellers. d. burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal. ANS: D

A tradeoff exists between a clean environment and a higher level of income in that...

a. studies show that individuals with higher levels of income pollute less than low-income individuals. b. efforts to reduce pollution typically are not completely successful. c. laws that reduce pollution raise costs of production and reduce incomes. d. employing individuals to clean up pollution causes increases in employment and income. ANS: C

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. ANS: C

Which of the following represents a way that a government can help the private market to internalize an externality?

a. taxing goods that have negative externalities b. Offering income subsidy to goods that have positive externalities c. The government cannot improve upon the outcomes of private markets. d. Both a and b are correct. ANS: D

An externality exists whenever

a. the economy cannot benefit from government intervention. b. markets are not able to reach equilibrium. c. a firm sells its product in a foreign market. d. Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays nor receives payment for that influence. ANS: D

When a free-rider problem exists,

a. the market will devote too few resources to the production of the good. b. the cost of the good will always be more than the benefit of the good. c. the good will not be produced. d. entrepreneurs will eventually find a way to make free-riders pay their share. ANS: A

If a firm uses labor to produce output, the firm's production function depicts the relationship between

a. the number of workers and the quantity of output. b. marginal product and marginal cost. c. the maximum quantity that the firm can produce as it adds more capital to a fixed quantity of labor. d. fixed inputs and variable inputs in the short run. ANS: A

A free rider problem arrises 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. ANS: C

The marginal product of an input in the production process is the increase in

a. total revenue obtained from an additional unit of that input. b. profit obtained from an additional unit of that input. c. total revenue obtained from an additional unit of that input. d. quantity of output obtained from an additional unit of that input. ANS: D

Because many good substitutes exist for a competitive firm's product, the demand curve that it faces is

a. unit-elastic. b. perfectly inelastic. c. perfectly elastic. d. inelastic only over a certain region. Ans: C