EC 201 Homework

If Ilona wants to live her life based on comparative advantage, then she should

do for herself the things for which she has low opportunity cost and trade with others for things she has a high opportunity cost.

A free market with externalities ______ social surplus.

does not maximize

Graphically, a firm's marginal revenue curve is:

downward-sloping, but with twice the slope of the firm demand curve.

Above-normal profits are eliminated by ______, and below-normal profits are eliminated by ______.

entry; exit

A marginal external benefit is the:

extra benefit accruing to bystanders as a result of one extra unit of output.

Mana has a comparative advantage in baking cakes. This means that she

gives up less to bake a cake than other bakers give up to bake a cake.

In the case of a binding price floor (a.k.a. "effective" price floor), the price paid in the market will be:

greater than the free market equilibrium price.

An individual demand curve is a graph:

hat plots the quantity of an item that someone plans to buy, at each price., that plots the quantity of an item that someone plans to buy, at one single price point.

The more inelastic the demand curve for a product is, the:

higher is the monopolist's price markup.

Compensating differentials lead to:

higher salaries for more unpleasant jobs.

A firm with monopoly power is able to set a markup price that is:

higher than prices on similar goods sold by competitive firms.

The accumulated knowledge and skills that make a worker more productive are known as:

human capital

It is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8. Because of the weather the surcharge is twice the regular cost, so the trip will cost $16. You should _____ because the benefit to you of taking the Uber is _____ than the cost.

take an Uber; more

Asking "One more?" allows the _____ principle to be analyzed as a simple question.

marginal

Marginal revenue product is the

marginal revenue from hiring an additional worker.

In the 1990s, fast-food restaurants refused to make special orders—there was no way to "hold the tomatoes." When Burger King branded itself as the place where you could "have it your way" and allowed special orders, it enjoyed an advantage over other fast-food restaurants. Until other firms copied it, what was Burger King's position?

monopolistic competitive

The demand for most goods tends to become ______ over time.

more elastic

Necessities tend to have a(n) ______ demand than luxuries.

more inelastic

When resources are organized according to the principle of comparative advantage, individuals become Select one:

more specialized so they can trade and end up with more of everything.

Which of the following is the best example of a monopolistic competitive market?

restaurants

Price ceilings that keep the market away from equilibrium create five important effects:

shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources.

The labor demand curve in a labor market

slopes downward.

The labor supply curve in a labor market

slopes upward

When the substitution effect dominates, a person's labor supply curve

slopes upward

A good has a free-rider problem when:

someone can enjoy the benefits of the good without bearing the costs.

An efficiency wage improves efficiency when:

the increase in worker effort and reduced turnover cover the cost of the higher wage.

In a labor market, the wage is

the price of labor.

When plotting a supply curve

the quantity supplied goes on the horizontal axis.

In a perfectly competitive market, each firm sells at:

the same price

The Rational Rule for Employers implies that they keep hiring until

the wage equals the marginal revenue product of the last worker hired.

Externalities tend to occur because decision makers consider _____ and do NOT consider _____.

their own costs and benefits; the effects of their actions on others

The demand curve for Froot Loops breakfast cereal is very elastic because:

there are many good substitutes for Froot Loops.

A downward-sloping demand curve implies:

there is an inverse relationship between price and quantity demanded.

When deciding on the number of hours to work using the marginal principle, you are asking the question,

"Should I work one more hour?"

If a firm has revenues of $200, explicit costs of $100, and implicit costs of $100, then its economic profit is:

$0

Consumer surplus is the amount that consumers:

are willing to pay for a good minus what they actually pay for it.

You have paid $100 for student season tickets to the football games at your university. It is halfway through the season, and the team has not won any games. You are considering whether you will attend any future games this season. All of the following are costs or benefits you should consider when making this decision EXCEPT the ____

$100 you spent on the season tickets.

It is a beautiful afternoon, and you are considering taking a leisurely stroll through the park. Your alternatives to walking are streaming a movie that you value at $5, taking a nap that you value at $7, or reading a new book that you value at $12. What is the opportunity cost to you of taking the stroll through the park?

$12

If you are willing to pay $8 for a $6 burrito, what is your consumer surplus if you buy it?

$2

If Major League Baseball ticket prices rise by 15%, the number of tickets sold falls by 5%. The elasticity of demand is:

-1/3.

If the price of coffee falls by 10% and the quantity supplied of coffee falls by 1.5%, then the elasticity of supply of coffee is:

0.15

Which statement is FALSE?

A frost that destroys half the orange crop will create a surplus of oranges.

Why is a price change NOT an externality?

A price change does not change total costs or benefits.

Which of the following is a positive externality?

After measles vaccinations increase by 20%, the number of cases of measles falls by 35%.

A government uses taxes to build and maintain a museum. Which of the following considerations implies that visiting a museum is NOT a public good?

Although enjoying the exhibits might be non-rival, the experience is excludable because admittance could easily be limited to those who pay.

Consider the market for gasoline, a good with a relatively low elasticity of demand. Who will bear the majority of a tax imposed on gasoline?

Buyers will bear the majority of the tax, as long as demand is less elastic than supply.

Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?

Chloe pays Winston weekly to refrain from playing music loudly.

The opportunity cost of attending a movie instead of babysitting for your neighbor includes the...

Cost of movie ticket and popcorn, lost income from not working, the time you spend driving to the movie

A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate?

Diminishing marginal product (a.k.a. diminishing marginal returns)

Which of the following is NOT a reason that it is advantageous for employers to offer benefits rather than extra salary?

Employers can offer substitutes for hard work.

Who ultimately pays the tax depends on who writes the check to the government.

False

Some researchers estimate that all saltwater fish will be extinct by 2048, in large part due to overfishing. But surveys also show that more households eat chicken and beef than fish; however, neither chickens nor cattle are in danger of extinction. Which of the following best explains these observations?

Fish tend to be nonexcludable resources, whereas chicken and beef are excludable.

Charles McCoy is a manager at a coffee shop, and he has to decide how many workers to hire. One worker can make 20 drinks that sell for $4 on average in one hour. A second worker can make another 16 drinks in one hour. The marginal benefit of each additional worker decreases by four drinks, with each additional hire. Given that workers are paid $15 per hour and have eight-hour shifts, how many employees should Charles hire for each hour?

Five

Which of the following is NOT part of the three-step recipe used to analyze externalities? (Note: the steps are not necessarily in order.)

Identify costs and benefits in the public sector.

Suppose that a private-sector firm produces two goods: Good 1 is a private good and good 2 is a public good. Which of the following statements is TRUE?

If a consumer spends more money on good 1, she gets more good 1.

Why might the benefits of monopolistic competition outweigh the inefficiencies?

If we had perfect competition instead of monopolistic competition, we would not have all the variety and innovation that we have today.

Which of the following explains why it is difficult to determine the optimal quantity of public goods that the government should produce?

It is difficult to assess exactly how much each individual values a public good.

The iconic blue-and-white Chinese porcelain sold to people all over the world (particularly between the fourteenth and the sixteenth centuries) was so successful, entrepreneurs in Persia, Netherlands, Syria, Iberia, Mexico, and many other areas attempted to copy it. The actual process for creating such high-quality ceramics was kept secret, but in 1708 a German alchemist finally found a way to replicate the ancient art. What do you expect happened to the price of porcelain after 1708, and why?

It should have fallen because of the increased competition.

Profit maximization occurs when:

MR = MC.

Marge tutors English students. If she raises rates, her revenues increase. Brad tutors biology students. If he lowers rates, his revenues increase. Which of the following is TRUE?

Marge's demand is inelastic, and Brad's demand is elastic.

Asking "Or what?" allows the _____ principle to be analyzed as a simple question.

Opportunity Cost

Employers should hire more workers when the marginal revenue product is greater than (or equal to) the wage. This rule is known as the

Rational Rule for Employers.

Mario is willing to sell an extra unit of his product as long as price is:

at least as high as the marginal private cost.

The tragedy of the commons is the:

Tendency to overconsume common resources

Amul Food Factory in India makes ice cream and produces processed and condensed milk. In the factory, the firm's employees use raw milk and sugar. The firm runs on electricity and purchases raw milk every day. Large robotic assembly lines fill and package the ice cream containers. Large industrial freezers store the ice cream. Based on this scenario, can you identify the fixed costs for Amul Food Factory?

The cost of building the factory, purchasing the robotic assembly lines and industrial freezers.

Which of the following is FALSE regarding public goods?

The fact that something is a public good doesn't mean it is nonrival.

Which of the following is NOT a factor that can shift supply?

The market price of a product.

A tax targeted to reduce consumption of a good by a specific quantity will raise the most revenue when:

both supply and demand are inelastic.

When you go to the store to buy some M&Ms candy, you find they are more expensive than they were last month. Which of the following could explain why M&Ms are more expensive?

The supply of cacao beans, used to produce chocolate, has fallen around the world.

The government increases the training requirements to obtain an electrician's license. What impact will this have in the labor market for electricians?

The supply of electricians will decrease, resulting in a higher wage and lower quantity of labor.

A meat processing plant produces both steak and ground beef. What effect would rising market prices for steak have on the market for ground beef?

The supply of ground beef will decrease.

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

both the beekeeper and the orchard owner.

Economics is the study of:

Trade-offs when making decisions.

Which of the following is an example of the tragedy of the commons?

Tuna in the ocean are being overharvested because it is difficult to prevent anyone from fishing for tuna.

The marginal social cost of driving an SUV is equal to:

both the cost of the vehicle's pollution and its operation (gas, etc.).

Workers on the night shift at a factory earn more per hour than workers on the day shift, although their human capital and productivity are the same. This is an example of:

a compensating differential.

A normal good is:

a good for which higher income causes an increase in demand.

An externality is NOT:

a price change.

When a good is nonrival and nonexcludable, the good is referred to as:

a public good

At Trader Joe's, the price of chocolate chip cookies falls. As a result, you would expect to see a.

a rise in the quantity demanded of chocolate chip cookies.

at least as high as the marginal private cost.

a side effect of an activity when the side effect harms bystanders.

An externality is defined as:

a side-effect of an activity that affects bystanders whose interests are not taken into account.

Which of the following would be both nonrival and nonexcludable?

a siren tornado warning system

When quantity supplied exceeds quantity demanded, _____ exists.

a surplus

Typical evidence for the existence of market power would be market prices:

above production costs.

Marginal social benefit is the term for:

all marginal benefits, no matter who gets them.

A signal is:

an action taken to credibly convey information that is hard for someone else to verify.

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is:

an externality.

The socially optimal amount of good with an externality is _____:

based on cost-benefit analysis where MSC=MSB.

In a market system, public goods would:

be underproduced.

The term "gains from trade" means the

benefits that come from reallocating resources, goods, and services to better uses.

The key to using the cost-benefit principle is to think about _____ aspects of a decision.

both financial and non-financial

Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and 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:

both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers.

What type of good is nonrival and excludable?

club goods

What type of good is rival and nonexcludable?

common resources

The Rational Rule for Buyers

compares the benefit of buying an additional unit of the item to the cost of that item.

The marginal principle breaks quantity decisions into iterative decisions that use the

cost-benefit principle

Alex and Marilyn started Ono Yo, an organic and fresh fruit frozen yogurt truck. As the demand for organic and healthier desserts rose, demand for Ono Yo's products grew. Because of the growth in demand for Ono Yo's product, Alex's and Marilyn's

demand for workers increased

Damon's wage rises. The substitution effect would cause him to _____ his work hours, and the income effect would cause him to _____ his work hours.

increase; decrease

A school principal strives to motivate teachers to work hard and be effective by stressing to them the satisfaction they can gain from knowing that they can have an impact for good on the next generation. The principal is using _____ to get teachers to provide students with a high-quality education.

intrinsic motivation

An external cost:

is a cost paid by people other than the producer or consumer trading in the market.

What is the impact of higher wages on labor supply according to the income effect?

leisure is more attractive

In the long run, firms will exit industries where price is:

less than average cost.

If the price of a good does not take into account all of the relevant costs to everyone in society, then the price of that good is too:

low, and the product will be overproduced.

When you love your job, the opportunity cost of working is _____ the opportunity cost if you dislike your job.

lower than

When you assign tasks to employees based on comparative advantage, task assignments go to those with the

lowest opportunity cost

Sunk costs should ____ be considered as part of the opportunity costs of a decision.

never

Street lights are an example of a good that is:

nonexcludable and nonrival.

The difference between private goods and common resources is that common resources are:

nonexcludable, and private goods are excludable.

Dental services can be classified as

normal goods

Daisy is a milk farmer in a perfectly competitive market where there are many milk farmers. The market price of milk is $0.15 per gallon, which is also the marginal cost per gallon of milk. If Daisy charges $0.25 per gallon, she will

not sell any milk

Toilet paper is a rival good because:

one person's use of toilet paper reduces the ability of another person to use the same sheets.

When you calculate marginal costs, they should include:

only variable costs

The leisure you forgo in order to work is the

opportunity cost of working.

Fewer people get flu shots than is efficient because:

people usually perceive that the private cost of getting flu shots is higher than their private benefit.

A preconceived bias against a group that's not based on reason or experience is known as:

prejudice.

Goods that are excludable include both:

private and club goods.

The marginal revenue product is equal to the marginal

product of labor multiplied by the price of that product.

A shortage occurs when:

quantity demanded exceeds quantity supplied.

An equilibrium price is a price where the

quantity supplied equals the quantity demanded.

A tax on sellers of popcorn will:

reduce the size of the popcorn market.

Studies of the minimum wage indicate that minimum wage laws _____ employment opportunities for low-skilled workers, but there is less agreement regarding _____.

reduce; the amount of the reduction

Sunk costs are costs that are incurred

regardless of which decision is made.

A cross-price elasticity value that is positive will indicate goods that are substitutes.

true

If one person uses a good and thereby diminishes the use of the good by others, the good is rival.

true

A corporate culture that makes workers feel that their treatment is _____ may lead them to slack off.

unfair

In a labor market graph, _____ is measured on the vertical axis, and _____ is measured on the horizontal axis.

wage; hours of labor

People will be induced to enter the workforce when:

wages rise.

A nonrival good is a good:

where one person's use of the good does not reduce another person's ability to use the same unit of the good.

When comparing a monopoly with a competitive industry, monopoly quantity:

will be lower, and monopoly price will be higher, than that of a competitive firm.