ECON 201 - Exam 4
Average total cost is equal to total cost divided by profit.
False.
Firms have less pricing power if their firm-level product is more unique.
False.
Low-rise construction workers are expected to be paid more than high-rise construction workers.
False.
Music is a relatively enjoyable profession, a factor that raises the wage for musicians.
False.
The market for designer jeans is a good example of a perfectly competitive market.
False.
To better feed his army, Napoleon established a technology prize that led to the development of canning in 1809. Napoleon required the inventor Nicolas Francois Appert to publish the method. Napoleon's reign as Emperor ended after his defeat at Waterloo, a defeat which might not have been so decisive had canned food not made its way to the enemies' mouths. By demanding Appert publish his method, what did Napoleon force Appert to give up?
a monopoly.
An example of a monopoly would be:
a sole provider of electrical power in a city.
In a highly competitive industry, demand for a firm's product is:
perfectly elastic.
Firms should exit the market if:
price falls below the average cost.
A tax on sellers of popcorn will:
reduce the size of the popcorn market.
When an industry becomes monopolized:
the losses to consumers are typically greater than the gains to the monopolist.
In a monopoly market:
the lure of above-normal profits may give a firm an incentive to develop new products and technologies.
A compensating differential is:
a difference in wages that offsets differences in working conditions.
Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:
$2.
Without taxes, the market price per bag of apples is $5. With a $2 tax per bag of apples, buyers now pay $5.75 per bag. What is the final price per bag of apples received by sellers?
$3.75
The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost (MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm's profit-maximizing level of output?
30
Which of the following statements is TRUE?
A tax on sellers is equivalent to a tax on buyers.
Which one of the following statements is correct?
Monopoly profit encourages firms to research and develop new drugs.
Which of the following statements is TRUE?
Consumer surplus under competition is greater than consumer surplus under monopoly.
The supply of nurses in country A is the same as the supply in country B, but the nurses in country A earn 90% more than the nurses in country B. What can explain this difference?
Country A's economy is more productive than country B's, so the demand for nurses is higher in country A.
If the Bill and Melinda Gates Foundation were to buy out and destroy the patent for Combivir, which of the following would NOT be one of the effects?
Drug companies would have no incentive to create new and better drugs.
Which of the following statements is TRUE?
High profits in an industry give entrepreneurs an incentive to enter that industry.
In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct?
I. An increase in demand will cause the short-run price to rise above $23, but in the long run, the price will return to $23. II. An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal. III. A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits.
Why do similar jobs have similar compensation packages?
I. The law of demand and supply will ensure that the salaries will be similar over time.
Firms in competitive industries:
I. can only charge a price equal to the market price. II. cannot charge any more than the market price. III. will earn less profit if they charge less than the market price.
Workers earn higher wages:
I. when the demand for labor rises in an industry. II. the greater the amount of human capital market issues they possess. III. the more dangerous the job they perform.
A market is considered perfectly competitive if:
II. there are many sellers, each small relative to the total market. III. the product sold is similar across sellers.
Which of the following statements is correct?
If the elasticity of demand is greater than the elasticity of supply, sellers will receive more of the subsidy.
Workers in many foreign countries such as India are paid much less for work that is very similar to the work done by workers in the United States. One reason for this is that:
India is a less productive economy.
Why has the Earned Income Tax Credit (EITC) increased employment among single mothers?
It provides a certain amount of tax relief for families with children.
There are two major theories of why education leads to higher earnings (though they are not mutually exclusive): signaling and the building of labor market issues. If the signaling theory is dominant, how would the average wage for college graduates change if everyone received a college degree?
It would decrease because it would be more difficult to differentiate workers.
Which of the following is NOT a possible cause of the increasing return to college education since the 1980s?
More people are obtaining a college degree, thus increasing the wages of workers with a college degree.
To maximize profit, a firm in a competitive market increases output until:
P = MC.
In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?
P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0
Why are there more births in the United States in late December than in early January?
Parents get a tax deduction if babies are born before the year end.
What condition is necessary in a constant cost industry?
Prices of the industry's inputs do not change as the industry expands.
Which one of the following statements about subsidies is NOT correct?
Subsidies always increase the gains from trade for producers.
Which of the following statements is TRUE regarding subsidy?
Suppliers receive more benefit of a subsidy if the elasticity of supply is less than the elasticity of demand.
Which of the following statements is TRUE?
The rising returns to human capital labor market issues may be attributable to the growing importance of advanced technology.
Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
The water used to grow California cotton is highly subsidized by the government.
Which of the following statements is FALSE?
There is almost no return to getting more education beyond a bachelor's degree.
Total profit for a given quantity of output can be calculated as:
Total Revenue - Total Costs.
A monopoly can be defined as a single firm in a given market.
True.
A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation.
True.
Firms in competitive industries should adhere to: 1) expanding output if MR > MC, and 2) reducing output if MC > MR.
True.
In a perfectly competitive market, sellers who set their price above the market price will sell nothing.
True.
Marginal revenue is always equal to the price of the product for a competitive firm.
True.
Some workers might prefer less safety and more pay than more safety and less pay.
True.
The competitive firm's demand curve is horizontal at the market price.
True.
The long run is the period after all exit and entry has occurred.
True.
The more and better substitutes a good has, the more elastic the demand for that good will be.
True.
The primary reason that AIDS drugs are priced well above cost is monopoly power.
True.
The productivity of the firm is directly related to the productivity of an individual worker.
True.
The short run is the period before exit or entry can occur.
True.
We expect jobs that are inherently more dangerous to pay higher wages, which is a compensating differential.
True.
Which of the following statements is correct for a specific good or service?
Whoever bears the burden of a tax also receives the benefit of the subsidy.
Fishermen who go deep-sea crab fishing (like those on The Deadliest Catch) earn:
a compensating wage differential.
Truck drivers who drive on the ice roads in Alaska and Canada (like those on Ice Road Truckers) earn:
a compensating wage differential.
Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?
a.) There would be an increase in consumer surplus. b.) The deadweight loss in the market would decline. c.) The future supply of new drugs would decrease.
The market wage of computer programmers is determined by:
an upward sloping supply curve of labor and a downward sloping demand curve for labor.
When wages decrease, firms will hire more workers who will be:
assigned to the least important tasks.
If the market wage for electrical engineers in the United States is $50 per hour, then we know that the marginal product of electrical engineers is:
at least $50 an hour.
A high demand for labor in one industry will:
attract workers from another industry.
In economic development, brain drain refers to the tendency of a developing country's most skilled workers leaving to work in a wealthy country. Why can skilled foreign workers from poor countries make so much more money in wealthy countries?
because the demand for skilled workers is higher in wealthy countries.
A subsidy will cause the biggest deadweight loss when:
both supply and demand are elastic.
In general, wages are determined:
by the skills of the worker and the productivity of the entire economy.
A tax on the seller of a product:
causes the supply curve for the product to shift to the left.
Economic theory suggests that college graduates receive higher wages than those with only a high school education because:
college graduates are more productive.
Lawyers who work at law firms tend to work very long hours and must be available for their clients at any time, day or night. Lawyers who work as public defenders, on the other hand, work hours that are more normal. What idea suggests that lawyers who work at law firms will earn more than public defenders on average?
compensating differential
A government's decision to subsidize the production of insulin for people with diabetes would mostly benefit the:
consumers of insulin.
The economic inefficiency of a monopolist can be measured by the:
deadweight loss involved relative to a competitive firm.
When labor demand decreases, the wage is expected to:
decrease.
Which of the following is NOT a source of monopoly power?
decreasing marginal costs.
If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:
demand for the firm's output is perfectly elastic.
Monopolies will have more market power when one firm owns an input that is difficult to duplicate and the:
demand for the product is inelastic.
Average cost equals total cost ______ quantity.
divided by
Unlike price floors, subsidies:
do not create surpluses.
An industry is said to be perfectly competitive when:
each firm has virtually no influence over the price of its product.
Nobel Prize winning economic historian Douglass North argues that:
economic growth was slow until patent laws were created to protect innovation.
The signaling theory of education suggests that:
educated people are paid more not because they have more skills, but because their degree proves they are intelligent and conscientious.
Which of the following best illustrates a product sold in a perfectly competitive market?
eggs.
To be efficient, the revenue from taxation must provide goods that have benefits that _________ the deadweight loss caused by the taxation itself.
exceed.
High prices charged by monopolists will cause the monopolists':
gains to be less than the lost consumer surplus
Monopolists are people, too. This means that:
gains to monopolists count just as much as losses to consumers.
Firms are profitable when price is:
greater than average cost.
To maximize profit, firms should keep producing as long as marginal revenue is:
greater than marginal cost.
A firm is willing to hire a worker when the marginal product of labor is:
greater than the wage.
The wages of office cleaners in the United States are ____ than the wages of office cleaners in India because ____.
greater; American offices are more productive, hence more valuable to keep clean
A college education in the United States:
has been shown to earn a wage premium.
A wage subsidy would:
increase the demand for labor, increase the wages received by workers, and lower the wages paid by firms.
If the price of output in an industry rises, firms in that industry will _____ labor.
increase their demand for
To maximize profit, a firm will hire workers when the _______ in revenue from hiring an additional worker ________ the worker's wage.
increase; is greater than
We often think of technology and labor as substitutes for each other, but technology can lead to the hiring of more labor if it:
increases the marginal product of labor.
Which of the following is NOT a source of monopoly power?
inelastic demand for the product
Apple's iPod provides an example that market power may arise from:
innovation.
Saudi Arabia has market power in the world's oil markets because:
it controls a significant fraction of the world's oil supply.
If a single supplier produces a good with many good substitutes, then:
it will have little control over the market price.
Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is:
known as deadweight loss.
In the Wealth of Nations, Adam Smith wrote: Pecuniary wages and profit, indeed, are everywhere in Europe extremely different according to the different employments of labour and stock. But this difference arises partly from certain circumstances in the employments themselves, which, either really, or at least in the imaginations of men, make up for a small pecuniary gain in some, and counterbalance a great one in others; and partly from the policy of Europe, which nowhere leaves things at perfect liberty. (Book 1, Chapter 10) Which idea was Smith describing?
labor market issues
Firms earn negative profit when price is:
less than average cost.
The increase in a firm's revenues created by hiring an additional worker is called:
marginal product of labor.
The market demand curve for labor is based on the:
marginal product of labor.
Which of the following is NOT a source of monopoly power?
marketing.
Modern theories of economic growth emphasize that monopolies:
may sometimes be necessary for innovation and economic growth.
In the long run, demand is ______ the short run.
more elastic than in
A flat firm-level demand curve means:
no market pricing power.
A crime scene cleaner earns about three to four times more than an office cleaner, even though neither job requires a college degree. This difference in wages:
reflects a compensating differential.
If a pharmaceutical company discovering a new drug is not granted a patent to retain its monopoly power on the drug,:
research and development in discovering new drugs will decrease.
If Homer operates a small bakery and sells donuts for $4/dozen, he should:
sell an additional dozen donuts as long as the marginal cost of producing an additional dozen donuts is less than $4.
Firms in a perfectly competitive industry maximize profits by:
setting a price equal to the market price.
When a tax is imposed on consumers the demand curve will:
shift downward by the amount of the tax.
A subsidy is:
similar to a reverse tax.
The market supply curve for labor:
slopes up.
The individual supply curve for labor:
starts sloping up and then bends back as wages rise.
Not only do both wage subsidies and minimum wages increase wages, but:
subsidies increase employment, whereas minimum wages reduce it.
A _______ creates a situation in which the price received by sellers _______ the price paid by buyers.
subsidy; exceeds
The difference between what buyers pay for a unit of a good and what sellers receive is known as the:
tax.
Marian Hossa was paid $7.4 million by the Detroit Red Wings for the 2008Ð2009 season. We can conclude that:
the Red Wings expected Marian Hossa to increase the team's revenue by at least $7.4 million.
A firm will continue to hire workers as long as:
the marginal product of labor is greater than the wage.
A single person's supply curve for labor slopes down when:
the person starts taking part of their income as leisure.
The question of who pays the greater amount of a commodity tax is determined by:
the relative elasticities of demand and supply.
It is possible for an individual to have a downward-sloping labor supply curve if:
the wage increases enough that a worker may decide to work less and enjoy the income.
If the price of the AIDS drug Combivir was driven down to marginal cost by competition:
there would be less incentive to invest in creating the next improved AIDS drug.
Because Colgate owns patent number 5,547,091, only Colgate sells toothpaste with a flip-top cap, while others use the more traditional screw top. A patent probably wasn't a necessary incentive for Colgate to develop the flip-top cap, so why did it patent the cap?
to establish market power.
Profit is defined as:
total revenue minus total cost.
The total amount of money that a firm receives from sales of its output is called:
total revenue.
Compared with a similar job that requires little human capital labor market issues, a job that requires a large amount of human capital labor market issues will likely pay:
twice the wage rate.
The amount of money that the firm pays for its inputs is called:
variable cost.
The general rule of hiring workers is to hire:
workers if they contribute more to the firms' revenues than the firm's costs.
