Econ Final Exam
Suppose the price of salt increases by 25 percent and, as a result, the quantity of pepper demanded (holding the price of pepper constant) decreases by 3 percent. The cross-price elasticity of demand between salt and pepper is In this example, salt and pepper are If so, then the cross-price elasticity of demand between salt and pepper would be
-.12 complements positive
Would this tax on soft drinks be considered efficient?
Yes, because it imposes a small excess burden (deadweight loss) relative to the tax revenue it raises.
Which costs are affected by the level of output produced?
variable costs
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
Trade-offs force society to make choices, particularly when answering the following three fundamental questions
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
With respect to consumption, individuals and countries
can, through trade, consume beyond their production possibilities frontiers
a. To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output. __ b. The success of Pepsi's LIFEWTR and Coke's smartwater leads more firms to begin producing premium bottled water. ___ c. In the six months following the Japanese earthquake and tsunami in 2011, production of automobiles in Japan declined by 20 percent____
4,3,1
Suppose a consumer is trying to decide how much to spend on housing and how much to spend on all other (non-housing) consumption. The economic model of consumer behavior predicts that the consumer will
choose the combination of housing and non-housing consumption that makes her as well off as possible from among the combinations of housing and non-housing items she can afford.
How do externalities in the production of college educations result in market failure Because of externalities, the market for college educations will
provide insufficient college educations.`
The effect of an increase in demand is a______ the demand curve
shift of
What is meant by productive efficiency? Productive efficiency is
when a good or service is produced at lowest possible cost.
Suppose the price of pepper increases by 10 percent and, as a result, the quantity of salt demanded (holding the price of salt constant) increases by 5 percent. The cross-price elasticity of demand between pepper and salt is In this example, pepper and salt are_______ If so, then the cross-price elasticity of demand between pepper and salt would be
.50 substitutes negative
When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand? If demand is perfectly elastic, then what is the effect of an increase in price?
0 a decrease in quantity demanded to zero
Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational?
When we assume the managers at Microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality.
Is it possible to price discriminate across time? Briefly explain.
Yes. Firms can charge higher prices at times when consumer demand is less elastic and lower prices at times when consumer demand is more elastic.
The voting paradox refers to the __________ of majority voting to always result in __________.
failure; consistent outcomes
A tax is efficient if it imposes a large excess burden relative to the tax revenue it raises.
false
What is comparative advantage?
the ability to produce a good or service at a lower opportunity cost than other producers
Suppose the United States has two utilities, Commonweath Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year. However, the marginal cost of reducing a ton of pollution for Consolidated Electric is $200 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is $300 per ton. The government's goal is to cut sulfur dioxide pollution in half (by 20 million tons per year). If the government issues 10 million tradable pollution permits to each utility, what will be the cost of eliminating half of the pollution to society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of______ million per year. If the permits are not tradable, what will be the cost of eliminating half of the pollution? If permits cannot be traded, then the cost of the pollution reduction will be ______million per year.
$4,000; $5,000
Suppose that legalizing the use of cocaine would decrease its price by 79 percent. If the price elasticity of demand for cocaine is -2.25, what would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine? __________ percent. Suppose instead that the price elasticity of demand for cocaine is -0.11. What would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine? The higher the absolute value of the price elasticity of demand for cocaine, the______the increase in cocaine use that would result from legalization
177.75 8.69% greater
Refer to the graph to the right. What is the opportunity cost of moving from point B to point C?
20 sedans
Refer to the to graph on the right. Which level of output in the graph below represents the minimum efficient scale? Which size bookstore is more likely to experience diseconomies of scale?
20,000 books A bookstore selling 80,000 books per month
The diagram to the right illustrates a hypothetical demand curve representing the relationship between price (in dollars per unit) and quantity (in 1,000s of units per unit of time).
2000
Suppose that you are the vice president of operations of a manufacturing firm that sells an industrial lubricant in a competitive market. Further suppose that your economist gives you the following supply and demand functions: Demand: Qd= 50-p Supply: Qs= -10+p Consumer surplus_____ Producer Surplus____
25.00 50.00
How can a country gain from specialization and trade?
A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.
What is a market failure?
A market failure is when the market fails to produce the efficient level of output.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
Which of the following illustrates the law of supply?
An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied
Which of the following events would cause the supply curve to decrease from S1 to S2(shift to left)
An increase in the price of inputs.
Which areas represent the revenues collected by the government from the tax?
B + C + E + F
What is perfect price discrimination?
Charging every consumer a different price equal to their willingness to pay
Suppose you were assigned the task of choosing a price that maximized economic surplus. What price would you choose? Why?
Choose the price where the quantity demanded equals the quantity supplied because that is the equilibrium condition.
In the 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28 industries, Balassa found that the United States had an absolute advantage In these circumstances, would there have been any gain to the United States from importing any of these products from Britain? Explain.
Even with an absolute advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage.
How do property rights affect externalities and market failure?
Externalities and market failure will result from the difficulty of enforcing property rights.
Economists assume that the only reason people take the actions they do is in response to economic incentives.
False
If consumers cannot resell products, which of the following is true?
Firms can practice price discrimination.
According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest.
In Chicago, Green Summit appears to be running nine different restaurants, with names such as Butcher Block, Milk Money, and Leafage. In reality all of the food is cooked in one central kitchen and none of the restaurants have a physical location. The brands exist only as Web sites and on the containers the food is delivered in. An article on chicagotribune.com quoted the firm's CEO as saying: "I don't really think anybody cares. They just want really high-quality food." If nobody cares whether their restaurants exist as physical places, why does Green Summit have a Web site for each restaurant and packaging printed with each restaurant's name and logo? Aren't Green Summit's costs higher than if they just had a single name and one Web site? Does Green Summit's strategy increase or decrease productive efficiency in the restaurant business? Briefly explain. Does the strategy increase or decrease allocative efficiency? Briefly explain. Does it increase or decrease the well-being of its customers? Briefly explain.
Green Summit is trying to differentiate its product to appeal to different consumers. Decreases productive efficiency by producing above the lowest average cost. Increases allocative efficiency by allowing products to better suit consumer preferences Increases consumer well-being with increased variety.
What is the law of one price?
Identical products should sell for the same price everywhere, assuming no transactions costs.
A student makes the following comment: I can understand why a perfectly competitiveLOADING... firm will not earn profits in the long run because a perfectly competitive firm charges a price equal to marginal cost. But a monopolistically competitiveLOADING... firm can charge a price greater than marginal cost, so why can't it continue to earn profits in the long run? How would you answer this question?
In the long run, competition shifts the firm's demand curve leftward until price equals average total cost at the quantity where marginal revenue equals marginal cost. At this quantity, price is greater than marginal cost.
What is the difference between the short run and the long run?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
What does increasing marginal opportunity costs mean?
Increasing the production of a good requires larger and larger decreases in the production of another good.
In a famous essay on the market system, the economist Leonard Read discussed how a pencil sold by the U.S. firm Eberhard Faber Pencil Company (now owned by Paper Mate) was made. He noted that logging companies in California and Oregon grew the cedar wood used in the pencil. The wood was milled into pencil-width slats at a factory in San Leandro, California. The graphite for the pencil was mined in Sri Lanka and mixed with clay purchased from a firm in Mississippi and wax from a firm in Mexico. The rubber was purchased from a firm in Indonesia. Which of the following statements is true?
It was not necessary for the managers of any of firms that participated in the making of the pencils to know how the components they produced were used to make pencils.
Briefly explain whether you agree with the following statement: "A lower price in a market always increases economic efficiency in that market."
I disagree, because economic efficiency declines if price falls below the market equilibrium.
Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city. Similar buildings in the neighborhood rent for $4,000 per month. Jill is considering selling her building and renting space in the suburbs for $3,000 per month. Jill decides not to make the move. She reasons, "I would like to have a restaurant in the suburbs, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $3,000 per month." What do you think of Jill's reasoning?
Jill is incorrectly ignoring the opportunity cost of using the building she owns.
Suppose that Lichtenstein and Luxembourg currently have identical production possibilities frontiers but that Lichtenstein devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, whereas Luxembourg devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? When a country devotes resources to producing capital goods, then in the future that country's production possibilities frontier will In particular, over the next 10 years, the production possibilities frontier for Luxembourg _______will shift out farther.
Luxembourg shift out along both axis Luxembourg
Which of the following statements about microeconomics and macroeconomics is correct?
Macroeconomics is the study of the economy as a whole.
According to a news story about the International Energy Agency, the agency forecast that "the current slide in [oil] prices won't [reduce] global supply." Would a decline in oil prices ever cause a reduction in the supply of oil?
No, a decline in oil prices would reduce the quantity of oil supplied, not the supply of oil.
An article in the New Yorker notes that: "The Bronx [borough of New York City] is home to 1.5 million people, two hundred thousand public-school students, eleven colleges and universities, and a single general-interest bookstore—a Barnes & Noble, located in the Bay Plaza shopping center..." The article also notes that this bookstore closed at the end of 2016. Would the only bookstore in the Bronx, or any city, be considered a monopoly? If so, why would it have closed?
No, because there are close substitutes for brick and mortar bookstores, such as online retailers like Amazon, it would not be a monopoly. The Bronx's only bookstore would have closed due to competition from firms offering close substitutes.
The chapter mentions that in 1965 married women with children worked an average of 32 hours per week while men worked an average of only 4 hours on housework—a total of 36 hours of housework. In 2016, the estimated average weekly hours of housework for women declined to 15.7, while the hours worked by men increased to about 9.7—a total of 25.4 hours of housework. Does the decrease in the total number of hours of housework—from 36 to 25.4—mean that families are willing to live in messier homes?
No, because there are more labor saving devices so less time is required.
At which point is the country's future growth rate likely to be the highest? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.(highest point on line)
Which point(s) are inefficient? Briefly explain why.
Point E because production there is not using all available resources.
What is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
What happens when consumption of a product is path dependent?
The cost of switching to a product with a better technology gives the product with the initial technology an advantage.
What is the focus of a command-and-control approach to reducing pollution?
The government imposing quantitative limits on the amount of pollution firms are allowed to generate.
Economic surplus is the sum of consumer surplus and producer surplus.
True
Suppose that there are three variables involved in the graph to the right: (1) quantity, (2) price, and (3) a third variable. Which of those variables causes the quantity to change from point C to point D in the graph?
The third variable
The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.
True
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
The substitution effect is the change in the quantity demanded of a good that results from ______________, holding constant the effect of the price change on consumer purchasing power.
a change in price making the good more or less expensive relative to other goods
A production possibilities frontier (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute
The price elasticity of supply always has
a nonnegative value
Refer to the graphs above. What do you expect to happen in this market as it approaches long-run equilibrium? If the market demand curve shifts to the right, how will a competitive firm's level of output change? A perfectly competitive firm is losing money in the short run, and its price is less than its average variable cost. In order to minimize its losses in the short run, this firm should
a shift to the right of the market supply curve as new firms enter The firm will increase its output, and its profits will increase. shut down
A monopoly is a market structure that is characterized by
a single seller of a good or service that does not have a close substitute.
A monopoly is a market structure that is characterized by Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
a single seller of a good or service that does not have a close substitute. If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
an independent court system
The public choice model
applies economic analysis to government decision making.
The monopolistically competitive firm sells _________ product and faces _________ demand curve.
a differentiated; a downward-sloping
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms
charge a price greater than marginal cost and do not produce at minimum average total cost.
What is the basis for trade?
comparative advantage
Why might consumers not act rationally? Consumers might
be overly optimistic about their future behavior
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the wineries—Jerry's Wine Emporium—raises the price of his wine by $5.00 per bottle. If the industry is perfectly competitive, the reaction of consumers would be to If the industry is monopolistically competitive, the reaction of consumers
buy wine from another winery. could be to remain loyal to Jerry's and pay the higher price.
Arbitrage means
buying a product at a low price and reselling it at a high price.
Arbitrage is
buying a product in one market at a low price and reselling it in another market at a higher price.
Suppose a firm practices price discriminationLOADING... to increase its profits. What potentially limits price discrimination? A firm's ability to practice price discrimination will be limited if
consumers who can buy a good at a low price resell it to consumers who would otherwise have to pay high prices.
Which of the following is not an example of an externality? An externality is not created by
consuming a pair of gap jeans
After Russia seized what had formerly been the Ukrainian territory of Crimea in February 2014, the United States and many other countries imposed economic sanctions that reduced the ability of Russia to engage in international trade. A columnist writing in the New York Times noted that, "If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster...." If the columnist is correct about the effect of the sanctions, then, in the long run, the sanctions will
decrease the economic well-being of the average Russian because Russia will have to produce some goods and services at a higher cost than its trading partners.
Suppose gasoline has few close substitutes available. If so, then an increase in the price of gasoline will likely
decrease the quantity of gasoline demanded by a relatively small amount.
Economies of scale happen when the firm's long run average total cost ________ as output increases
decreases
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale.
A natural monopoly occurs when
economies of scale are large enough so that one firm can supply the entire market at a lower average total cost than can two or more firms.
Is perfect price discrimination economically efficient? Perfect price discrimination is
efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.
What happens when the quantity demanded is very responsive to changes in price? The percentage change in quantity demanded will be
greater than the percentage change in price.
When there are many people involved in attempting to reach an agreement, the transactions costs are often _______ than the net benefits from reducing an externality. In such cases, a private solution to an externality problem _______ feasible.
higher; is not
In a perfectly competitive industry with constant costs, the long-run supply curve will be
horizontal
Which of the following is most likely to increase market power?
horizontal mergers
Consider the market for eggs illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium at a price of 5 cents and a quantity of 50 (thousand). If the price were 3 cents instead of 5 cents, then consumer surplus would In turn, producer surplus would Consequently, at a price of 3 cents, deadweight loss would equal Consequently, at a price of 3 cents, deadweight loss would equal
increase by area C and decrease by area E decrease by areas C and F areas E and F
Many firms advertise. What effect does advertising have on firm profits? One possible effect of advertising is to
increase profits by shifting the demand curve for the product to the right.
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be
increasing
In the diagram to the right, point F indicates an
inefficient results
The price elasticity of demand for a particular brand of raisin bran is, in absolute value
larger than the price elasticity of demand for all breakfast cereals
Which type of efficiency does a monopolistically competitive firm achieve in the long run?
neither allocative nor productive efficiency
The more cell phones in use, the more valuable they become to consumers. This is an example of
network externalities.
What characterizes perfectly competitive markets? Perfectly competitive markets have
no barriers to new firms entering
Define rivalry and excludability and use these terms to discuss the four categories of goods. Rivalry is the situation that occurs when Excludability is the situation that occurs when Private good _____ and ______ A public good _____ and ______ A public good _____ and______ A common resource ______ and _____
one person's consuming a unit of a good means no one else can consume it. anyone who does not pay for a good cannot consume it. rival/excludable nonrival/nonexcludable nonrival/excludable rival/excludable
What role does utility play in the economic model of consumer behavior? When modeling consumer behavior, utility
reflects the enjoyment a consumer receives from consuming a particular set of goods and services.
Suppose a firm, like Comcast Cable, spends a great deal of money to convince a local governement that it should be the only cable provider of a region. Or a union, like the UAW, spends a great deal of money lobbying the government to create legislation granting unions special bargaining rights. These examples are created by
rent seeking
When a firm advertises a product, it is trying to shift the demand curve for the product to the ________ and make it more ________.
right; inelastic
A private good is rival and excludable, a public good is nonrivalrous and nonexcludable, a quasi-public good is nonrivalrous and excludable, and a common resource is rival and nonexcludable.
rival and excludable nonrival and non excludable non rival and excludable rival and nonexcludable
Assume fish in a public lake are a common resource. If so, then fish in a public lake are _______ and _________.
rival; nonexcludable
According to Joseph Schumpeter, what does economic progress depend on?
technological change in the form of new products
Consumer surplus is used as a measure of a consumer's net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit. Consumer surplus gives us the benefit to consumers
that remains after subtracting the price.
What does the short-run production function hold constant? A short-run production function holds constant
the amount of capital.
The private benefit is ________, while the social benefit is ________.
the benefit received by the consumer of a good or service; the total benefits from consuming the good or service
Which of the following is an example of a transaction cost associated with negotiating the reduction of a negative externality? An example of a transaction cost is How might transaction costs affect private solutions to externality problems? Transaction costs
the cost associated with drawing up a binding contract to reduce a negative externality may make private solutions to reduce negative externalities no longer feasible.
Refer to the graph to the right. A tax is imposed in the market for cigarettes that shifts the supply curve from S1 to S2. What area corresponds to the revenue collected by the government from the tax?
the dark grey area
Deadweight loss is
the reduction in economic surplus resulting from a market not being in competitive equilibrium.
What explanation might an economist provide why some people smoke cigarettes when such behavior can lead to health consequences? Some people likely smoke cigarettes because
their preferences are not consistent over time
According to the law of demand,
there is an inverse relationship between price and quantity demanded
Which Congressional Act was passed in 1936 to outlaw price discrimination that reduces competition?
the Robinson-Patman Act
In a perfectly competitive industry with increasing average costs, the long-run supply curve will be
upward sloping
In discussing dividing up household chores, Emily Oster, an economist at the University of Chicago, advises that: "No, you shouldn't always unload the dishwasher because you're better at it." Even if you are better at unloading the dishwasher than your spouse, you shouldn't always be the one to unload it because
you may be even better at some other household task and must consider the opportunity cost.
Is zero economic profit inevitable in the long run for a monopolistically competitive firm?
No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____.
consumer; producer; maximum; equilibrium
Discussions of the economic results of rent control and of federal farm programs would be considered ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ________ analysis
positive; normative
Suppose income increases by 10 percent and, as a result, the quantity of a particular brand of automobile demanded (holding the price for this particular automobile constant) decreases by 16 percent. The income elasticity of demand for this brand of car is This particular brand of automobile is a(n) ______good. In another example, suppose market research shows that a particular brand of truck is a normal good and a necessity. If so, then the income elasticity of demand for this truck is
-1.60 inferior less than 1 but greater than 0
Suppose you own a bookstore where you currently sell 20 John Grisham mystery novels per day at a price of $39 per book. However, if you were to reduce the price to $30, then you would sell 32 John Grisham mystery novels per day. Using the midpoint formula, what is the price elasticity of demand for John Grisham mystery novels? In this price range, the demand for John Grisham mystery books is
-1.77 elastic
Which of the following statements about microeconomics and macroeconomics is correct?
. Microeconomics involves the study of how households and firms make choices.
Suppose income increases by 25 percent and, as a result, the quantity of a particular brand of automobile demanded (holding the price for this particular automobile constant) increases by 37 percent. The income elasticity of demand for this brand of car is_____ This particular brand of automobile is a(n) _______good. In another example, suppose market research shows that a particular brand of truck is a normal good and a necessity. If so, then the income elasticity of demand for this truck is_____
1.48; normal; less than 1 but greater than 0.
Suppose the price of tires increases from $70 per tire to $110. In response, the quantity of tires supplied increases from 20,000 to 40,000 tires. What is the price elasticity of supply for tires? Using the midpoint formula, the price elasticity of supply is
1.50
Use the graph to the right of the market for cigarettes to answer the following questions. According to the graph, how much is the government tax on cigarettes? What price do producers receive after paying the tax? If the tax were collected from the buyers of cigarettes, the graph would differ from the one shown here by having With the tax being collected from the buyers instead of the producers, the new equilibrium price that they would pay the producers will
1.50 5.00 demand shift down by the tax per pack instead of supply shifting up by the tax per pack. decrease
Sometimes questions that involve graphs will ask you to consider the effect of a changing factor or factors. Problem statement: → The line labeled D1 in the graph to the right shows the number of cups of lemonade that Caroline and Emily can sell at their lemonade stand at various prices. Caroline and Emily have noticed that they sell more lemonade when it's hotter. Click anywhere on the graph to open a window with a control labeled Temperature. If you use the slider to change the temperature, the line will shift. Change the temperature from 80 degrees to 100 degrees. Question: → At a price of $0.50, how many more or fewer cups of lemonade do Caroline and Emily sell when the temperature is 100 degrees than when the temperature is 80 degrees?
10
Refer to the graph to the right. What is the optimal quantity of this public good?
15 units
Refer to the graph to the right. What is the value of the area of rectangle A? Refer to the new graph to the right. What is the value of the shaded area?
250,000 6250
What is the value of the Herfindahl-Hirschman Index (HHI) when there are four firms in an industry and each firm has an equal market share? The Department of Justice and the FTC consider markets as highly concentrated if the postmerger HHI for a proposed horizontal merger is
2500 above 2500
The diagram to the right shows a market in which a price floor has been imposed. Identify the following (enter all values as integers). a. The deadweight loss is ____ b. The transfer of consumer surplus to producers is ____ c. Producer surplus with this price floor is ____ d. consumer surplus with the price floor is___
40,000; 40,000; 100,000; 20,000
Suppose the demand for a Czech novel translated into English is perfectly inelastic. Assume the initial price of the translated novel is $26.00 and the quantity demanded is 438 copies per year. If the price of the translated novel increases by $3.00, then the quantity demanded will be ______copies per year. Next, suppose the demand for a mystery novel by Dean Koontz is infinitely elastic. In this example, assume the initial price of the novel is $28.00 and the quantity demanded is 12 thousand copies per year. If the price of the mystery novel increases by $2.00, then the quantity demanded will be _____copies per year.
438;0
Suppose the demand for a Czech novel translated into English is perfectly inelastic. Assume the initial price of the translated novel is $30.00 and the quantity demanded is 555 copies per year. If the price of the translated novel increases by $2.00, then the quantity demanded will be _____copies per year. Next, suppose the demand for a mystery novel by Dean Koontz is infinitely elastic. In this example, assume the initial price of the novel is $28.00 and the quantity demanded is 55 thousand copies per year. If the price of the mystery novel increases by $1.00, then the quantity demanded will be___ copies per year.
555;0
Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $3,000, buys gasoline ($2.20 in gas is required to mow each yard), and pays a helper $25.00 per yard. Prior to opening the lawn company, Charles earned $8,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 1 percent per year in the bank and that the mowing equipment depreciates at 20 percent per year. Charles plans to mow 200 yards per year. What is Charles's implicit cost of production?
8630
Suppose that you have been hired to analyze the impact on employment from the imposition of a minimum wage in the labor market. Further suppose that you estimate the supply and demand functions for labor, where L stands for the quantity of labor (measured in thousands of workers) and W stands for the wage rate (measured in dollars per hour) Demand= Ld= 90-5w Supply= Ls= 5w The competitive market equilibrium wage is ___per hour. The competitive market equilibrium quantity of labor is___ thousand workers Now suppose the proposed minimum wage is $11. How large will the surplus of labor in this market be? With a minimum wage of $11 per hour, the surplus will be ___ thousand workers.
9, 45, 20
An article about record high avocado prices discussed how avocado crops had suffered from hot weather, droughts, and an invasive beetle that kills avocado trees. Use a demand and supply graph of the avocado market to illustrate the effect of the hot weather, droughts, and invasive beetle. How are producer surplus and consumer surplus affected? Refer to the graph at right, and the shaded areas designated by letters A through N. a. The impact of the hot weather, drought, and an invasive beetle results in a consumer surplus in the market for avocados represented by area(s) b. The impact of the hot weather, drought, and an invasive beetle results in a loss of producer surplus equal to areas There is a gain of producer surplus equal to area(s)
A. J,F,G B
Which of the following are effects of monopoly?
A. Monopoly causes an increase in producer surplus. B. Monopoly causes a reduction in economic efficiency. C. Monopoly causes a reduction in consumer surplus. D. All of the above are effects of monopoly.<----
Which of the following reasons do economists use to explain why people are overweight?
A. People's preferences are not consistent over time. B. People overvalue the utility from current choices. C. People undervalue the utility to be received in the future. D. All of the above explain why people are overweight.<--
When the government imposes price floors or price ceilings, which of the following occurs?
A. Some people win. B. There is a loss of economic efficiency. C. Some people lose. D. All of the above occur.<--
Refer to the graph to the right. When 15,000 cups of tea are produced and consumed per month, which of the following is true?
A. The marginal benefit to buyers of the last cup of tea is equal to the marginal cost of producing the last cup of tea. B. The level of output is economically efficient. C. The sum of consumer and producer surplus is maximized. D. All of the above are true. <--
Which of the following mistakes do consumers commonly commit when making decisions?
A. They take into account monetary costs but ignore nonmonetary opportunity costs. B. They are unrealistic about their future behavior. C. They fail to ignore sunk costs. D. All of the above are mistakes consumers commonly commit when making decisions <---
The editorial argues that buying and selling kidneys should be legalized: "With proper regulation, a kidney market would be a big improvement over the current sorry state of affairs. Sellers could be checked for disease and drug use, and cared for after operations...Buyers would get better kidneys, faster. Both sellers and buyers would do better than in the illegal market, where much of the money goes to middlemen." Do you agree with the argument? Should the government treat kidneys like other goods and allow the market to determine price?
A. Yes. Legalizing the exchange of kidneys would increase the quantity supplied, benefiting those who need a kidney but are unable to obtain one due to the shortage. B. No. Legalizing the exchange of kidneys would hurt those who otherwise would have been supplied a kidney at no cost. C. Yes. Legalizing the exchange of kidneys would benefit consumers by lowering the price. Your answer is not correct. D. Yes. Legalizing the exchange of kidneys would hurt suppliers by decreasing the amount they could receive for providing a kidney. E. Both a and b are reasonable arguments. <-----
An example of technological change is
A. a firm rearranging the layout of a retail store to increase sales. B. a firm installing faster or more reliable machinery or equipment. C. a hurricane damaging firm facilities. D. both a and b E. all of the above. <--
When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include
A. an omitted variable. B. reverse causality. C. both a and b. <-- D. None of Above
What role do they play in the working of a market system? Private property rights
A. encourage a significant number of people to be willing to risk funds by investing them in business. Your answer is not correct. B. encourage firms to spend money on research and development. C. determine what goods and services will be produced. D. are the basis for international trade. E. both a and b. <--
Economic efficiency
A. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. B. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. C. is a market outcome in which every individual is better off than they would be at any other market outcome. D. both a and b <----- E. all of the above.
Externalities affect the economic efficiency of a market equilibrium by causing a difference between
A. the private cost of production and the social cost of production. B. the private benefit of consumption and the social benefit of production. C.consumer surplus and producer surplus. D. both a and b. <---- E. all of the above.
When a positive technological change occurs,
A. the same output can be produced with fewer inputs. B. more output can be produced from the same inputs. C. Either (a) or (b). <--- D.None of the above.
Economists define economic efficiency in this way
A. to help policymakers understand the negative consequences of taxes. B. to help policymakers understand the negative consequences of price floors. C. to illustrate the benefits of a competitive market equilibrium. D. to help policymakers understand the negative consequences of price ceilings. E. all of the above. <---
Why are independent courts important for a well-functioning economy? Independence is necessary for courts:
A. to make their decisions based on the law. B. to make their decisions free of influence from other parts of the government. C. to make their decisions free of intimidation by criminal gangs. D. to make their decisions free of influence from people with powerful political connections. E. all of the above. <--
Many universities and corporations offer a health wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary, but typically consist of employees completing a health assessment, receiving a healthy living program, and monitoring their monthly health activities. Corporations and universities are willing to pay employees to take care of themselves because a healthier workforce The incentive of employees to improve or maintain their health once they obtain health insurance may be ______ impacted. When an employer offers a wellness program to its employees, the health insurance premiums the employer pays on behalf of the employees are likely to
A. translates into lower costs, in part by reducing illness-related absenteeism and premature retirements. B. performs more efficiently, thereby improving overall productivity in the workplace. C. is a happier workforce and thus less likely to become confrontational with management. D. all of the above. E. A and B only. <-- Negatively decrease
Rank the following four goods from lowest income elasticity of demand (1) to highest income elasticity of demand (4). a.Bread __ b. Pepsi __ c. Mercedes-Benz automobiles __ d. Laptop computers __
A.1 B.2 C.4 D.3
Which of the following events would create economic growth, that is, shift the production possibilities frontier outward?
A.An increase in the available natural resources. B.An increase in the available labor. C.An increase in technology that affects the production of both goods. D.All of the above. <--
Will apple producers benefit from the price floor?
A.Apple producers who are able to sell their apples at the $14 price per crate will benefit. B.Apple producers who are not able to sell their apples will not benefit. C.Total revenue for apple producers as a group will decrease from $198 million to $168 million. D.Both a and b. E.All of the above. <--
When is market failure likely to arise?
A.Market failure is likely to arise from a market surplus. B.Market failure is likely to arise from scarcity. C.Market failure is likely to arise from a market shortage. D.Market failure is likely to arise when it is difficult to enforce property rights.<-------- E.Market failure is likely to arise when property rights are incomplete. <-------
Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the graph?
A.Whenever the marginal product of labor is greater than the average product of labor, it pulls the average product of labor up. Your answer is not correct. B.The marginal product of labor initially increases due to specialization and then decreases due to diminishing returns. C.The average product of labor equals the marginal product of labor when the marginal product of labor is at its maximum. D.Both a and b. <----- E.All of the above.
As new firms enter the market, a monopolistically competitive firm can maintain profits by
A.discovering new ways of differentiating its product. B. securing tax breaks and/or subsidies from government. C.finding new ways of lowering the cost of producing its product. D.All of the above. E.A and C only. <------
What is price discrimination? Price discrimination is when
A.firms charge a higher price for a product when it is first introduced and a lower price later. B.firms charge a higher price to customers who are less sensitive to price and a lower price to consumers who are more sensitive to price. C.firms charge each consumer a different price equal to that consumer's willingness to pay. D.both a and b. E.all of the above. <----
The government can block the entry to a market through Which of the following rights is given to the holder of a patent?
A.granting a public franchise. B.granting copyright. C.granting a patent. D.All of the above <---- the exclusive right to a new product for a limited period
Indicate which of the following statements represent positive analysis and which represent normative analysis. a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents b. The federal government should spend more on AIDS research. This represents c. Rising paper prices will increase textbook prices. This represents d. The price of coffee at Starbucks is too high. This represents
A.positive analysis B.normative analysis C.positive analysis D. Normative analysis
What are the sources of externalities and market failure?
A.the difficulty of enforcing property rights in certain countries B. incomplete property rights C. a lack of understanding of the market system D. Both (a) and (b) <--
Characterize utility maximization. When consumers maximize utility,
A.they consume each good up to the point where the marginal utility per dollar spent is the same for each good. B.the marginal rate of substitution equals the price of the good on the horizontal axis divided by the price of the good on the vertical axis at the point of optimization. C.the slope of the indifference curve equals the slope of the budget constraint at the point of optimization. D.both a and b. E. all of the above. <----
Consider a form of public consumption such as wearing clothes. An individual's demand for clothes depends on
A.the individual's tastes and preferences. B.the cost of the clothes. C.other consumers' consumption of clothes. D.both a and b. E.all of the above.<---
What is the role of an entrepreneur?
A.to operate a business that produces a good or service B.to bring together the factors of production—labor, capital, and natural resources C.to take risks D.All of the above. <---
The late Nobel Laureate James Buchanan, who is one of the key figures in developing the public choice model, wrote: "The relevant difference between markets and politics does not lie in the kinds of values/interests that persons pursue, but in the conditions under which they pursue their various interests." Do you agree with this statement? Are there significant ways in which the business marketplace differs from the political marketplace?
Agree. Although both marketplaces are driven by self-interested behavior, self interest (e.g., rent seeking) in the political marketplace benefits a few at the expense of many, while self interest in the business marketplace benefits society as a whole.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Which of the following statements is correct?
An innovation is the practical application of an invention.
In the book publishing industry, how are firms able to price discriminate across time?
An author's most devoted book fans want to buy the author's books as soon as they are published.
Refer to the graph to the right. Which of the following represents the deadweight loss when the price of tea is $2.20 per cup?
Area C + E
Assume the figure to the right illustrates the market for houses for sale in a small city. Suppose the market price of houses is $250,000. How large will the resulting surplus be? What is the equilibrium price of houses?
At a price of $250,000, there will be 800 surplus houses. 150,000
Using the graph to the right, determine the effect on consumer surplus and producer surplus of a shift in the supply curve from S1 to S2. Consumer surplus increases by areas Producer surplus changes from areas Economic surplus changes from areas
BCD BE to areas EFG. ABE to areas ABCDEFG.
Bob consumes food and housing. Suppose his marginal utility from an additional unit of food is 40 and his marginal utility from an additional unit of housing is 200. Furthermore, suppose the price of a unit of food is $1.00 and the price of a unit of housing is $4.00. Can Bob increase his utility without changing his total expenditures on food and housing? Holding expenditures constant,
Bob can increase utility by spending less on food and more on housing.
The graph to the right shows your weekly demand for pizza. How was this demand curve constructed?
By computing your optimal consumption of pizza at the various prices shown, all other variables that affect your demand for pizza held constant.
A columnist for Forbes argues that: "Even if China is always better than Spain at producing textiles, if the best thing that Spain could be doing is textiles then that's what Spain should be doing." What does the columnist mean by writing that China "is always better than Spain" in producing textiles (which include clothing, sheets, and similar products)? Is the columnist arguing that Spain has an absolute advantage over China in producing textiles, a comparative advantage, or both? The columnist notes that, in fact, Spain exports significant quantities of textiles. If his description of the situation in China and Spain is accurate, briefly explain how Spanish firms are able to export textiles in competition with Chinese firms.
China can produce textiles at a lower cost in terms of resources than Spain can. A comparative advantage in producing textiles. Spain must be able to produce textiles at a lower opportunity cost than China can.
Which of the following is an example of logrolling? One way in which the government intervenes in the economy is by establishing a regulatory agency or commission that has authority over a particular industry or product. Because the firms that are regulated have an incentive to influence those actions, regulation may lead to
Congressman Hacker votes in favor of funding for a national park in Congresswoman Sleet's district because Sleet has promised to vote in favor of funding for a new highway in Hacker's district. regulatory capture
_________surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area_______
Consumer, A
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost, but they also have choices more suited to their tastes.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic? At what price is total revenue maximized? Total revenue is maximized when price equals __
Demand is elastic at all prices above $7.00 and inelastic at all prices below $7.00. 7
In 2017, Disney offered a complex variety of ticket options for admission to Walt Disney World. Disney charged different prices for one-day tickets to its Disney World parks depending on the time of the year. Summer and the winter holiday season had the highest ticket prices, while most weeks in the winter and spring had the lowest. But people buying tickets that could be used for more than one day paid the same price whatever time of the year they attended. Briefly explain what assumptions Disney must be making for this pricing strategy to increase its profit. A guide book to Disney World notes that families have many different ticket options to choose from and that: "Adding to the complexity, Disney's reservation agents are trained to avoid answering...which ticket option is 'best.' Many families, we suspect, become overwhelmed...and simply purchase a more expensive ticket with more features than they'll use." Can the complexity of Disney's ticket options be a form of price discrimination? If so, which people are likely to pay the higher ticket prices and which people the lower ticket prices?
Disney must believe that the market segment is less elastic during the summer and winter holiday season. Yes, this is a form of price discrimination because consumers who are less sensitive to price will spend less time investigating the options.
The graph to the right shows the effect of a tax imposed on soft drinks. Use this graph to answer the following questions. Which areas in the graph represent the excess burden (deadweight loss) of the tax?
D + G
EOG, a Texas-based producer of oil and gas, is called the "Apple of oil" because of the company's history of developing innovative methods to extract energy from shale rock. Using one of EOG's innovations, called iSteer, the company can navigate through thousands of feet of rock with a drill bit that allows for greater recovery of oil and gas than methods the company previously used. Briefly explain why economists would consider EOG's use of iSteer an example of technological change.
EOG's use of iSteer enables it to recover more oil and gas with a certain quantity of inputs.
Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?
Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the additional cost of producing it. Regulating price instead to equal marginal cost would result in the firm suffering a loss.
Which of the following statements about economics as a social science is correct?
Economics studies the actions of individuals
Which of the following statements is correct?
Economists use the terms firm, company, and business interchangeably.
How does the entry of new coffeehouses affect the profits of existing coffeehouses?
Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic.
In early 2017, a headline in the Wall Street Journal read: "Pricey Virtual-Reality Headsets Slow to Catch On." Is it possible that Sony, Facebook, and the other firms producing virtual-reality headsets were better off keeping prices high when initially offering them for sale even if the result was a smaller quantity sold? Briefly explain.
Firms may have been better off charging a higher price initially if the elasticity of demand was more inelastic.
In 2008, GoGo became the first company to offer Wi-Fi service on commercial aircraft. It provides the service primarily through ground-based cellular towers. Many air travelers find the $30 price GoGo charges on a cross-country flight to be very high because the speeds offered are too slow to stream movies or other content. GoGo faces competition from newer services that use satellites rather than ground-based towers, which enables them to offer much higher speeds at half the price GoGo charges. According to an article in the Wall Street Journal, in late 2016, GoGo was "rolling out an advanced satellite-based network" that would allow it to offer higher speeds at a lower price. A number of airlines, though, were considering switching to competing services. Will copying its competitors by offering a faster, lower-priced service likely allow GoGo to recapture its market share? Unlike its competitors, GoGo had to spend substantial amounts to build a network of ground-based cellular towers. It has to abandon those towers as it switches to a satellite-based network. Is the cost of those towers a disadvantage to GoGo as it competes with the new firms entering the industry? Briefly explain. In economic decison-making, the cost of the original towers isa sunk cost that is irrelevant.
GoGo may be able to recapture some of its market share by offering a better product. a sunk cost that is irrelevant.
In England during the Middle Ages, each village had an area of pasture, known as a commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used optimally?
Grazing created a negative externality, resulting in the commons being overused.
Firm A is a new producer in the market for good X, which is characterized by linear demand and supply curves. Initially, to attract customers, the firm prices its product low at $8 per unit. While the firm sells 1,000 units of the product at this price, there is a shortage in the market. This shortage can be cleared if price is increased to $10 per unit. The quantity demanded and supplied at this higher price will be 1,500 units. Dan Taylor, the firm's financial head, thinks that consumer surplus will certainly decline if the price is increased to $10 because consumers prefer to pay lower prices. Which of the following is a flaw in Dan's reasoning?
He is not accounting for the new consumers who will benefit from being able to consume the product.
Baseball writer Rob Neyer described attending a Red Sox game at Fenway Park in Boston and having a seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations
If they are offered a price greater than the price they would pay if they did not already own the good
Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
According to an article in the Wall Street Journal, reporting on Coca-Cola's results for the fourth quarter of 2016: "Higher pricing ... drove revenue growth of 8%." Based on this information, is the demand for the beverages Coke sells price elastic or price inelastic? Briefly explain
Inelastic, because a price increase raises Coca-Cola's revenue.
Suppose Apple is currently selling 2,000,000 iPods per year. However, managers at Apple are considering whether to increase production by 200,000 iPods. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Apple increase production by 200,000 iPods?
Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional iPods is required to answer this question.
Consider the figure to the right and assume that it is the market for health-care services. When the "baby boomer" generation retires, the number of people who require health care increases by 30%, and, as a result, the number of health-care providers also increases, but by only 25%. What is the effect on the price of health-care services over time?
It increases because demand increased by more than supply.
The following excerpt is from a letter sent to a financial advice columnist: "My wife and I are trying to decide how to invest a $250,000 windfall. She wants to pay off our $114,000 mortgage, but I'm not eager to do that because we refinanced only nine months ago, paying $3,000 in fees and costs." How should the $3,000 in fees and costs be considered?
It is a sunk cost and should not be taken into account when deciding to pay off the mortgage.
Is it possible for technological change to be negative? If so, give an example.
It is possible for technological change to be negative. An example is when a firm hires less−skilled workers.
What is budget constraint?
It is the limited amount of income available to consumers to spend on goods and services
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens?
It sells more units but receives lower revenue per unit.
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
In 2016, Walmart closed 150 stores in the United States and deeply discounted the merchandise in them. Some people bought the merchandise at these low prices and resold it on Amazon, eBay, and other sites. An article in the Wall Street Journal described one reseller who: "sent three employees in a 26-foot truck to the nearest closing Walmart, about 160 miles south.... They hauled off $35,000 in merchandise, like Legos and Star Wars pajamas, which he said he expects to sell for as much as $100,000 on Amazon." Is the reseller making a $65,000 profit on these goods? Brefly explain. Is the reseller exploiting the people who buy these goods from him on Amazon? Briefly explain.
No, the seller is making less than $65,000 because he incurs transactions costs. No, because the people who bought these goods must have been made better off by purchasing these goods.
"In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don't." Don't firms also benefit from cost reductions because they are able to earn greater profits?
No. Because short-run profits encourage entry, firms earn zero economic profit in the long run.
Does a product always have to sell for the same price everywhere? Briefly explain.
No. The law of one price only holds exactly when transactions costs are zero.
Which of the following statements about normative analysis is correct?
Normative analysis is concerned with what ought to be.
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization.
Refer to the graphs above. Which graph best describes the move from an inefficient use of a common resource to an efficient use of it?
Panel D
In considering the attitudes of consumers toward fairness, which of the following have economists found to be true? In the ultimatum game, if neither the allocator nor the recipient cared about fairness, what would be the optimal distribution of $20.00? In the ultimatum game, when the allocator and the recipient care about fairness, how does that affect the distribution of $20.00?
People attempt to treat others fairly, even if doing so makes them worse off financially. $19.99 for the allocator and $0.01 for the recipient. Recipients usually reject offers of less than a 10 percent share
Which point(s) are unattainable? Briefly explain why.
Point A because it is outside the production possibilities frontier.
Which point(s) are efficient? Briefly explain why.
Points B,C,and D because this is where maximum output is produced with available resources.
Which of the following statements about positive analysis is correct?
Positive analysis is concerned with what is
Segment.com reorganized its office as part of its "anti-distraction campaign." According to an article in the Wall Street Journal, the company cut back on its internal text messaging service and moved "some of its communication back to email to reduce the number of notifications employees were receiving." Does this movement from a new technology—text messaging—to an older technology—email—represent positive or negative technological change at Segment? Briefly explain. Suppose that competition for software engineers results in Segment.com having to pay them higher salaries. Would the fact that the firm will now face an increased cost of providing its services be an example of negative technological change? Briefly explain.
Positive technological change, because more output can be produced using the same inputs. No, this would not represent technological change because the same output can be produced using the same inputs.
What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
Price is equal to both average revenue and marginal revenue.
Firm A is a new producer in the market for good X, which is characterized by linear demand and supply curves. Initially, to attract customers, the firm prices its product low at $8 per unit. While the firm sells 1,000 units of the product at this price, there is a shortage in the market. This shortage can be cleared if price is increased to $10 per unit. The quantity demanded and supplied at this higher price will be 1,500 units. Which of the following is most strongly supported by this information?
Producer surplus will increase if the price rises from $8 per unit to $10
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
Briefly discuss the difference between these two concepts.
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
Which of the following are key results of price discrimination?
Profits increase and consumer surplus decreases.
Refer to the graph to the right, which shows two potential demand curves in the market for photocopies at a printing company. If you start at point A on D1, what is the percentage change in quantity demanded when price falls from $30 to $20? Use the midpoint formula to calculate this percentage change.
Quantity demanded rises by 55 percent
________ is a problem that occurs when someone concludes that a change in variable X caused a change in variable Y when, in fact, it is a change in variable Y that caused a change in variable X.
Reverse causality
In the table below, fill in the missing blanks to complete the summary of the effects of changes in demand and supply on equilibrium price and quantity.
SCU + DCU = Q unchanged and P unchanged SCU + DCSR= Q increases and P increases SCU + DCSL= Q decreases and P decreases SCSR + DCU= Q increases and P decreases SCSR + DCSR= Q increases and P indeterminant SCSR + DCSL= Q indeterminant and P decreases SCSL + DCU= Q decreases and P increases SCSL + DCSR= Q indeterminant and P increases SCSL + DCSL= Q decreases and P indeterminant
Peter Reinhardt, CEO of Segment.com, made the following comment on his blog when discussing how the firm's noisy open office was lowering the productivity of its engineers: "We can't immediately ditch our open floor plan (although we're looking at various options for our next office.)" Why can't the firm immediately ditch its open floor plan? Is Reinhardt's remark about Segment.com's economic short run or its economic long run? Briefly explain.
Segment considers its current open floor plan to be a fixed cost. Short run, because the floor plan is fixed.
Some people—usually business travelers—have a very strong desire to fly to a particular city on a particular day, and airlines charge these travelers higher ticket prices than they charge other people, such as families who are planning vacations months in advance. Some people really like Big Macs and other people only rarely eat Big Macs, preferring to eat other food for lunch on most days. Consider the following possible explanations of why airlines can charge different people different prices, while McDonald's can't. Which is correct?
Since people can't resell airline tickets, they cannot buy them at a low price and resell them at a high price, whereas people can resell hamburgers.
What is the difference between technology and technological change?
Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs.
The Danish firm a2i Systems A/S sells software that helps service stations implement dynamic pricing strategies for gasoline sales. Service stations that use the software typically offer lower prices in the morning than in the afternoon and even raise prices when competing stations with very low prices have long lines. In an article in the Wall Street Journal, the firm's CEO noted: "This is not a matter of stealing more money from your customer. It's about making margin on people who don't care, and giving away margin to people who do care." What does the CEO mean by "margin"? Briefly explain how these pricing strategies "make margin" on customers who don't care and "give away margin" on customers who do care.
The CEO means the increase in price over cost. These pricing strategies use price discrimination to charge customers whose demand is more inelastic higher prices.
Harvard Business School started using case studies—descriptions of strategic problems encountered at real companies—in their courses in 1912. Today, Harvard Business Publishing (HBP) sells its case studies to about 4,000 colleges worldwide. HBP is the sole publisher of the Harvard Business School's case studies. What criteria would you use to determine whether HBP has a monopoly on the sale of business case studies to be used in college courses?
The ability to ignore the actions of other firms, the persistence of economic profits, and the availability of close substitutes.
A student remarks: "If firms in a monopolistically competitive industry are earning economic profits, new firms will enter the industry. Eventually, the representative firm will find its demand curve has shifted to the left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that point, some firms will leave the industry, and the representative firm will find its demand curve will shift to the right. In long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking even." Is the analysis correct or incorrect?
The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the firm's demand curve is tangent to its average cost curve it is still earning zero economic profit. Your answer is correct.
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?
The country is operating on its production possibilities frontier.
If demand decreases and supply increases, which of the following will definitely occur?
The equilibrium price will decrease.
If demand and supply both increase, which of the following will definitely occur?
The equilibrium quantity will increase.
Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00.
If a perfectly competitive firm is producing at point A, in the graph to the right, which of the following is true? What does the shaded area in the second graph to the right represent for a perfectly competitive firm that produces at output level Q?
The firm earns zero economic profit. negative economic profit
If marginal revenue slopes downward, which of the following is true?
The firm must decrease its price to sell a larger quantity.
The fumes from dry cleaners can contribute to air pollution. Suppose the following diagram illustrates the situation in the dry cleaning market. Explain how a government can use a tax on dry cleaning to bring about the efficient level of production. What should the value of the tax be? The tax should be___ per unit How large is the deadweight loss (in dollars) from excessive dry cleaning, according to the figure? The deadweight loss is_____ thousand.
The government can use a tax to increase the marginal private cost of producing dry cleaning to equal the marginal social cost 6 900
If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society? Refer to the graph to the right. How much reduction in sulfur dioxide can be considered economically efficient?
The marginal benefit from reducing another ton of pollution should be equal to the marginal cost. 8.5 million
Every society faces trade-offs because we live in a world of scarcity. Suppose a student-athlete has the opportunity to earn $200,000 next year playing for a minor league baseball team, $900,000 next year playing for a European professional football team, or $0 returning to college for another year.
The opportunity cost of the student-athlete returning to college next year is $900,000
Refer to the to graph. For a certain output range (or quantity of pizzas produced per day), marginal cost is greater than average cost. What is this output range? When marginal cost is less than average total cost, average total cost must be
The output range greater than about 525 pizzas per day decreasing
Lexmark charges lower prices for its printer cartridges in some foreign countries than it charges in the United States. An article in the Wall Street Journal explained how a company in West Virginia bought Lexmark printer cartridges from retailers in foreign countries and resold the cartridges for higher prices in the United States. Is Lexmark assuming the price elasticity of demand for printer cartridges is more or less elastic in the United States relative to the price elasticity of demand for printer cartridges in these foreign countries? Is Lexmark likely to be able to continue price discriminating in this way? Briefly explain.
The price elasticity of demand in the United States must be less elastic because customers are less sensitive to price. Yes, because transactions costs would ensure that arbitrage would reduce, but not eliminate, the price differences.
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward.
Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Is it likely that the production possibilities frontierLOADING... in this situation would be a straight line:
The production possibilities frontier would likely be bowed out because not all resources are equally well suited to produce both consumption and capital goods.
When the DuPont chemical company first attempted to enter the paint business, it was not successful. According to a company report, in one year it "lost nearly $500,000 in actual cash in addition to an expected return on investment of nearly $500,000, which made a total loss of income to the company of nearly a million." Why did this report include as part of the company's loss the amount it had expected to earn -- but didn't -- on its investment in manufacturing paint?
The report sought to include implicit costs because DuPont could have invested its money elsewhere and earned $500,000.
How are the differences in prices in the table below explained in the textbook?
The sellers must not be offering identical products.
Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."
The statement is correct because every good (except undesirable things) is scarce
Briefly explain whether you agree with the following statement: "If consumer surplus in a market increases, producer surplus must decrease."
The statement is incorrect. Consumer surplus (and producer surplus) could increase by decreasing deadweight loss.
The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in a nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning?
The student is drawing a false conclusion; he is making the error of reverse causality.
The demand for pears is highest during summer and lowest during winter. Yet pear prices are normally lower in summer than in winter. What must be happening to the supply of pears, from winter to summer, for the equilibrium price to fall?
The supply increases more than the demand increases.
What is the tragedy of the commons? How can it be avoided? The tragedy of the commons can be avoided by
The tendency for a common resource to be overused. A. clearly defining and enforcing property rights. B. setting a tax equal to the external cost of overusing common resources. C. removing restrictions to increase access to common resources. D. both a and b. <--- E. all of the above.
What happens when network externalities are present?
The usefulness of a product increases with the number of consumers who use it.
Refer to the graph to the right. How would you describe the value of the slope of this curve?
The value of the slope is greater between points g and h than between points i and j.
In 2017, President Donald Trump was considering a major increase in federal government spending on infrastructure: building and repairing bridges, highways, rail lines, and subways. An article in the Economist argues that: "Just as economists talk of 'negative externalities' (from, say, pollution), infrastructure can have positive externalities that are not captured by investors but will benefit society." Explain what positive externalities might exist from infrastructure spending If infrastructure spending generates a positive externality, what effect should this have on government policy? Will voters be more or less likely to support government spending programs on infrastructure?
There is likely to be an increase in productivity for any business that uses the infrastructure. More likely, because investment in infrastructure will result in greater economic growth and higher future incomes
During the 1928 presidential election campaign, Herbert Hoover, the Republican candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good policy? Explain.
This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage.
Evaluate the following argument: "Adam Smith's analysis is based on a fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm not selfish, and most people I know aren't selfish."
This statement is based on the misconception that following your self-interest and being selfish are the same thing
For which of the following products is the price elasticity of demand (in absolute value) the largest?
Tide liquid detergent
Jason Furman and Tim Simcoe, the chair of and a senior economist for President Barack Obama's Council of Economic Advisors, wrote, "Economists have studied [price discrimination] for many years, and while big data seems poised to revolutionize pricing practice, it has not altered the underlying principles...Those principles suggest that [price discrimination] is often good for both firms and their customers." Furman and Simcoe describe "need-based financial aid for college students" as an example of price discrimination that is good for consumers. What do Furman and Simcoe mean by "underlying principles"? Need-based financial aid is an example of price discrimination because those with the Financial aid is
When prices reflect a buyer's ability to pay, sellers can serve customers who would otherwise get priced out of the market. least ability to pay receive the most aid. good for both colleges and students because students get an education and colleges get paying students.
An article in the Wall Street Journal described the marketing philosophy of Whole Foods Market, a supermarket chain that sells many food products that have no preservatives or artificial sweeteners: Whole Foods has long divided its 462 stores into 11 regions, each with distinct product offerings like local maple syrup and gourmet pickles. A quarter of Whole Foods shoppers that visited the chain in the past month did so for items they couldn't find elsewhere... For those who shopped at Wal-Mart Stores Inc., only 3% said exclusive brands were the top draw. Explain why Whole Foods does not achieve productive efficiency by offering its customers "distinct product offerings" and "exclusive brands." Briefly explain how Whole Foods product differentiation may benefit its customers more than if the supermarkets achieved allocative and productive efficiency.
Whole Foods decreases productive efficiency by not producing at minimum average total cost. increased variety
According to Forbes magazine, in 2017 Bill Gates was the world's richest person with wealth of $86 billion. Does Bill Gates face scarcity? Which of the following statements is true?
Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. All individuals face a scarcity of time and need to make choices how to allocate it.
According to Forbes magazine, in 2017 Bill Gates was the world's richest person with wealth of $86 billion. Does Bill Gates face scarcity? Which of the following statements is true?
Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. All individuals face a scarcity of time and need to make choices on how to allocate it.
If you own the only hardware store in a small town, do you have a monopoly?
Yes. You would have a monopoly if your profits are not competed away in the long run.
What is the difference between zero accounting profit and zero economic profit?
Zero economic profit includes a firm's implicit costs but zero accounting profit does not.
Which of the following is the correct definition of demand curve?
a curve that shows the relationship between the price of a product and the quantity of the product demanded
Which of the following is the textbook's definition of a supply curve?
a curve that shows the relationship between the price of a product and the quantity of the product supplied
Refer to the graphs below. Each graph shows the supply curve for smartphones. Figure 1 illustrates ________, and Figure 2 illustrates ________.
a decrease in the price of an input; an increase in the price of a substitute in production
Which of the following events would shift the supply of smartphones to the right?
a decrease in the price of inputs used to produce smartphones
In many cities, firms that own office buildings can renovate them for use as residential apartments. According to a news story, in many cities "residential rents are surpassing office rents." The response to an increase in residential rents would be
a decrease in the supply of office space, shifting it to the left.
An unexpected frost in the orange groves of California would cause
a decrease in the supply of orange juice, increasing the equilibrium price.
What is a public franchise? A public franchise is Are all public franchises natural monopolies? All public franchises ______ natural monopolies, and all natural monopolies ______ public franchises.
a firm designated by the government as the only legal provider of a good or service. are not; are not
Productive efficiency means that
a good or service is produced at the lowest possible cost.
In discussing the NCAA, the late Nobel laureate economist Gary Becker wrote, "It is impossible for an outsider to look at these [NCAA] rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players." A cartel is The NCAA acts like a cartel because it As a result of the NCAA acting like a cartel, If you are a student who does not play intercollegiate sports but who is enrolled at a school, such as the University of Alabama or Ohio State University, with prominent sports teams, the NCAA acting as a cartel makes you
a group of firms that collude by agreeing to restrict output to increase prices and profits. restricts the number of games that the member schools' teams can play. athletic departments benefit because they have lower costs, but athletes lose because they cannot be compensated for playing. worse off because you would have fewer games to watch and have to pay more to watch them.
What is a merger between firms in the same industry called?
a horizontal merger
Economic efficiency is
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.
An article in the Wall Street Journal about attempts by Congress to rewrite the tax code to make it more efficient noted that there were many provisions in the code intended to reduce the taxes paid by industries in districts of the members of Congress supporting the provisions. In total, these provisions result in tax losses of $1 trillion to the federal government. The article observed that eliminating these provisions is "virtually impossible ... [because] congressional sponsors engage in logrolling to make sure almost everything stays in year after year." Logrolling refers to the situation where Suppose that eliminating tax preferences for industries in districts of members of Congress supporting the provisions would increase the federal governments tax receipts by $1 trillion, which could then be used to lower the tax rates of the individual income tax. Such a change would likely A change like this is more likely to be enacted if those that
a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills. benefit the economic interests of a larger group. benefit have significant political influence.
McDonald's eliminates $1.00 off coupons. This will cause
a movement along the demand curve for McDonald's Big Mac hamburgers
Which of the following is the correct definition of demand schedule?
a table that shows the relationship between the price of a product and the quantity of the product demanded
Which of the following is the textbook's definition of a supply schedule?
a table that shows the relationship between the price of a product and the quantity of the product supplied
What is the definition of market power? Market power is the
ability of a firm to charge a price greater than marginal cost.
If a surplus exists in a market, we know that the actual price is
above the equilibrium price, and the quantity supplied is greater than the quantity demanded.
Imagine that the next time the New England Patriots play the Miami Dolphins at Gillette Stadium in Foxborough, Massachusetts, Patriots star quarterback Tom Brady has a temporary lack of judgment and plans to sell Patriots memorabilia during the game because he realizes that he can sell five times more Patriots products than anyone in the stadium sports gear store. Likewise, imagine that you are a creative and effective manager at work and that you tell your employees that during the next six months, you plan to clean the offices because you can clean five times better than the cleaning staff. Both you and Tom are making an error in judgment by assuming that specialization should be based upon________ You shouldn't necessarily do what you are better than anyone else at doing
absolute advantage unless your advantage in that activity is greater than advantages you possess in other activities.
With a downward-sloping demand curve, average revenue is equal to price With a downward-sloping demand curve, marginal revenue is below price
actually, average revenue is always equal to price, whether demand is downward sloping or not. because the firm must lower its price to sell additional units.
What is the law of diminishing returns? The law of diminishing returns states that
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
Which of the following industries uses sophisticated methods to calculate the price of each unit sold each day?
airlines
What do economists mean when they use the Latin expression ceteris paribus?
all else equal
What do economists mean when they use the Latin expression ceteris paribus?
all else equal
What must be true for the Coase TheoremLOADING... to hold? For the Coase Theorem to hold,
all parties to an agreement must be willing to accept a reasonable agreement
Are consumers only interested in making themselves as well off as possible in a material sense? Consumers are
also concerned with fairness as exemplified by tipping in restaurants that will never be visited again.
Suppose that the curves in the figure to the right represent two supply curves for traditional wings (basket of six) at Buffalo Wild Wings. The movement from point A to B on S1 is caused by Indicate which of the following would cause a movement from point A to C.
an increase in the price of baskets of traditional wings. a decrease in input prices, an increase in worker productivity
Excludability is the situation that occurs when
anyone who does not pay for a good cannot consume it.
An increase in the price of a substitute for iPads will lead to __________ in the quantity of iPads demanded, so the cross-price elasticity of demand will be _________. If Amazon.com raises its prices by 10 percent and, as a result, the quantity of books demanded on Barnesandnoble.com increases by 35 percent, what do consumers consider the two Web sites to be?
an increase; positive close subsitutes
On a shopping trip, Melanie decided to buy a light blue coat made from woven fabric. A tag on the coat stated that the price was $79.95. When she brought the coat to the store's sales clerk, Melanie was told that the coat was on sale, and she would pay 20 percent less than the price on the tag. After the discount was applied, Melanie paid $63.96, $15.99 less than the original price.
at least $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she pays, but she could have be willing to pay more than $79.95 for the coat.
On a shopping trip, Melanie decided to buy a light blue coat made from woven fabric. A tag on the coat stated that the price was $79.95. When she brought the coat to the store's sales clerk, Melanie was told that the coat was on sale, and she would pay 20 percent less than the price on the tag. After the discount was applied, Melanie paid $63.96, $15.99 less than the original price. The value of Melanie's consumer surplus from this purchase is
at least $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she pays, but she could have be willing to pay more than $79.95 for the coat.
All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?
average fix costs
What cost measure is equal to AFC +AVC?
average total cost
A monopolistically competitive firm is not productively efficient because it produces a level of output where A monopolistically competitive firm has excess capacity in the sense that if it increased output beyond the quantity associated with profit maximization, it could produce at a lower________cost.
average total cost is not at a minimum. average
How should sunk costsLOADING... be used in consumer decision-making? In consumer decision-making, sunk costs should Suppose you bought a ticket to a basketball game. The ticket is nonrefundable (and can't be resold) and must be used on Saturday. Then, a friend calls and invites you to a baseball game on Saturday. You only have time to attend one of the events, and your friend offers to pay the cost of going to the baseball game. If you prefer baseball games over basketball games, then you should attend the
be ignored baseball game
How should sunk costs be used in consumer decision-making? In consumer decision-making, sunk costs should Suppose you bought a ticket to a play. The ticket is nonrefundable (and can't be resold) and must be used on Saturday. Then, a friend calls and invites you to a football game on Saturday. You only have time to attend one of the events, and your friend offers to pay the cost of going to the football game. If you prefer football games over plays, then you should attend the
be ignored football games
Your company incurs a cost for fire insurance, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of
becomes a variable cost.
In recent years, some economists have begun studying situations in which people do not appear to be making choices that are economically rational. This new area of economics is called
behavioral economics
If a shortage exists in a market, we know that the actual price is
below the equilibrium price, and the quantity demanded is greater than the quantity supplied.
What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger Which type of merger is more likely to increase the market power of a newly merged fir _________ mergers are more likely to increase market power.
between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good. horizontal
Which of the following terms corresponds to a market in which buying and selling take place at prices that violate government price regulations?
black market
Prices for many goods are higher in the city of Shenzhen on the mainland of China than in the city of Hong Kong. An article in the Economist notes that "individuals can arbitrage these differences through what effectively amounts to smuggling." The article means that individuals can Ultimately, you would expect the result of individuals engaging in this arbitrage to be similar Consider the fact that the government of China requires a visa for Shenzhen residents to visit Hong Kong and regulates the number of trips that can be made between the two cities in a given year. Given this information, you can expect the result of individuals engaging in this arbitrage to be
buy the product in Hong Kong and sell it in Shenzhen so eventually the price in Shenzhen will decrease and the price in Hong Kong will increase. prices in Shenzhen and Hong Kong. prices that will be closer, but not the same due to transactions costs.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.44 per kilogram, and his marginal cost of production is $1.79 per kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short run? Farmer Lane
can increase his profit by producing less output.
Economists refer to the necessity of holding all variables other than price constant in constructing a demand curve as the
ceteris paribus condition.
On the diagram to the right, a movement from A to C represents a
change in demand
Which of the following will NOT change the demand for coffee?
changes in the price of coffee
Assume that an industry that began as a perfectly competitive industry becomes a monopoly. Compared to when the industry was perfectly competitive, the monopolist will
charge a higher price and produce less output.
From the list below, select the variable that will cause the demand curve to shift:
consumer income
The graph to the right illustrates the markets for two different types of labor (labor market 1 with demand curve D1 and labor market 2 with demand curve D2). Suppose an identical minimum wage is imposed in both markets. In which market will the minimum wage have the largest impact on employment? Why? The minimum wage will
decrease employment more in labor market 1 because D1 is flatter.
After Russia seized what had formerly been the Ukrainian territory of Crimea in February 2014, the United States and many other countries imposed economic sanctions that reduced the ability of Russia to engage in international trade. A columnist writing in the New York Times noted that, "If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster...." If the columnist is correct about the effect of the sanctions, then, in the long run, the sanctions will
decrease the economic well-being of the average Russian because Russia will have to produce some goods and services at a higher cost than its trading partners.
The price of Burger King's Whopper hamburger increases.This will cause
demand for McDonald's Big Mac hamburgers to increase.
The U.S. economy enters a period of decline in incomes. This will cause
demand for McDonald's Big Mac hamburgers to shift to the right if they are inferior goods
On most days, the price of a rose is $1, and 8,000 roses are purchased. On Valentine's Day, the price of a rose jumps to $2, and 30,000 roses are purchased. The effect of Valentine's Day is to change the market ______ for roses. In particular, the demand curve shifts to the _______. Based on this information, we do not know much about the price elasticity of demand for roses because the demand curve was not constant. However, we do have constant supply. The price elasticity of supply is_____
demand; right; 1.74
Suspicions of arbitrage have a long history. For example, Valerian of Cimiez, a Catholic bishop who lived during the fifth century, wrote, "When something is bought cheaply only so it can be retailed dearly, doing business always means cheating." What might Valerian think of eBay? Valerian would largely________ Do you agree with his conclusion? Explain.
disapprove No. Arbitrage reallocates resources to areas where they are more highly valued.
Eric Finklestein, an economist at Duke University, has argued that the external costs from being obese are larger than the external costs from smoking because "the mortality effect for obesity is much smaller than it is for smoking and the costs start much earlier in life." The "mortality effect" Finklestein refers to means that people If the mortality effect of obesity is smaller than the mortality effect of smoking, then obesity has a larger external cost because What is the most likely reason why tobacco taxes have been more politically popular than taxes on soda?
don't die as quickly from obesity as they do from smoking. obese people live longer than smokers and thus incur higher costs from their related illnesses. Second hand smoke is a more obvious negative externality than the social costs of obesity.
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _______ in this range.
elastic
Suppose the price elasticity of demand for cereal is −1.14. If so, then the demand for cereal is _____ In another example, assume the price elasticity of demand for a particular magazine is −1.22. The demand for the magazine is____
elastic; elastic
Economist Richard Thaler of the University of Chicago notes that most economists consider arbitrage to be one way "that markets can do their magic." Arbitrage can help markets to work because the arbitrage process will
eliminate most of the price differences between markets.
In the diagram to the right, point A provides the _____, point B the _____, and point C the _____
equilibrium price; market equilibrium; equilibrium quantity
Consider firms that introduce new products, such as DVDs in 2001. When firms introduce new products, how do they typically determine the price elasticity of demand for those products? Firms with new products often
estimate price elasticity of demand by experimenting with different prices.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost.
Allocative efficiency means that
every good or service is produced up to the point where marginal benefit is equal to marginal cost.
Which of the following are sometimes called accounting costs?
explicit costs
Some coal is mined by private companies on land owned by the federal government. Two economists writing in an opinion column argue, "The federal government should also take into account the economic consequences of burning coal when pricing this fuel. The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions." By "the added costs associated with the impacts of greenhouse gas emissions," the economists mean the The price the federal government charges the coal companies should
external costs (negative externalities) such as global warming and health effects of pollution. include this cost because including this cost makes the marginal social cost equal to the marginal social benefit and economic efficiency is achieved.
An increase in demand causes an increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply.
false
An increase in the price of cappuccino will increase the quantity of cappuccinos demanded.
false
Consumer surplus and producer surplus measure the total benefit consumers and producers receive from participating in a market.
false
For most products, the supply curve becomes increasingly inelastic the longer the period of time over which it is measured.
false
If you and your neighbor both grow oranges and grapefruits and you are better than your neighbor at picking both oranges and grapefruits, there can be no advantage to you in specializing in growing only one type of fruit and trading with your neighbor for the other
false
If you and your neighbor both grow oranges and grapefruits and you are better than your neighbor at picking both oranges and grapefruits, there can be no advantage to you in specializing in growing only one type of fruit and trading with your neighbor for the other.
false
In a competitive market, firms can dictate what the equilibrium price of a good or a service will be.
false
Market failure refers to a situation in which a market ceases to exist.
false
Rules of thumb are guides to decision making that always produce optimal choices
false
The more time that passes, the more inelastic the demand for a product becomes
false
Utility refers to how much consumers utilize a product or service.
false
When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more elastic
false
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is
false: decreases in price affect the quantity demanded, not demand.
Using the graph to the right, explain why economic surplus would be smaller if Q1 or Q3 were the quantity produced than if Q2 is the quantity produced. Economic surplus at Q1 would be smaller than at Q2 because if Q1 units of output were produced, then some units for which marginal benefit is ________marginal cost would_____ produced. Economic surplus at Q3 would be smaller than at Q2 because if Q3 units were produced, then some units for which marginal cost is ___________marginal benefit would ____ produced.
greater than; not be greater than; be
Consider the market for Post raisin bran cereal. The demand for this product would become more elastic if it
had more close subsitutes
If a country has a comparative advantage in the production of a good, then that country
has a lower opportunity cost in the production of that good.
Two key groups participate in markets. A__________ consists of all the individuals in a home. ______ are suppliers of goods and services. We can use a simple economic model called the ___________ to see how participants in markets are linked
households, firms, circular flow diagram
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
According to a Wall Street Journal article, restaurant chains, including Subway, McDonald's and Chick-fil-A, have begun serving only chickens that were raised without being fed antibiotics. Using this method of raising chickens increases their cost. Suppose that consumers react to the news of restaurants selling antibiotic-free chicken sandwiches by increasing their demand for the sandwiches. Refer to the graph at right depicting the market for chicken sandwiches. Assume the initial equilibrium occurs at point 'A'. The events described result in an increase in demand (D1 to D2), and a decrease in supply. The the new supply curve is somewhere to the left of S1. Under what conditions will the economic surplus increase in the market for chicken sandwiches?
if the supply curve shifts to the left less than the demand curve shifts to the right
The Coase theorem states that
if transaction costs are low, private bargaining will lead to an efficient solution to externalities.
What is a production function? A firm's production function is best described as
illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.
When asked what was most valuable about the big data Disney was collecting from its MagicBands program, the executive in charge of the program stated, "The biggest value comes from being able to segment customers into better, smarter segments so you know what is going on and can act on those segments." Disney and other firms use these methods to
implement pricing strategies to increase their profits.
The median voter theorem states that the outcome of a majority vote is likely to represent the preferences of the voter who is
in the public middle
The law of diminishing returns applies
in the short run
Late in the semester, a friend tells you, "I was going to drop my psychology course so I could concentrate on my other courses, but I had already put so much time into the course I decided not to drop it." Is your friend's reasoning correct or incorrect? Your friend's reasoning is
incorrect
. The price of fries decreases due to potatoe surplus. This will
increase the demand for McDonald Big Mac burger
The income effect causes quantity demanded to ________ when the price of a normal good decreases, and causes quantity demanded to ________ when the price of an inferior good decreases
increase; decrease
What is the outcome of enforcing contracts and property rights in a market system?
increased economic activity
As you move up a linear demand curve, the price elasticity of demand in absolute value On the lower part of a linear demand curve below the midpoint, the demand is ________ and raising the price causes total revenue to _________.
increases inelastic; increase
The price of organic apples falls and apple growers find that their revenue decreases. Is the demand for organic apples elastic or inelastic? The demand for organic apples is
inelastic
Between 1950 and 2017, the price of wheat fell dramatically from $19.23 per bushel to $3.85 per bushel. Suppose between 1950 and 2017, the supply of wheat increased substantially due to increases in productivity, shifting the wheat supply curve to the right. With this supply shift, the amount by which the price of wheat falls will be larger the more ______ the demand for wheat. In addition, assume that between 1950 and 2017 the income of the average American increased substantially and that wheat is a normal good. With this increase in income,______
inelastic; the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat.
Whether carried out by an individual or a country, production beyond the production possibilities frontier
is not physically possible.
Whether carried out by an individual or a country, production beyond the production possibilities frontier With respect to consumption, individuals and countries
is not physically possible. can, through trade, consume beyond their production possibilities frontiers.
The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entry into the market for delivering first-class mail. Is it also a natural monopoly? How can we tell? The USPS What would happen if the law preventing competition in this market were removed? If the law preventing competition were removed, then
is probably not a natural monopoly because if it were, then a law blocking competition would not be necessary. new firms would likely enter the market.
What is meant by allocative efficiency? Allocative efficiency is when every good or service
is produced up to the point where price equals marginal cost.
Describe a monopoly's demand curve. A monopoly's demand curve
is the same as the demand curve for the product.
When the price of a product changes,
it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
Using the same amount of resources, suppose that Nicaragua can produce twice as much sugar as Colombia. Nevertheless, Colombia could still have the comparative advantage in producing sugar if
it is even less efficient than Nicaragua in the production of goods other than sugar.
A monopolistically competitive firm in a long-run equilibrium produces where
its demand curve is tangent to its average total cost curve.
Consider the market for Ping golf clubs. Suppose the price of memberships at local golf courses increases. Assume memberships at local golf courses and Ping golf clubs are complements. The demand curve for Ping golf clubs will shift to the ____ Instead, suppose the price of tennis rackets increases. If tennis rackets and golf clubs are substitutes, then the demand for Ping golf clubs will______
left; increase
In general, the demand for a good will be _________ elastic the ___________ the share of the good in the average consumer's budget
less; smaller
When lettuce prices doubled, from about $1.70 per head to about $3.40, the reaction of one consumer was quoted in a newspaper article: "I will not buy [lettuce] when it's $3.40 a head," she said, adding that other green vegetables can fill in for lettuce. "If bread were $5 a loaf we'd still have to buy it. But lettuce is not that important in our family." For this consumer's household, which product has the higher price elasticity of demand bread or lettuce For this consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative
lettuce positive
An article on fortune.com estimated that the cost of materials in Apple's iPhone 7 with 32 gigabytes of memory was $225. Apple was selling the iPhone 7 for $649. Can we conclude from this information that Apple is making a profit of about $424 per iPhone? Briefly explain. Apple's profit is
likely less than $424 per iPhone because Apple also has fixed costs of production.
Briefly discuss the relationship between property rights and the existence of externalities. Without property rights (or if property rights are difficult to enforce), externalities are ________. For example, if you buy a house and the government protects your right to exclusive use of that house, then your private benefit from the house will likely ______the social benefit of the house. In another example, if you buy a college education and you have no property right that will enable you to prevent others from benefiting from your education, then your private benefit will likely be______ the social benefit.
likely to result equal less than
Panera Bread restaurants have been a very popular "fast-casual" dining option—with better food choices than fast-food restaurants like McDonald's, and faster service and lower prices than traditional restaurants. Panera's profit per restaurant is much greater than McDonald's. Looking forward to ten years from now, you would expect Panera's economic profit per restaurant to be
lower because more firms will imitate Panera.
In general, companies that take demand into account will charge __________ markups on products that are ________ price elastic.
lower; more
What is the purpose of the antitrust laws? Antitrust laws are intended to Who is in charge of enforcing them?
make illegal any attempts to form a monopoly or to collude. A.The Federal Trade Commission. B.The Antitrust Division of the U.S. Department of Justice. C.The U.S. Department of Transportation. D.Both a and b. <----- E.All of the above.
Consider the market for wood from a forest. Suppose the trees are a common resource. Assume the supply curve represents the private cost of production and the demand curve represents the private benefit from consumption. Explain how the private market overuses common resources. First, the private market equilibrium quantity is that quantity where the For a common resource The optimal market quantity is that quantity where the
marginal private benefit curve intersects the marginal private cost curve. the marginal social cost curve is above the marginal private cost curve. marginal social cost curve intersects the marginal private benefit curve.
The increase in total revenue that results from selling one more unit of output is
marginal revenue
The monopoly's profit-maximizing quantity is that quantity where The profit-maximizing price for the profit-maximizing quantity is determined by the _____ curve. The firm's profit can be represented by a rectangle with a base equal to the quantity produced and a height equal to the
marginal revenue equals marginal cost. demand difference in price and average total cost.
The market for athletic shoes is intensely competitive. In 2016, the Sports Authority, one of the firms in the market, declared bankruptcy and closed its 500 stores. An Associated Press article discussed the effect of the closings of the Sports Authority stores on Foot Locker's store in the New York City borough of Manhattan, and quoted Foot Locker's CEO as stating: "We realized a long time ago that we couldn't be everything to everybody [in one store]. We have definitive brands and experiences." To maximize profit, a monopolistically competitive firm produces output up to the point where The economic profit is equal to After the exit of Sports Authority, what happens to Foot Locker's demand and marginal revenue curves? The demand and marginal revenue curves shift______ Why would Foot Locker's CEO emphasize that the store will have "definitive brands and experiences?" Wouldn't trying to be "everything to everybody" be a better strategy because the store might attract a larger number of customers? Briefly explain. For a monopolistically competitive firm, such as Foot Locker, the best strategy to earn economic profits is
marginal revenue equals marginal cost. the difference in price and long-run average cost multiplied by the quantity produced. right product differentiation because that results in a downward-sloping demand curve.
According to the law of diminishing marginal utility, as the consumption of a particular good increases,
marginal utility decreases
The GPA you earn in a particular semester is your ________ GPA, and your cumulative GPA for all completed semesters is your ________ GPA.
marginal; average
The marginal cost curve intersects both the average variable cost and the average total cost curves at their _______points.
minimum
Compare the demand for pepper with demand for food. The demand for pepper is likely
more inelastic because pepper tends to represent a smaller fraction of a consumer's budget.
Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of his businesses, including replacing halogen lamps with LED lamps. Goltz noted, "...I'm guessing that many business owners could save a lot more than pennies on their fixed costs, and those savings...fall right to the bottom line." The cost of electricity used to power the lights used in Mr. Goltz' businesses are fixed costs because these costs Goltz wrote that reducing fixed costs results in savings that "fall right to the bottom line" because
must be paid regardless of the volume of output. profit, the bottom line, is revenue minus fixed costs minus variable costs, so a reduction in fixed costs increases profit.
The Arrow impossibility theorem states that __________ can be devised so that it will consistently __________ the underlying preferences of voters.
no system of voting; represent
"Rent controls, government farm programs, and other price ceilings and price floors are bad." This is an example of a
normative statement. The statement is concerned with what should be.
Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargainingLOADING...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution reduction? If the electric utility and the people suffering the effects of the utility's pollution can bargain, then making the utility legally liable for the damages from its pollution will
not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.
Mabel is an advocate for a "zero tolerance" policy regarding all illegal street drugs, including cocaine, marijuana, and heroin. Mabel has witnessed high crime and violence in her neighborhood and believes that only by arresting and prosecuting anyone who sells or uses illegal drugs will she and her neighbors and their children live without fear. The policy that Mabel endorses is
not economically efficient because at some point the additional benefit from reducing drug use would be less than the additional cost.
The following questions are about long-run equilibrium in the market for cage-free eggs. As described in the chapter opener, the market for cage-free eggs in 2015 was In the long run in the market for cage-free eggs, we would expect As of 2017, the U.S. Department of Agriculture (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the long-run price of cage-free eggs? In the long run, will the quantity of cage-free eggs be larger, smaller, or the same as it would have been without the USDA adopting the guidelines? Briefly explain. With the stricter guidelines, other things equal, the market price of cage-free eggs would ______ as the minimum long-run average cost ______. At the new market price, the long-run equilibrium quantity will be _______
not in equilibrium because farmers who were raising cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods the equilbrium price to decrease and the equilibrium quantity to increase, as more firms enter. increase;increase smaller
Define rivalry and excludability and use these terms to discuss the four categories of goods. Rivalry is the situation that occurs when
one person's consuming a unit of a good means no one else can consume it.
In a magazine article, a writer explained that the provision of electric power in the United States consists of two processes: the generation of electricity and the distribution of electricity. The writer argued that, "power distribution is a natural monopoly...But...there's...no reason why the people who generate the electricity...should be the same people who own the power lines." The distribution of electric power might be a natural monopoly because The generation of electric power would not be a natural monopoly because
only one distribution network is needed to transmit the power. generation can be done in various ways and in various locations, so there are no inefficiencies associated with multiple providers.
Suppose a new recreational neighborhood park would cost $20,000, including opportunity costs, to construct and maintain. If built, the park would be a public good For simplicity, assume the neighborhood park would be used by three families, each of whom would derive a marginal benefit equivalent to $8,000 from the park. Should the neighborhood park be built? It would be_________ for the park to be built. If left to the private market, without private bargaining or government intervention, would the park be built? Without private bargaining or government intervention, the park________ be built.
optimal; would not
If a supply curve is a vertical line, it is ________, and if it is a horizontal line, it is ________.
perfectly inelastic and has an elasticity value of zero; perfectly elastic and has an elasticity value of infinity
Refer to the graph to the right. A change in demand is illustrated by the move from ________, and a change in quantity demanded is illustrated by a movement from ________. Which of the following would not shift the demand curve for a good or service?
point C to point A; point A to point B a change in the price of the good or service
An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following observation: "It was important... to understand the ways that government could fail systematically." In this context, government failure means Public choice theory helps us to understand how government could fail systematically because it recognizes that policymakers are The same article notes that: "Rent-seeking is a very useful concept to have around when thinking about policy." Rent seeking is Rent seeking can be useful in understanding why government policies
politicans making bad decisions for their own selfish reasons. no different than consumers or managers of firms and are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest. lobbying or bribing politicians to gain favorable legislation or regulations. sometimes produce results that are inefficient and harmful to the people.
The income elasticity of demand for a normal good is _____ and for an inferior good is ______ If the income elasticity of SUVs is greater than 1, what is the good considered?
positive; negative a luxury
While in Shanghai, China to teach an MBA course, Craig Richardson, an economics professor from Winston-Salem State University, asked his American students to haggle with sellers in a market where prices for the same items can vary widely. Professor Richardson explained that the same item with the same sticker price at different market stalls can have a final price that varies "by 1,500% or more, depending on the negotiating skills of the buyer." Shanghai merchants The consumers who are likely to pay the highest prices for similar items in the Shanghai market are those who are (select all that apply)
practice price discrimination because they charge different prices for the same good. A.most willing to haggle. B.familiar with the product. C.unfamiliar with the product.<----- D.least willing to haggle.<----
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost.
A monopolistically competitive firm produces where _________, while a perfectly competitive firm produces where _________.
price is greater than marginal cost; price is equal to marginal cost
A buyer or seller that is unable to affect the market price is called
price taker
According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
prices
By paying college students a subsidy equal to the external benefit from a college education, the government will cause students to internalize the externality. That is, the external benefit from a college education will become a
private benefit received by college students, and the demand curve for college educations will shift up.
Absolute advantage is the ability of an individual, a firm, or a country to
produce more of a good or service than competitors using the same amount of resources
Absolute advantage is the ability of an individual, a firm, or a country to
produce more of a good or service than competitors using the same amount of resources.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the product's price.
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the
production function
In arguing that the costs of the federal government's agricultural programs exceed their benefits, economist Vincent H. Smith stated, "The 10% to 15% of farm families that receive more than 85% of all farm subsidies—amounting to millions of dollars a year in a few cases—have annual household incomes many times as large as those of the average U.S. taxpayer." According to the U.S. Government Accountability Office these programs cost taxpayers about $20 billion annually. The stated purpose of the federal government's agricultural programs is to The points Smith raises—most farm subsidies go to a small percentage of high income farmers—are The programs persist because farmers receiving subsidies are the
provide income security for farmers so that they continue to produce. inconsistent with the stated purpose of the agricultural programs because the programs are not supporting most farm families. most politically active.
What is the law of demand? The law of demand is the
rule that, holding everything else constant, when the price of a good falls, the quantity demanded will increase, and when the price of a good rises, the quantity demanded will decrease.
What effect does the entry of new firms have on the demand curve of an existing firm in a monopolistically competitive market? The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to
shift to the left and become more elastic.
A study analyzed the costs to a pharmaceutical firm of developing a prescription drug and receiving government approval. An article in the Wall Street Journal noted that included in the firm's costs was "the return that could be gained if the money [used to develop the drug] were invested elsewhere." Briefly explain whether you agree that this return should be included in the firm's costs. This return
should be included in the firm's costs because the opportunity cost of the firm's investment is one of the firm's implicit production costs.
In the United States, the loss in economic efficiency due to market power is
small
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
As output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals _______.
smaller; average fixed cost
Is it ever possible for an increase in pollution to make society better off? Referring to the graph to the right,
society would be better off increasing pollution if pollution reduction is at Q3.
Under what circumstances can a firm successfully practice price discrimination? To successfully practice price discrimination,
some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product
When the government imposes price floors or price ceilings,
some people win, some people lose, and there is a loss of economic efficiency.
Suppose the current equilibrium price of cheese pizzas is $11.00, and 11 million pizzas are sold per month. After the federal government imposes a $3.00 per pizza tax, the equilibrium price of pizzas rises to $12.00, and the equilibrium quantity falls to 9 million. Compare the economic surplus in this market when there is no tax to when there is a tax on pizza. With the tax, the change in economic surplus is New government revenue with the tax can be represented by
the deadweight loss equal to the area under the demand curve and above the supply curve for units between the quantity with the tax and market equilibrium quantity. the area of a rectangle with a height equal to the tax and a base equal to the quantity sold.
Which of the following is the definition of consumer surplus?
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
Producer surplus is How does producer surplus change as the equilibrium price of a good rises or falls? As the price of a good rises, producer surplus _______, and as the price of a good falls, producer surplus_______
the difference between the lowest price a firm would be willing to accept and the price it actually receives. increase; decreases
Which of the following is the definition of producer surplus?
the difference between the lowest price a firm would have been willing to accept and the price it actually receives
Refer to the graph to the right of the costs for a perfectly competitive firm. Which of the following best represents profit per unit of output? Which of the following best represents total profit?
the distance between points A and B the shaded rectangle
When the demand curve shifts to the right,
the equilibrium price and quantity will both increase.
In colonial America, the population was spread thinly over a large area, and transportation costs were very high because it was difficult to ship products by road for more than short distances. As a result, most of the free population lived on small farms where they not only grew their own food but also usually made their own clothes and very rarely bought or sold anything for money. Why were the incomes of these farmers likely to rise as transportation costs fell? As transportation costs fell,
the farmers gained access to new markets and customers. Using comparative advantage, the farmers specialized, producing those goods for which they had lower opportunity cost. As they traded for other goods, their incomes and living standards increased.
Refer to the table below. Which of the following costs are implicit costs? Which of the following are sometimes called accounting costs?
the forgone salary and interest explicit costs
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
How are prices determined in perfectly competitive markets In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers.
A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest." This statement is false because
the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long run average cost curve
Economic surplus is maximized when
the marginal benefit of consumption is equal to the marginal costs of production.
When a competitive market is in equilibrium, what is the economically efficient level of output?
the output level where marginal cost is equal to marginal benefit
Which of the following is a primary determinant of the price elasticity of supply? The price elasticity of supply is affected by In particular, the supply curve for a particular product will be increasingly more elastic over a _____ period of time.
the passage of time longer
How is the price elasticity of demand measured? The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
How do externalities affect markets? If a positive externality in consumption is present in a market, then
the private benefit from consumption will be different than the social benefit from consumption.
How do externalities affect markets? If a negative externality in production is present in a market, then
the private cost of production will be different than the social cost of production.
Refer to the graph to the right. After rent control is imposed, area A represents
the producer surplus transferred from landlords to renters.
What are private property rights? Private property rights are
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property
According to an article on Phillyburbs.com, some farmers in rural Pennsylvania are causing a "stink" by using pig manure for fertilizer. The farmers purchase the pig manure, which is an organic fertilizer, from a nearby pork processing plant and spread it across the fields where they grow corn and soybeans. The article asserts that the farmers switched to pig manure because of the skyrocketing price of chemical fertilizers. Some of the residents of Milford, however, have complained about the smell, but the "farmers are likely protected under Pennsylvania's Right to Farm Act, which allows farmers to engage in practices that are common to agriculture." In their switch to the organic pig manure fertilizer, farmers responded to According to the Pennsylvania Right to Farm Act, do the farmers or the townspeople have the property rights to the smell of the air around the farms? (Some of the residents did ask the township to urge the farmers to plow-under the manure to reduce its stench.) According to the Pennsylvania Right to Farm Act, _____have the property rights to the smell of the air around the farms because the Pennsylvania Right to Farm Act allows
the rising price of chemical fertilizers. Farmers farmers to engage in practices that are common to agriculture.
A positive externality causes
the social benefit from consuming the good to be greater than the private benefit.
Over the past 30 years, the price of oil has been relatively unstable, fluctuating between $11.00 and well over $100 per barrel. Which of the following potentially contributes to oil-price instability? Oil prices are relatively unstable because
the supply of oil is inelastic.
Suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game. If the suburban area has the ability to create additional parking during periods of peak demand, then
the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game.
William Easterly in The White Man's Burden shares the following account by New York University Professor Leonard Wantchekon of how Professor Wantchekon's village in Benin, Africa, managed the local fishing pond when he was growing up: To open the fishing season, elders performed ritual tests at Amlé, a lake fifteen kilometers from the village. If the fish were large enough, fishing was allowed for two or three days. If they were too small, all fishing was forbidden, and anyone who secretly fished the lake at this time was outcast, excluded from the formal and informal groups that formed the village's social structure. Those who committed this breach of trust were often shunned by the whole community; no one would speak to the offender, or even acknowledge his existence for a year or more. The village elders were trying to prevent the economic problem of The solution of the village elders to outcast those who committed the breach of trust by fishing in the pond when it was forbidden is an example of
the tragedy of the commons using community norms to solve the problem. The solution would most likely be effective because it was used in a small community.
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes.
Refer to the graph to the right. The graph shows the market demand for satellite television service. If the market price is $81, which consumers receive consumer surplus in this market?
those willing to pay more than $81
In a firm selling multiple products, what is the intent of cost-plus pricing?
to cover all costs, including those that are difficult to assign to a specific product
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
What term refers to the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services?
transaction costs
Critics who claim that tradable emission allowances are equivalent to the government issuing licenses to pollute are ignoring the economic ideas that resources are scarce and trade-offs exist.
true
Firms often rely on market experiments to calculate the price elasticity of demand for a new product.
true
If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product.
true
One way for a firm to become a monopoly is by controlling a key resource.
true
The basis for trade is comparative advantage, not absolute advantage.
true
The costs of federal regulations are estimated to be several thousand dollars per taxpayer.
true
The more substitutes available for a product, the greater the price elasticity of demand
true
Perfect price discrimination is
unlikely to occur because firms typically do not know how much each consumer is willing to pay.
William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book: "It's often asked why the publisher can't simply raise the price [if costs increase]... It's likely that the editor [is already]... charging as much as the market will bear. ... In other words, you might be willing to pay $50.00 for a ... book on the Brooklyn Bridge, but if... production costs [increase] by 25 percent, you might think $62.50 is too much to pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that $50.00 is this book's ceiling—the most you would pay before deciding to rent a movie instead." According to the graph on the right and what you have learned in this chapter, a monopolistically competitive firm responds to an increase in cost by adjusting the price_______ This model does not fit Germano's description because he assumes what? If a publisher does not raise the price of a book following an increase in its production cost, the result will be The ability of a publishing company to raise book prices when costs increase would be greater, the_______is the elasticity of demand for published books
upward Demand is perfectly elastic. less than maximum profit. lower
The slope of a straight line equals the change in value on the ____________ axis ____________ by the change in the value on the other axis between any two points on the line Refer to the graph to the right. What is the value of the slope of this line?
vertical; divided -1.5
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly?
was not a monopoly because candles were a good substitute for electricity.
A free market exists
when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed
The optimal combination of pizza and coke you should consume is the one
where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good
will have a comparative advantage if it has a lower opportunity cost of producing that good.
Suppose that last semester your semester GPA was 3.90 and your resulting cumulative GPA was 2.96. Next, suppose that this semester your semester GPA will be 3.40. If so, then your cumulative GPA
will increase because your "marginal" GPA will be above your cumulative GPA
A columnist on forbes.com offers the following advice to retailers practicing price discrimination: "Consumers don't much like the idea of other people getting better deals than are offered to them, and retailers need to be careful not to turn differentiated pricing into discriminatory pricing. There has to be a legal and ethical rationale for offering different prices to different customers." What would be a legally acceptable reason for offering different prices to different customers? What would be a legally unacceptable reason? A legally acceptable reason for offering different prices to different customers would be differences in _________ and a legally unacceptable reason for offering different prices would be differences in________ Price discrimination might be legally acceptable but ethically unacceptable when
willingness to pay; race price discrimination seems unfair.
In perfect competition, long-run equilibrium occurs when the economic profit is
zero
Which of the following is a result of perfect price discrimination
zero consumer surplus
Which of the following is a result of perfect price discrimination?
zero consumer surplus
The graph at right represents the situation of Karl Kumquats, a kumquat grower. Karl is earning Karl's firm illustrates
zero economic profit, but could have a positive accouting profit. productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.
In the long run, the monopolist can earn
zero or positive economic profit.
Refer to the graph to the right. When the market price of a cup of tea is $2.00, what is the producer surplus from selling the 40th cup of tea?
$0.20
Refer to the graph to the right. If the reduction of sulfur dioxide is increased from 7.0 million to 8.5 million tons, the total benefit of this change is equal to ________ and the total cost of this change is equal to ________.
$375 million; $255 million
In writing about the increased popularity of national parks in the United States, such as Yosemite, Yellowstone, and the Grand Canyon, environmental economist Margaret Walls wrote: When one person's visit to a park doesn't appreciably diminish the experience for others, the fee to use the park should be zero. That doesn't apply when the public good starts to experience congestion problems...the Park Service should...[charge] a significantly higher fee at the most popular parks during the summer months. . Are Yosemite and other national parks public goods? Briefly explain.
No, Yosemite and other national parks are not public goods when congestion diminishes others' enjoyment of them.
If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency?
No, a monopoly may produce an inefficiently high or low level of output in the presence of a negative externaility.
In 2016, Walmart closed 150 stores in the United States and deeply discounted the merchandise in them. Some people bought the merchandise at these low prices and resold it on Amazon, eBay, and other sites. An article in the Wall Street Journal described one reseller who: "sent three employees in a 26-foot truck to the nearest closing Walmart, about 160 miles south.... They hauled off $35,000 in merchandise, like Legos and Star Wars pajamas, which he said he expects to sell for as much as $100,000 on Amazon." Is the reseller making a $65,000 profit on these goods? Briefly explain. Is the reseller exploiting the people who buy these goods from him on Amazon? Briefly explain.
No, the seller is making less than $65,000 because he incurs transactions costs. No, because the people who bought these goods must have been made better off by purchasing these goods.
According to an article in the Wall Street Journal, Staples Inc., an office supply store, "has found a new use for some of its roomy office-supply stores: make parts of them into offices." With many businesses having moved to storing their records digitally and many consumers now shopping online rather than in stores, Staples no longer needs as much floor space for filing cabinets and some other products. To use the surplus space, Staples has begun a partnership with Workbar, an office-sharing firm, to offer small business owners and professionals shared workspaces within select Staples retail stores Does Staples incur a cost from using some of the space in its retail stores for office workspaces? If Staples does incur a cost, briefly explain what the cost would be.
Yes, if the surplus space could be used for some other alternative use, then Staples incurs an opportunity cost.
