Economics Exam #2

A consumer loves to drink beer every day of the week, the marginal utility of beer consumption is bound to ________ at the end of the week, ceteris paribus, and this demonstrates the law of _______. decrease; total utility. increase; increasing marginal utility. increase; diminishing marginal utility. decrease; diminishing marginal utility.

decrease; diminishing marginal utility.

Rent seeking is attempting to transfer surplus from one group to another, for firms it usually involves: restricting supply in order to decrease price. restricting supply in order to increase price. increasing supply in order to decrease price. increasing supply in order to increase price.

restricting supply in order to increase price.

Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes? The supplier. The more elastic the supply curve, the larger the percentage of the burden is borne by the supplier. The consumer. The more substitutes that exist for the consumer, the larger the percentage of the burden is borne by the consumer. The supplier. The greater the profit for the supplier, the larger the percentage of the burden is borne by the supplier. The consumer: The more inelastic the demand curve, the larger the percentage of the burden is borne by the consumer.

The consumer: The more inelastic the demand curve, the larger the percentage of the burden is borne by the consumer.

If the federal government wanted to tax a good, would government prefer demand for the good to be inelastic or inelastic if it wanted to raise revenue? The government doesn't care about elasticity. The government would prefer demand to be more elastic. The government would prefer demand to be more inelastic. The government only cares about elasticity on the supply.

The government would prefer demand to be more inelastic.

While the traditional approach of U.S. government policies for environmental protection has had some level of success, some economists propose: a range of policies stipulating set limits governing pollutant emissions. stringent policies balancing industry profit goals and environmental quality. stringent policies that will return the environment to its former pristine quality. a range of more flexible, market-oriented pollution control policies.

a range of more flexible, market-oriented pollution control policies.

A firm produces 10 units of output. Its average variable cost (AVC) = $25, average fixed cost (AFC) = $5, and marginal cost (MC) = $30. The firm's: choose all that apply total cost is $200. average total cost (ATC) is $30. total cost is $300. average total cost (ATC) is $20.

average total cost (ATC) is $30. total cost is $300.

The term ____________ refers to a market exchange that affects a third party who is outside or external to the exchange. private costs spillover social costs market failure

spillover

The law of diminishing marginal utility implies: total utility decreases. marginal utility increases. total utility decreases, but marginal utility increases. total utility increases, but marginal utility decreases.

total utility increases, but marginal utility decreases.

The marginal cost curve is generally______, because diminishing marginal productivity implies that additional units are__________. upward sloping, less costly to produce. downward sloping, more costly to produce. downward sloping, less costly to produce. upward sloping, more costly to produce.

upward sloping, more costly to produce.

If the average total cost is declining, then: the marginal cost must be greater than the average total cost. the marginal cost must be equal to the average total cost. the total cost must also be declining. the marginal cost must be less than the average total cost.

the marginal cost must be less than the average total cost.

Should tenants who rent apartments worry that increases in property taxes will increase their rent in the short run? No. In the short run, the supply of apartments is highly elastic so the owner will bear the majority of the tax burden; it will not be passed on to tenants. Yes. In the short run, the supply of apartments is highly elastic so the tenant will bear the majority of the tax burden. No. In the short run, the supply of apartments is highly inelastic so the owner will bear the majority of the tax burden; it will not be passed on to tenants. Yes. In the short run, the supply of apartments is inelastic so the tenant will bear the majority of the tax burden.

No. In the short run, the supply of apartments is highly inelastic so the owner will bear the majority of the tax burden; it will not be passed on to tenants.

When the total product curve reaches its maximum point, the value of the marginal product at that point is: zero. one. negative. positive.

zero

Which of the following is an example of a fixed cost? Payroll taxes. Monthly rent for the factory. Wages for workers. Raw materials for production.

Monthly rent for the factory.

The marginal social benefit of a good that exhibits positive externalities implies: The marginal social benefit equals the marginal private benefit minus the benefits received by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit plus the costs incurred by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit minus the costs incurred by third parties not involved in the trade.

The marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade.

If the marginal product is greater than the average product, then the average product is: decreasing. increasing. constant. zero.

increasing

A public good is a good that is _______ and thus is difficult for market producers to sell to individual consumers. excludable or rival. nonexcludable or nonrival. nonexcludable and nonrival. excludable and rival.

nonexcludable and nonrival.

Economists are able to determine total utility by: multiplying the marginal utility of the last unit consumed by the number of units consumed. multiplying the marginal utility of the first unit consumed by the number of units consumed. multiplying the marginal utility of the last unit consumed by the unit price. summing up the marginal utilities of each unit consumed.

summing up the marginal utilities of each unit consumed.

John starts a business. The rent of the building is $4,000, the cost of the two secretaries is $40,000, and the cost of electricity and gas comes to $5,000. There's a great demand for his information, and his total revenue amounts to $100,000. By working on his own business, John forfeits the $50,000 he could earn by working for his former employer and the $4,000 he could have earned as interest had he saved his funds instead of putting them in this business. What are the accounting profit and economic profit?

$51,000 and -$3,000.

Why of the following statement is true about price ceiling? Equilibrium quantity is reduced A transfer of surplus from producers to consumers. It generates deadweight loss. All of the above.

All of the above

Explain how studying for an exam is subject to the law of diminishing marginal productivity. The law of diminishing marginal productivity implies that the optimal amount of studying is however many hours will lead to your highest possible score. After this point, your performance falls and you should not study any more. The more and more time you devote to studying, the amount of time you have to devote to other things diminishes at the margin. This is true for any activity. That is, all activities are subject to diminishing marginal productivity. Assuming you organize your studying reasonably, you will focus on the parts of the text that are most likely to show up on the exam and most likely to raise your grade. As you study less relevant material, your additional time spent studying will yield fewer additional points on the exam. At some point, additional studying can have a negative return. The law of diminishing marginal productivity pertains to studying in a group only. If you study with one or two people, your grade will likely improve because they can teach you information you don't know. However, at some point, as you add another person, the grades for everyone decline.

Assuming you organize your studying reasonably, you will focus on the parts of the text that are most likely to show up on the exam and most likely to raise your grade. As you study less relevant material, your additional time spent studying will yield fewer additional points on the exam. At some point, additional studying can have a negative return.

In which case would the shortage resulting from a price ceiling be greater: when supply is inelastic or elastic? Inelastic. The reason is that the response in quantity supplied is greater when price elasticity is lower. Elastic. The reason is that the response in quantity supplied is greater when price elasticity is greater. Inelastic. The reason is that the response in quantity supplied is greater when producers are not greatly affected by changes in price. Elastic. The reason is that the response in quantity supplied is greater when producers are not greatly affected by changes in price.

Elastic. The reason is that the response in quantity supplied is greater when price elasticity is greater.

If average product is falling, what is happening to short-run average variable cost? If average productivity is falling, short-run average variable cost could be rising or falling; it depends on what is happening with marginal productivity. If average productivity is falling, short-run average variable cost is rising; to say that productivity falls is equivalent to saying that cost rises. If average productivity is falling, short-run average variable cost is also falling; to say that productivity falls is equivalent to saying that cost falls. Short-run average variable costs are always falling. They are not related to average product.

If average productivity is falling, short-run average variable cost is rising; to say that productivity falls is equivalent to saying that cost rises.

If marginal cost is increasing, what do we know about average cost? If marginal cost is increasing, average costs could be rising, falling, or constant. The direction of average costs depends on whether marginal cost is higher, the same, or lower than average cost. If marginal cost is increasing, average costs are falling. Marginal costs only increase at very high levels of production. When items are mass-produced (because of economies of scale), their average costs always fall, even when marginal costs begin to increase. Average cost is constant and always lower than marginal cost because of the law of decreasing marginal productivity. As more items are produced, marginal costs increase (the same as productivity decreasing), but average costs remain constant because the total number of items produced is also increasing. If marginal cost is increasing, average costs are rising. As the cost of the next item produced rises, the average cost of all items produced must also rise.

If marginal cost is increasing, average costs could be rising, falling, or constant. The direction of average costs depends on whether marginal cost is higher, the same, or lower than average cost.

A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect? In the long run, fixed cost decreases as costs are spread out over a greater quantity of output. Declining fixed cost accounts for the downward-sloping average total cost curve. In the long run, there are no fixed costs, meaning the average total cost curve shifts down. In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale. In the long run, fixed cost increases as firms build new plants and purchase new capital. This means that the average total cost curve will eventually slope upward.

In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.

What distinguishes the short run from the long run? In the short run, some inputs are fixed, and in the long run, some inputs are fixed. In the short run, all inputs are variable, while in the long run, some inputs are fixed. In the short run, some inputs are fixed, while in the long run, all inputs are variable. In the short run, all inputs are variable, and in the long run, all inputs are variable.

In the short run, some inputs are fixed, while in the long run, all inputs are variable.

Which of the following would be classified as a positive externality? Increase in neighborhood property values because of well-maintained lawns. Removing government education subsidies for public schools. A surcharge for ambulance service is shifted to property taxes. Reselling outdated textbooks to under-funded public schools.

Increase in neighborhood property values because of well-maintained lawns.

How can "diamond/water" paradox be explained by using the utility concept? It is explained by the difference between total utility and marginal utility. Although our marginal utility for the consumption of a gallon of water is much higher than that of a diamond, the total utility of water is much lower than the total utility of diamonds. It is the total utility that determines willingness to pay, and thus defines the demand curve. It is explained by the different elasticities of diamonds and water. Water has a high elasticity because it is a necessity, while diamonds are inelastic because they are a luxury. This means that price can go very high for diamonds and people will not demand a lower quantity. It is explained by the difference between total utility and marginal utility. Although our total utility for the consumption of water is much higher than that of diamonds, the marginal utility of a gallon of water is much lower than the marginal utility of another diamond. It is the marginal utility that determines willingness to pay, and thus defines the demand curve. It is explained by the different elasticities of diamonds and water. Water has a very low elasticity because it is a necessity, while diamonds are highly elastic because they are a luxury. This means that price can go very high for diamonds and people will not demand a lower quantity.

It is explained by the difference between total utility and marginal utility. Although our total utility for the consumption of water is much higher than that of diamonds, the marginal utility of a gallon of water is much lower than the marginal utility of another diamond. It is the marginal utility that determines willingness to pay, and thus defines the demand curve.

When a firm decides how much to produce, what's the most important cost for the firm? Marginal cost because this cost shows the additional cost associated with producing one more unit of output. Firms will use this information to decide to produce more or less output. Fixed costs because these costs are spent and cannot be changed in the time period under consideration. If fixed costs are higher, the firm will choose to produce more output. Costs that are spent to improve the image of the firm. A firm will choose to increase output if it spends a large amount on advertising and brand image. Variable costs because these costs change as output changes. If the firm wants to maximize profits, it will choose to produce a quantity where variable costs are minimized.

Marginal cost because this cost shows the additional cost associated with producing one more unit of output. Firms will use this information to decide to produce more or less output.

Which of the following statements is true? Marginal utility can increase positively, but not negatively. Marginal utility can be positive or negative, but not zero. Marginal utility can be positive, negative, or zero. Marginal utility can decrease but not become negative.

Marginal utility can be positive, negative, or zero.

What percentage of a tax will the demander pay if price elasticity of supply is 0.3 and price elasticity of demand is 0.7? Percent paid by demander is 70% and percent paid by supplier is 70%. Percent paid by demander is 30% and percent paid by supplier is 30%. Percent paid by demander is 30% and percent paid by supplier is 70%. Percent paid by demander is 70% and percent paid by supplier is 30%.

Percent paid by demander is 30% and percent paid by supplier is 70%.

How does a consumer decide to achieve the highest utility when consuming two goods? The total utility per dollar is the same for both goods. The marginal utility per dollar for first good is greater than the marginal utility per dollar for the second good. The marginal utility per dollar is the same for both goods. The marginal utility per dollar for first good is less than the marginal utility per dollar for the second good.

The marginal utility per dollar is the same for both goods.

Why are both nonexcludability and nonrivalry important elements of public goods? Goods with these characteristics can be efficiently supplied privately or publicly. These characteristics are important because they counteract negative externalities. With negative externalities, extra social costs are incurred. With public goods, extra social benefits are gained. These characteristics increase the ability of free riders to enjoy the benefit of the public good without sharing in the cost of that good. These characteristics increase the value of a public good because no single person can make the decision to provide the good. They must be provided in collaboration with the public.

These characteristics increase the ability of free riders to enjoy the benefit of the public good without sharing in the cost of that good.

Taxation: All of the above. reduces consumer surplus. generates deadweight loss. reduces producer surplus

all of the above

Which of the following statements is true? All of the above. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Social surplus is the sum of consumer surplus and producer surplus.

all of the above

Residents of Starville enjoy taking their dogs with them when they go to their local park for recreation and picnics. Everyone enjoys the park more when each group cleans up after themselves and their pets. Since the local park is a public good, we can expect the park to be: dirty and it's a positive externality. dirty and it's a negative externality. clean and it's a positive externality. clean and it's a negative externality

dirty and it's a negative externality.

A tailoring company has two workers. The combined production of the two workers is ten shirts per day. The company decides to double the amount of capital and labor, as a result, the production has increased to twenty-two shirts per day. The production increase implies: constant returns to scale. diminishing marginal product. diseconomies of scale. economies of scale.

economies of scale

Market failure describes a situation in which the market itself ____ in a way that balances social marginal costs and social marginal benefits. avoids externalities. fails to allocate resources efficiently. incurs the costs outside the production process. remains outside the transaction.

fails to allocate resources efficiently.

An individual who wants others to pay for public goods, but plans to use those goods without paying, is often referred to as a: freeloader. free rider. tax evader. cheater.

free rider