MicroEconomics Unit 3

Which of the following is a possible result of economies of scope?

A company that sells both lumber and paper products Feedback: Response: Economies of scope make it less costly for a firm to produce a certain good when it's already producing some other good.

Which of the following is not a source of U.S. comparative advantage?

A relatively closed immigration policy Feedback: Response: Many of the brightest students in the world come to the U.S. to study and remain in the U.S., creating jobs and helping to maintain U.S. comparative advantages in a number of fields.

Which of the cost curves above best represents a typical average variable cost curve?

C. Response: The average variable cost curve is generally U-shaped and lies below the ATC curve. In order from A to D, the curves above represent MC, ATC, AVC, and AFC.

Which of the following statements is always true?

If MC is greater than ATC, ATC is rising. Response: If MC is greater than ATC, ATC is rising. If MC is below ATC, ATC is falling. It does not matter whether MC is increasing or decreasing, only whether it is greater than or less than average cost.

If the opportunity cost of producing computers is lower in Japan than in the U.S., then:

Japan should produce computers and sell them to the U.S. Feedback: Response: It is impossible to say which country will consume more computers, but—following the principle of comparative advantage—Japan should produce computers if their opportunity cost is lower.

Refer to the graph above. The graph shows production possibility curves for widgets and wadgets for both Saudi Arabia and the United States. Given these production possibility curves, you would suggest that:

Saudi Arabia specialize in widgets and the United States in wadgets. Feedback: Response: The opportunity cost for Saudi Arabia of wadgets in terms of widgets is higher than the opportunity cost for the United States. Thus, the U.S. has the comparative advantage in wadgets; Saudi Arabia must have the comparative advantage in widgets.

Which of the following may help to explain why economists view trade as good, while the public tends to be fearful of outsourcing?

The gains from trade are sometimes difficult to see when they come in the form of lower prices. Feedback: Response: On the other hand, it is easy to identify the jobs that are lost due to outsourcing.

Which of the following statements correctly summarizes a difference between the layperson's view of trade and the economist's view of trade?

The gains from trade in the form of low consumer prices tend to be widespread and not easily recognizable while the costs in jobs lost tend to be concentrated and readily identifiable. Feedback: Response: It is because the costs of trade are more visible than the benefits that many laypeople oppose free trade. Switching "economists" and "laypeople" would make options B through D correct.

What is a production function?

The relationship between any combination of inputs and the maximum output obtained from that combination. Feedback: Response: Production functions are derived by allowing inputs to change and observing the effect on output, assuming efficiency.

Which of the following statements about the gains from trade is false?

When two countries trade, either the traders or the citizens will benefit in each country, but never both. Feedback: Response: Overall, the traders and citizens in both countries will benefit, but it is true that every trader and every citizen may not benefit, and the benefits may not be distributed equally.

In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions, giving electric utilities an allowance of a set amount of emissions, and allowing the utilities to trade their allowances. This is an example of:

a market incentive plan. Feedback: Response: Individual utility companies are permitted emissions that exceed their initial allowance if they can show that other utility companies' emissions are below the allowance. Currently, over 5 million such allowances are traded each year.

Economists define the long run as:

a period of time in which all inputs are variable. Feedback: Response: In the long run, all inputs are variable, and the firm can choose among all the possible production techniques.

Diminishing marginal productivity of labor occurs because:

additional workers cannot be as effective as previously hired workers because other inputs are fixed. Feedback: Response: The law of diminishing marginal productivity occurs because fixed inputs cause a bottleneck which limits the effectiveness of adding more of the variable input.

Economists noticed that in markets where sellers have better information than buyers, eventually only inferior products—lemons—are offered for sale. This problem is called the:

adverse selection problem. Feedback: Response: This problem is known as adverse selection. The classic example is the used car market where only lemons are offered for sale because people with superior used cars cannot find buyers willing to pay a fair price, because buyers know there is a certain probability that the car is a lemon.

The problems that occur when buyers and sellers have different amounts of information about the good for sale are:

adverse selection problems. Feedback: Response: This is how the text defines adverse selection problems.

In the long run:

all inputs are variable. Feedback: Response: In the long run, by definition, the firm can vary all inputs.

An unemployed worker has an incentive to ask for a higher wage than he is willing to accept because stating that he is willing to accept a lower wage may signal to potential employers that his skills are not well-developed. This is an example of:

an informational problem. Feedback: Response: Employers and potential employees have different amounts of information. Employees rely on imperfect signals to indicate their willingness to work as well as the quality of their work.

Implicit revenue refers to:

any increase in the value of the assets owned by the firm. Feedback: Response: This is the definition of implicit revenue.

Transferable comparative advantages:

are based on factors that can change relatively easily. Feedback: Response: Transferable comparative advantages are based on factors that can change relatively easily and will tend to erode over time. Technological innovations are turning inherent comparative advantages into transferable comparative advantages.

Learning-by-doing and technological change both:

are hard to predict and make real-world cost analysis very difficult. Feedback: Response: Learning-by-doing and technological change both are hard to predict and make real-world cost analysis very difficult.

Robert Kaplan of the Harvard Business school argues that traditional concepts of fixed and variable costs:

are not useful because variable costs are small. Feedback: Response: While variable costs are declining in importance, overhead costs are becoming more important. This may suggest a need for a much more careful division among types of overhead costs.

When MC = ATC, we know that:

average total cost is minimized. Response: Because ATC is falling when MC is below it and rising when MC is above it, MC must intersect the bottom of the ATC curve.

Since labor is relatively abundant in Bangladesh while land and capital are not, the economically efficient method of producing rugs would probably:

be labor intensive. Feedback: Response: Since labor is relatively abundant, it will also be relatively cheap, making labor intensive production methods less costly.

The fact that most U.S. citizens learn English from birth is a source of:

comparative advantage for the U.S. because English is the international language of business. Feedback: Response: English is the international language of business, which gives native English speakers an advantage over workers for whom English is a second language.

Using 100 workers and 10 machines, a firm can produce 10,000 units of output; using 250 workers and 25 machines, the firm produces 25,000 units of output. These facts demonstrate:

constant returns to scale. Feedback: Response: Average cost will be constant in this case because the number of inputs is increased 150 percent and output increases 150 percent.

A policy in which the absolute amount of oil people are allowed to use is limited by the government is called:

direct regulation. Feedback: Response: Direct regulation limits the amount of a resource people are allowed to consume.

The large corporation Mega-Mart has many layers of bureaucracy (department managers, store managers, district managers, regional managers, etc.) to help ensure that employees are doing the work they are supposed to. It didn't have to address this monitoring problem as a smaller company. This is an example of:

diseconomies of scale. Feedback: Response: Increased monitoring costs are a common example of diseconomies of scale.

An upward-sloping long run average cost curve is caused by:

diseconomies of scale. Feedback: Response: With diseconomies of scale, per unit costs are rising as the scale of operation gets larger.

The production method that produces a given level of output at the lowest possible cost is considered:

economically efficient. Response: According to your textbook, the production method that produces a given level of output at the lowest possible cost is economically efficient.

The shape of the long-run average cost curve is primarily determined by:

economies and diseconomies of scale. Feedback: Response: Economies of scale explain why the long-run average total cost curve slopes downward at first while diseconomies of scale explain why this curve eventually slopes up. Diminishing marginal productivity is a short-run concept.

When the indivisible setup costs are large, a firm is likely to experience:

economies of scale. Feedback: Response: When high setup costs can be divided among many goods produced, average costs fall. This makes it cheaper for a firm to produce on a large scale.

The graph above shows a firm's long run average cost. Between 15 and 18 units, the firm is experiencing:

economies of scale. Response: Economies of scale cause LRAC to decrease.

The ________ sees opportunities to sell goods at prices higher than production costs and organizes the factors of production to make that good.

entrepreneur Feedback: Response: The entrepreneur is responsible for translating information about cost into the supply of a good.

A person who organizes production and visualizes demand is a(n):

entrepreneur. Feedback: Response: This is how the text describes the role of an entrepreneur.

The law of diminishing marginal productivity states that as more units of a variable input are added to a fixed input, the additional output the firm gets will:

eventually decrease. Feedback: Response: Holding at least one input fixed, increasing a variable input may cause output to increase at an increasing rate initially, but at some point marginal product (additional output) will fall.

The complicated nature of intervention, the government's lack of information, and its inability to fine-tune policies are reasons for:

government failure. Feedback: Response: Many economists are eager to point out that market failures do not necessarily mean the government should get involved to fix the problem. There are government failures too, which could make matters worse.

The Interstate Commerce Commission continued to exist years after its regulatory job had been eliminated. This is an example of:

government failure. Feedback: Response: When problems change, the government solution often responds far more slowly. This is one of the explanations for government failure.

Large trade imbalances will right themselves unless:

government policy or private investments cause capital to flow from nations with trade surpluses to nations with trade deficits. Feedback: Response: If a country has a trade deficit, it is importing more than it is exporting, which means that it is buying more than it is producing. A nation cannot afford to do this unless capital is flowing in.

A country that is exporting more than it is importing:

has a trade surplus. Feedback: Response: A country that is importing more than it is exporting is running a trade deficit and is likely increasing its debt with the rest of the world.

The law of diminishing marginal productivity occurs:

in the short run. Feedback: Response: The law of diminishing marginal productivity is caused by some inputs being fixed. This happens only in the short run.

From a global perspective, free trade:

increases total output. Feedback: Response: With each country specializing according to their comparative advantage, world output is increased.

A market failure is a situation in which:

individual decisions do not lead to socially desirable outcomes.

In private good markets:

individuals reveal their demand when they buy goods. Feedback: Response: Private goods are rival and exclusive, so there is no incentive to either conceal or exaggerate willingness to buy and there can be no free rider problem.

Economists consider positive externalities to be:

inefficient because the free market will tend to produce too few of those goods generating positive externalities. Feedback: Response: Since decision makers ignore third-party benefits, the market tends to produce too few of the goods generating these benefits. This is inefficient because society would be better off if more of its scarce resources were dedicated towards the production of these goods.

A country would prefer to have:

inherent sources of comparative advantage. Feedback: Response: A country would prefer inherent sources of comparative advantage because they would not lose them. Whether a country would prefer a positive trade balance or not is unclear. A trade deficit is nice because the country can consume more than it produces. Outsourcing (and in-sourcing) are natural consequences of competition and trade.

Trade:

is broader than manufactured goods. Feedback: Response: Trade is much broader than just trade in manufactured goods, and includes the services that traders provide. Countries, like the U.S., can have comparative advantages in trade itself.

If a positive externality results from the consumption of higher education, the marginal benefit students receive from education:

is less than the marginal social benefit. Feedback: Response: The marginal social benefit equals the marginal private benefit of consuming a good plus the benefits of the positive externalities resulting from consuming that good.

If a nation has a comparative advantage in the production of good X then:

it can produce X at a lower opportunity cost. Feedback: Response: A comparative advantage in the production of X means the nation can produce that good with a lower opportunity cost. Because the nation is relatively more efficient at producing X, it will specialize in its production and export this good. It is possible to have a comparative advantage in X without having the absolute advantage (being able to produce more of X than any other nation).

As we do something, we become more proficient at it. Economists call this phenomenon:

learning by doing. Feedback: Response: See the textbook for a definition of learning by doing.

The increase in cost associated with a one unit increase in output is called:

marginal cost.

Other things equal, when marginal productivity falls:

marginal costs must rise. Feedback: Response: When marginal productivity falls, a greater amount of variable inputs is required to produce an additional unit of output, so marginal cost must increase. Average costs need not increase because of the presence of fixed inputs.

Outsourcing manufacturing work out of the United States:

may increase the number of jobs in services because the United States has a comparative advantage in facilitating trade. Feedback: Response: Manufacturing jobs are being outsourced because the United States does not have a comparative advantage in manufacturing. It does have a comparative advantage in facilitating trade, which is needed when foreign countries produce more manufactured goods for export.

When the effects of a decision are detrimental to a third party and are not taken into account by the decision maker, economists call this a(n):

negative externality. Feedback: Response: A negative externality occurs when the detrimental effects of a decision on a third party are not taken into account by the decision maker.

If Gail's grade is currently a C and the grade she receives on her next exam is a B, then her:

overall grade will increase. Feedback: Response: When the marginal grade (B) exceeds the average grade (C), the average grade will increase.

If indivisible setup costs are sufficiently high:

per-unit cost falls as output increases. Feedback: Response: If indivisible setup costs are high, the fixed costs of production can outweigh the variable costs, and the effect of falling average fixed cost will dominate the effect of rising average variable cost in the relevant output range.

Milton Friedman and others argue that medical licenses:

restrict supply and could be replaced by information requirements. Feedback: Response: Medical licenses can be viewed as a barrier to entry that restricts quantity and keeps prices high. An alternative to licenses would be to require doctors to provide patients with basic information, like their medical school grades and the success rates for the procedures they provide.

The long-run average total cost curve forms an envelope around the:

short-run average total cost curves. Feedback: Response: See the textbook for a discussion of the envelope relationship.

The book points to warranties as an example of:

signaling which can reduce the adverse selection problem. Feedback: Response: A warranty can serve as a signal that, for example, a used car is not a lemon. This can offset the buyer's lack of information which was the cause of the adverse selection problem in the first place.

If a firm experiences economies of scale over all relevant levels of output, its long-run average total cost curve will:

slope downward. Feedback: Response: The presence of persistent scale economies implies that long-run average cost always falls as output rises, so the long-run average total cost curve will be downward sloping.

In considering the distribution of the gains from trade:

smaller countries usually get a larger proportion of the gains from trade. Feedback: Response: See the textbook for a discussion of the three determinants of the distribution of the gains from trade. One of them is size: smaller countries, other things equal, benefit more from trade with larger countries.

The market demand curve for a public good is derived by:

summing individuals' demand curves vertically. Feedback: Response: Since multiple people can enjoy the public good simultaneously, one must add together each individual's maximum willingness to pay in order to determine how much everybody together values a particular quantity of the public good.

Using effluent fees to correct for negative externalities is an example of:

tax incentive policies. Feedback: Response: Taxes on negative externalities, such as water pollution, are often called effluent fees.

Economists define a public good as a good:

that is nonrival and nonexclusive. Feedback: Response: A public good is a good that is nonrival and nonexclusive. It may or may not be provided by the government, and it may or may not be good for everybody.

If the U.S. dollar appreciates relative to the Canadian dollar:

the Canadian dollar must be depreciating relative to the U.S. dollar. Feedback: Response: See the definition of currency appreciation and currency depreciation in the textbook.

When labor is the variable input, marginal product is defined as:

the additional output produced by an additional worker. Feedback: Response: In developing this concept, the text focuses on the case where labor is the variable input and other inputs are held constant.

Economies of scope occur whenever:

the cost of producing one good lowers the cost of producing another good within a multi-product firm. Feedback: Response: This is how the text defines economies of scope.

Other things remaining the same, when Americans want to buy more goods made in Europe, this causes:

the demand for Euros to increase along with their price. Feedback: Response: In order for Americans to buy goods made in Europe, they must also buy the correct currency in order to make these transactions. So an increase in demand for European goods increases demand for the Euro.

The law of diminishing marginal productivity explains why the:

the marginal cost curve eventually becomes upward-sloping. Feedback: Response: When diminishing marginal productivity sets in, more and more variable input is required for each unit of output. Accordingly, this increases the marginal cost of producing these units.

The envelope relationship discussed in this chapter describes:

the relationship between the long run average cost curve and the short run average cost curves. Response: The LRAC curve envelopes all the different SRAC curves.

Public goods tend not to be sold in the marketplace because:

their nature is such that if supplied to one buyer, they automatically become available to non-buyers as well. Feedback: Response: A public good is nonexclusive and nonrival.

With regard to voluntary solutions to environmental problems, economists believe that:

there will always be free riders preventing a voluntary solution from being fully effective. Feedback: Response: Economists often doubt that voluntary solutions would be successful because some would not contribute, making others less likely to contribute.

Average total cost is equal to:

total cost divided by total output. Feedback: Response: All average measures of costs are found by dividing by output.

The reason two countries trade is that:

trade can make them both better off. Feedback: Response: Both countries would not be willing to engage in trade unless they both expected to be better off as a result.

The market tends to ________ public goods because of ________.

under-provide; the free rider problem. Feedback: Response: Since public goods are nonexclusive, many free riders will refuse to pay for them in the hopes that others will. This makes it difficult for entrepreneurs to earn profits by providing public goods.

To achieve economic efficiency, managers should:

use the least costly input combination. Feedback: Response: Economic efficiency is attained when production costs are minimized.

Suppose your friend argues that due to low wages in China, all goods will eventually be produced in China, and the U.S. will produce nothing. Your friend is:

wrong, because in this case the U.S. dollar would depreciate, eliminating China's comparative advantage in at least some goods. Feedback: Response: If all goods were produced in China, the demand for the yuan would increase and the demand for the dollar would decrease. This would make Chinese goods more expensive for Americans and American goods less expensive for Chinese buyers.

Robert withdrew $100,000 from an account that paid 10 percent annual interest and used the funds to purchase real estate. After one year he sold the property for $120,000. Robert's economic profit on this deal was:

$10,000. Feedback: Response: The opportunity cost of $10,000 (foregone interest) must be included to determine economic profit.

Lisa quit her $40,000-per-year job to start her own economics consulting firm. At the end of her first year of operation, her total revenues were $150,000. Her total explicit costs were $108,000. Her economic profit for the year was:

$2,000. Feedback: Response: Economists always pay attention to opportunity costs. The salary from Lisa's previous job is an opportunity cost of starting her own firm. Her total implicit and explicit costs for the year were $148,000. This leaves $2,000 in economic profit.

Given the table above, what are the fixed costs for 3 units of output?

$4. Feedback: Response: Fixed costs are the same at each level of output. When output is zero, there are, by definition, no variable costs. The $4 in total costs at this level of output must therefore be fixed costs.

Given the table above, what is the marginal cost of producing the fifth unit of output?

$6. Feedback: Response: Marginal costs are the additional costs of producing one more unit. When production increased from 4 to 5 units, cost increased from $20 to $26. The additional cost was $6.