Econ 103 Final Exam
2. Accounting Profit and Economic Profit a. Very briefly explain the difference between accounting profit and economic profit. Your answer must be to the point and very specific.
Accounting Profit = Total Revenue - Explicit Costs Economic Profit = Total Revenue - Explicit Costs - Implicit Costs The difference is that accounting profit subtracts direct monetary outlays from the firm's revenue, while economic profit subtracts direct monetary outlays AND forgone opportunities from the firm's revenue. Economic profit considers forgone alternatives including everything that is given up such as money that used to be earned, but now is not because you are running your own business.
T/F If the quantity demanded of a good is unresponsive to a change in the price of that good, demand is elastic.
False
T/F In economics, the cost of something is exactly how much money you paid for it
False
T/F Normative economic analysis helps build an understanding of the way the world works through observation and description.
False
Consider the market simulation activity that we did together in class. b. List the specific steps that describe the process through which the market moved to equilibrium as the activity moved from round one into rounds two and three. Hint: I am asking you to identify and state the forces at work that drove the outcome explained in part a. I clearly repeated these steps in class many times. You must list at least three steps to receive full credit. (3 points)
Buyers bring willingness-to-pay based on benefit/value from consumption. Sellers bring willingness-to-sell based on opportunity cost of production. Buyers and sellers interact and exchange seeking to gain (follow their self-interest). The market moves toward equilibrium guided by market forces (invisible hand) as buyers and sellers seek to gain through engaging in voluntary exchange (become better off). This process is the result of.... • INTERACTION • INFORMATION/EXPERIENCE/KNOWLEDGE • COMPETITION (ACTING ON INFO/EXP/KNOW) ...leading to an established narrowed price range with more trades and increased well-being. Markets increase the well-being of society through interaction and voluntary/mutually beneficial exchange.
1. Price Elasticity of Demand & Total Revenue (5 points) Consider the following newspaper quote: "Great weather conditions combined with a new harvesting method increased yields resulting in a bumper crop of oranges in Florida last year. This bumper crop drove down orange prices by 20% and as a result of the new lower price, orange sales to consumers increased by 5%. a. Given this information and assuming there were no other changes, what is the price elasticity of demand for oranges over this range? Hint: I need an exact number as an answer as well as a general interpretation or characterization of this number in terms of elasticity. (2 points)
Ed=%deltaQd/%deltaP = 5/-20 = -1/4 = -0.25 Inelastic (unresponsive, small) The negative sign illustrates the Law of Demand meaning that P and Q move in opposite directions
T/F According to the law of supply, an increase in the demand for corn will eventually result in an increase in the supply of corn as the price rises.
False
T/F Consider a tax placed in a market with a normal upward sloping supply curve and downward sloping demand curve. The lost well-being from the tax associated with units still purchased represents dead-weight-loss while the lost wellbeing from the tax associated with units no longer bought and sold represents tax revenue.
False
T/F Consider the example from class where society agreed to reduce pollution by 30%. From the perspective of all firms jointly, the most efficient plan would be to require all polluting firms to reduce emissions by the same % amount.
False
T/F Consider the example from class where society agreed to reduce pollution by 30%. From the perspective of all firms jointly, the most equitable (fair) plan would be to require all polluting firms to reduce emissions by the same % amount.
False
T/F Demographers predict that over the next several decades, the average age of Americans will rise significantly as the elderly make up a larger and larger share of the total population. In the US market for medical care (S&D), the likely impact of this statement would be that the demand for medical care would increase which would in turn increase the supply of medical care.
False
T/F If the US has a comparative advantage in the production of a product, they must also have an absolute advantage in the production of that product.
False
T/F If the US market in isolation has a higher price compared to the world price with trade, then the US is said to have a comparative advantage in the production of this product.
False
T/F Positive economic analysis uses the information provided from normative economics to prescribe policy actions designed to improve a particular situation.
False
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. Given your answers to questions 16-21 there is likely nothing that the city can do in terms of alternative policies to successfully reduce congestion.
False
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. The price elasticity of demand for bus rides of -0.1 indicates that bus rides are classified as an inferior good.
False
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. The price elasticity of demand for bus rides of -0.1 indicates that people perceive the bus fare (price of the bus) as exactly the same thing as the cost of riding the bus.
False
T/F The best explanation for why Brazil and Liberia accepted the $1 billion and $150 million payments from Norway and stopped destroying their forests is because it would have hurt their reputation around the world if they did not.
False
T/F The consumption of soda and junk food by individuals leads to rising rates of overweight and obesity and is associated with increased medical costs, but this is in no way considered an externality as defined in economics.
False
T/F The economic way of thinking, if applied correctly, can solve society's problems.
False
Consider the market simulation activity that we did together in class. a. What two specific features were clearly seen in the data as the activity moved from round one into rounds two and three? Hint: Your answer should be complete and very specific. (3 points)
In round one there were very few transactions and there was no single price, but rather the prices trades took place at were dispersed or spread out over a wide range. In rounds two and three, the prices of the transactions taking place became concentrated within a narrow range approximately between $4.20 and $4.40 and the number of transactions taking place increased significantly. • ESTABLISHED PRICE (NARROW/CONCENTRATED RANGE) • MORE TRADES The squeezing of the price into a narrow range facilitated the trades that make both buyers and sellers better off resulting in an increased level of well-being among market participants (buyers and sellers) as more and more trades happened at an established price. The market moved to EQUILIBRIUM! Voluntary transactions create well-being!
4. Monopoly: Good or Bad Are monopolies good or bad? Very briefly comment on this question given your reading in the textbook and our class discussions.
The US has anti-trust laws to prevent monopoly power basically because of the inefficiency created as the monopolist restricts output and marks the price up above the marginal cost of the last unit produced (DWL). Generally speaking these laws help consumers by lowering prices and increasing consumer surplus. We do allow natural monopolies with regulation where the best example is electricity. We also allow monopoly power through the government granting the right to one firm to be the only seller through license agreements and patents/copyrights. One example of this is the cable TV market where a municipality sells the monopoly rights to one company for a fee thereby generating government revenue for the municipality. So in reality when you buy cable TV, you are really also helping to fund police and fire departments etc. Another example is with prescription drugs where firms are granted patent rights to be the only seller for some period of time. The result is high priced prescription drugs as new drugs are patented, but eventually we see competition and falling prices as generics are introduced when the patent runs out. The argument in favor of this is that we can have new beneficial drugs at high prices through research and development of firms because they have the incentive of profit, or instead we can fewer new beneficial drugs because of the lack of profit incentive leading to less research and development. There are others who argue that this patent protection is abused by drug companies as they fight for patent extensions and also as they introduce new drugs that are slightly different, but that do essentially the same thing and get patents and market them effectively to reap high profits and fight off competition from generics. These people believe that the drug industry is in need of more regulation including price controls. It is also possible that the government could direct and finance all pharmaceutical R&D, thus providing lower priced new beneficial drugs, but with higher taxes.
Consider the following newspaper quote: "Great weather conditions combined with a new harvesting method increased yields resulting in a bumper crop of oranges in Florida last year. This bumper crop drove down orange prices by 20% and as a result of the new lower price, orange sales to consumers increased by 5%. b. Strictly in terms of total revenue generated by sales, was this bumper crop of oranges good news or bad news for orange growers on average? Briefly explain your answer. Hint: Your answer should be very specific. Be sure to use some economic language and the economic way of thinking and refer to your answer to part a. (3 points)
The above shock would be illustrated by a rightward shift of the supply curve causing an excess supply of oranges at the initial price. In order to restore equilibrium the price will adjust and buyers will respond according to the Law of D. P ↓ Qd ↑ But by how much? When P ↓ and Q ↑, total revenue (P*Q) can increase, decrease, or remain unchanged depending on the price elasticity of demand over the relevant range. According to part a from above, for every 1% ↓ P, there will be a corresponding 0.25% ↑ Qd. In this example the demand is inelastic meaning that the action was on the lower portion of the demand curve. Thus, the quantity response (↑ Q) was small relative to the price change (↓ P). Therefore, total revenue (P*Q) will fall which on average could be bad news for orange growers. That is, the increase in sales did not make up for the decrease in price.
Why is the distinction you gave in your answer to part a important to economists? That is, what question are economists trying to answer when they calculate profit as compared to the question accountants are trying to answer when they calculate profit?
The difference described above is the result of the different questions that accountants and economists are trying to answer when they calculate a firm's profit. The accountant is asking how much is left over after all monetary expenses are netted out thereby revealing the income to the entrepreneur from running the business. The economist is asking how well the entrepreneur is doing running the business compared to her next best alternative, and therefore the economist must consider all forgone opportunities as costs.
What are the necessary conditions for a firm with some degree of monopoly/market power to be able to price discriminate? Very briefly explain
The monopolist must have some price setting power and they must have information regarding the willingness to Pay (WTP) for their product across individual consumers or groups of consumers. The monopolist must also be able to segment the market (separate buyers according to their WTP) and be able to prevent re-sale of their product from those who buy at a low price to people willing to pay more. That is, they must be able to keep selling to their high WTP customers at the high price while also selling to the low WTP customers at the lower price.
T/F A per unit tax (on either buyers or sellers) in a market with a normal upward sloping supply curve and downward sloping demand curve will create a wedge between the price paid by consumers and the price received by sellers and the amount of this wedge will be equal to the amount of the tax regardless of the price elasticities of demand and supply
True
T/F According to the law of demand, an increase in the supply of big screen TVs will eventually result in an increase in the quantity of big screen TVs purchased as the price decreases
True
T/F Based on economic theory, if Germany specializes in producing the good they have a comparative advantage in and engages in trade, their consumption possibilities will increase beyond their initial production possibilities.
True
T/F If the market for a product generates a negative externality (production or consumption) that has not been internalized, the private market outcome will result in a quantity bought and sold that is more than the optimal quantity.
True
T/F If there is an excess supply of a good in a market, then the price will tend to fall as a result of market forces
True
T/F If total revenue is $100, explicit costs are $50, and implicit costs are $30, then accounting profit equals $50.
True
T/F If total revenue is $200, explicit costs are $100, and implicit costs are $50, then economic profit equals $50.
True
T/F Normative economic analysis uses the information provided from positive economics to prescribe public policy designed to improve a particular decision.
True
T/F Positive economic analysis provides a description of the way the world works through observation and description.
True
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. A policy interpretation of the price elasticity of demand for bus rides of -0.1 suggests that this policy will not be successful in reducing congestion.
True
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. Given your answers to questions 16-21 the city could address the congestion problem through a two-pronged combination of alternative polices designed to increase the cost of driving a car (raise parking fees) and decrease the cost of the bus (more frequent runs and express routes).
True
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. The price elasticity of demand for bus rides of -0.1 indicates that people do not perceive the bus to be a good alternative substitute for their car even with a lower bus fare.
True
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. The price elasticity of demand for bus rides of -0.1 indicates that a 1% change in the bus fare will cause a 0.1% change in bus ridership in the opposite direction of the fare change.
True
T/F Suppose a city is considering a policy to reduce congestion in the downtown area. They decide that lowering the bus fare (price) would make the bus more attractive and lead to fewer cars and less congestion. The city hires an economist to research this issue and she reports that the estimated price elasticity of demand for bus rides is -0.1. The price elasticity of demand for bus rides of -0.1 indicates that consumers are unresponsive to the lowering of the bus fare and thus the demand for bus rides is inelastic.
True
T/F The best explanation for why Norway has paid Brazil $1 billion dollars and has agreed to pay Liberia $150 million to stop the destruction of their forests is because the perceived climate benefits to Norway are greater than this cost expense.
True
T/F The economic way of thinking involves considering alternatives and asking what else could I/we do.
True
T/F The economic way of thinking involves weighing the marginal costs and benefits of individual/social choices.
True
T/F The warming of the planet and other changes to Earth's climate resulting from greenhouse gas emissions as we produce/consume to meet our wants/desires is a very good example of what economists refer to as a negative externality.
True
T/F Total revenue equals the quantity of output the firm produces times the price at which it sells its output
True
T/F Use the diagram below showing a PPF for an economy that can produce guns and butter to answer questions 7 & 8 (True/False). Your answers must reflect the exact definition of the economic term being used. 7. Points A and B on the graph clearly illustrate the concept of opportunity costs and tradeoffs in that society must give up some guns in order to produce more butter.
True
T/F Use the diagram below showing a PPF for an economy that can produce guns and butter to answer questions 7 & 8 (True/False). Your answers must reflect the exact definition of the economic term being used. Point C on the graph clearly illustrates the concept of scarcity in that society cannot have all of the guns and butter they want/desire.
True
T/F With free trade, if a country imports wheat, domestic buyers of wheat are better off and domestic wheat farmers are worse off when compared to the before-trade domestic equilibrium.
True
c. Very briefly explain the concept of zero economic profit in a perfectly competitive industry setting. Keep your answer simple and to the point.
Zero economic profit means that the firm is earning a normal rate of return on their investment. This is just another way of saying that the revenue from selling output is exactly equal the total opportunity cost incurred by the firm during the production process. In a perfectly competitive industry setting the long run equilibrium will tend toward zero economic profit for all firms as competition drives price down to approaching the opportunity cost of production. We expect there will be entry if the typical firm is earning economic profit in the short run which will drive the price down and eliminate the profit through competition. Similarly, we expect there will be exit if the typical firm is earning economic losses in the short run which will increase the price and eliminate the losses. We saw an example of this in class during the candy market structure simulation activity where prices were driven down to the opportunity cost of production in the market with many competitors. The firms in the competitive market setting with many sellers of an identical product had no market power and therefore were price takers destined to earn zero economic profit. Competitive firms are limited in the price they can charge by both the demand for their product as well as the competition from other firms selling an identical product.
3. Competition and Monopoly a. List three characteristics of a perfectly competitive industry setting b. Given your answer to part a, what is the very general reason that a monopoly industry setting occurs? c. Given your answers to parts a and b, very briefly describe the key difference in outcomes between monopoly markets and competitive markets?
a. -- Many sellers -- Identical product across all sellers -- Free entry and exit -- Perfect Information and resource mobility b. In a monopoly industry there is one seller of a unique product such that the seller faces no direct competition. This result arises when there is/are significant barriers to entry resulting in a lack of competition. c. The lack of competition results in market power for the monopoly firm which allows them to be a price maker and as such they are able to earn economic profit. We saw an example of this in class during the candy market structure simulation activity where the monopolist was able to charge $0.25 because the only limit on the price they could charge was what consumers were willing to pay given by the demand for their product. In the long run this price making ability (market power) will result in economic profit for the monopolist due to a lack of competition resulting from some barrier to entry as long as consumers are willing to pay for the product.
1. The Short Run A firm is operating in the short run if_________________. There are two very specific answers to this question. The first is the standard textbook definition and the second is the one I gave in class. Please clearly write the words that would complete the above sentence for both definitions below in parts a and b. a. Textbook: b. Class:
a. ... some of their inputs are variable, but at least one of their inputs is fixed. This is usually described as the firm being able to vary their labor and raw materials inputs, but with a fixed kapital stock of factory and machinery b. ...they are kapital constrained.
Use the following information to answer questions 8 - 10. The diagram on the next page depicts the competitive market for peanuts. This market is initially in equilibrium with 400 tons being bought and sold at a price of $50 per ton. Consider a policy in which the government institutes a price regulation in the peanut market such that peanuts cannot be sold for less than $70 per ton. Hint: Use the diagram as needed to answer the questions, but you do not need to illustrate anything specific on the diagram. 8. How many tons of peanuts will consumers be willing to buy at this regulated price? a. 200. b. 400. c. 600. d. The same amount that farmers are willing to sell at this regulated price. e. Both a and d are correct.
a. 200.
Suppose it takes workers in Canada 10 hours to produce 1 ton of coal while in the US it takes workers 20 hours to produce 1 ton of coal. We can say that a. Canada has an absolute advantage in the production of coal. b. Canada has a comparative advantage in the production of coal. c. the US has an absolute advantage in the production of coal. d. the US has a comparative advantage in the production of coal. e. both a and b are correct
a. Canada has an absolute advantage in the production of coal.
1. Joe runs a small boat factory. He can make ten boats per year and sell them for $25,000 each. It costs Joe $150,000 for the raw materials (fiberglass, wood, paint, and so on) to build the ten boats. Joe has invested $400,000 in the factory and equipment needed to produce the boats which are now assets that he owns: $200,000 from his own savings and $200,000 borrowed at 10 percent interest (assume that Joe could have loaned his money out at 10 percent, too). Joe can work at a competing boat factory for $70,000 per year. Hint: The funds invested in the factory and equipment ($400,000) are not treated as a cost here because they represent assets of the firm, there is however a cost associated with obtaining these funds. a. What is the total revenue Joe can earn in a year? b.What are the explicit costs Joe incurs while producing ten boats? c. What are the total opportunity costs of producing ten boats (explicit and implicit)? d. How much is Joe's accounting profit? e. How much is Joe's economic profit? f. Is it truly profitable for Joe to operate his boat factory? Very briefly explain.
a. TR = P * Q = (25,000 * 10) = $250,000 b. The explicit costs are the costs that Joe incurs for which he makes a monetary outlay (takes money out of his pocket). The $400,000 itself is not an explicit cost because Joe owns the factory and equipment and it is therefore an asset. Explicit costs = 150,000 + 20,000 = $170,000 raw materials plus interest on the loan (money borrowed) c. Total opportunity costs = explicit costs + implicit costs = 170,000 + (70,000 + 20,000) = $260,000 The implicit costs are the forgone wage and the lost interest on savings d. Accounting profit = TR - explicit costs = 250,000 - 170,000 = $80,000 e. Economic Profit = TR - total opportunity cost = 250,000 - 260,000 = - $10,000 f. In order to answer this question we look at the two options available to Joe. 1: Joe can operate the boat factory and make an accounting profit of $80,000. 2: Joe can work for the competition and make $70,000 and also earn 10% interest on his savings, a total of $90,000. Comparing the two options, Joe would be better off not operating the boat factory. In economic terms, it would cost Joe $10,000 to operate the boat factory, which is the amount of his economic Profit of -$10,000 found in part e. Because Joe would be better off working for the competition it is not profitable for Joe to operate a boat factory
Use the following information to answer questions 10-12. Suppose the unit labor requirements for Japan and the United States (US) are as listed in the table below. Hint: It takes 30 labor hours to produce 1 car in Japan and it takes 150 labor hours to produce 1 airplane in Japan. Country Cars Airplanes Labor Hours Japan 30 150 2,400 United States (US) 50 200 2,400 10. The US has a comparative advantage in the production of a. airplanes, and Japan has a comparative advantage in the production of cars. b. cars, and Japan has a comparative advantage in the production of airplanes. c. both cars and airplanes. d. neither cars nor airplanes.
a. airplanes, and Japan has a comparative advantage in the production of cars.
Use the diagram below to answer questions 5 and 6 on the next page. 5. Point B on the graph on the previous page is a. efficient because it is not possible to get more butter without giving up some tractors. b. preferred to both points A and C because it has more of a mixture of tractors and butter than either point. c. preferred to point A because it has more tractors and less butter. d. preferred to point C because it has more butter and less tractors. e. both a and b are correct.
a. efficient because it is not possible to get more butter without giving up some tractors.
Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the arc midpoint method, the a. price elasticity of demand = -1.43 and an increase in the airfare will cause airlines' total revenue to decrease. b. price elasticity of demand = -1.43 and an increase in the airfare will cause airlines' total revenue to increase. c. price elasticity of demand = -0.70 and an increase in the airfare will cause airlines' total revenue to decrease. d. price elasticity of demand = -0.70 and an increase in the airfare will cause airlines' total revenue to increase.
a. price elasticity of demand = -1.43 and an increase in the airfare will cause airlines' total revenue to decrease.
______ Monopoly ______ Natural monopoly ______ Price discrimination Definitions: a. A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. b. A firm that is the sole seller of a product without close substitutes. c. The business practice of selling the same good at different prices to different customers.
b a c
Use the following information to answer questions 8 - 10. The diagram on the next page depicts the competitive market for peanuts. This market is initially in equilibrium with 400 tons being bought and sold at a price of $50 per ton. Consider a policy in which the government institutes a price regulation in the peanut market such that peanuts cannot be sold for less than $70 per ton. Hint: Use the diagram as needed to answer the questions, but you do not need to illustrate anything specific on the diagram. Now suppose the government alters this farm policy program to further accommodate farmers by purchasing any surplus quantity of peanuts that farmers are willing to produce at the regulated price of $70 per ton. What will be the dollar cost to the government of purchasing this excess supply of peanuts at this regulated price? a. $14,000. b. $28,000. c. $36,000 d. $42,000. e. There is not enough information to answer this question.
b. $28,000.
When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the arc midpoint method, the price elasticity of demand would be a. -0.22. b. -0.67. c. -1.33. d. -1.50.
b. -0.67.
Use the following information to answer questions 10-12. Suppose the unit labor requirements for Japan and the United States (US) are as listed in the table below. Hint: It takes 30 labor hours to produce 1 car in Japan and it takes 150 labor hours to produce 1 airplane in Japan. Country Cars Airplanes Labor Hours Japan 30 150 2,400 United States (US) 50 200 2,400 10. If the US and Japan specialize and trade based on the principle of comparative advantage, the US will a. export cars and Japan will export airplanes. b. export airplanes and Japan will export cars. c. not trade with Japan. d. there is not enough information to answer this question.
b. export airplanes and Japan will export cars.
1. Gasoline & Externalities (2 points each) a. MSC < MSB b. less than c. are not d. too much e. MSC > MSB f. greater than g. are h. too little Suppose that gasoline is bought and sold in a competitive market where buyers have a willingness to pay based on the value they receive from consuming and sellers have a willingness to sell based on their opportunity cost of production. Consider the situation in which there is an additional harm to society per gallon of gasoline consumed due to exhaust pollution that is not reflected in the market. Hint: Treat this as a consumption externality. You do not need to illustrate anything specific in the diagram below, but you may want to and sketch a picture to help you visualize the representation of this externality in the market for gasoline. This externality is represented in the market as the marginal social benefit of consumption being _________ the marginal private benefit of consumption. Given this situation, the private market outcome will result in ________ gasoline being bought and sold. The inefficiency of this private market outcome arises because there are units that _________ being produced and consumed for which the _________ .
b. less than d. too much g. are e. MSC > MSB
Suppose producing electricity results in a negative externality. In the absence of government intervention, the private market outcome will a. produce the socially optimal amount of electricity. b. produce more than the socially optimal amount of electricity. c. produce less than the socially optimal amount of electricity. d. there is no way that producing electricity results in a negative externality. e. there is not enough information to answer this question.
b. produce more than the socially optimal amount of electricity.
Maryann decides to spend 1 hour playing cards instead of studying or working at $10 per hour. Her opportunity cost is a. the benefit to her grades from studying for 1 hour and the $10 she could have earned. b. the benefit to her grades from studying 1 hour or the $10 she could have earned, whichever is worth more to her. c. the increase in gaming skill she obtains from playing cards for 1 hour. d. nothing because she enjoys playing cards more than working or studying. e. There is not enough information to answer this question
b. the benefit to her grades from studying 1 hour or the $10 she could have earned, whichever is worth more to her.
__________ Total Revenue __________ Total (Opportunity) Cost __________ Accounting Profit __________ Economic profit __________ Explicit Cost __________ Implicit Cost __________ Marginal product of labor __________ Fixed cost _ _________ Variable Cost __________ Marginal Cost __________ Diminishing Marginal Product of Labor Definitions: a. Total revenue minus total (opportunity) cost b. The cost of all the inputs a firm uses in production (both implicit and explicit) c. The amount a firm receives for the sale of its output d. Costs that do not involve a monetary outlay by the firm e. Total revenue minus explicit costs f. Costs that involve a direct monetary outlay by the firm g. Costs that do not vary with the quantity of output produced h. The increase in output that arises from an additional unit of labor used i. The increase in total cost that arises when another unit of output is produced j. Costs that vary with the quantity of output produced k. The property whereby the marginal product declines as the quantity of the labor used increases
c b e a f d h g j i k
______ Total Revenue ______ Total Opportunity Cost ______ Accounting Profit ______ Economic profit ______ Explicit Cost ______ Implicit Cost Definitions: a. Total revenue minus total opportunity cost b. The cost of all the inputs a firm uses in production (both implicit and explicit) c. The amount a firm receives for the sale of its output d. Costs that do not involve a monetary outlay by the firm e. Total revenue minus implicit cost f. Total revenue minus explicit costs g. Costs that involve a direct monetary outlay by the firm h. Costs that are deferred into the future
c b f a g d
The concept of internalizing an externality is formally defined as a. the fact that buyers only consider their private benefits when making a decision. b. the fact that sellers only consider their private costs when making a decision. c. altering incentives so people consider the external effects of their actions when making a decision. d. both a and c are correct. e. both b and c are correct.
c. altering incentives so people consider the external effects of their actions when making a decision.
Gains from international trade occur when the exchange is based on a. the amount of labor resources that the two countries have. b. absolute advantage. c. comparative advantage. d. both a and c are correct. e. a, b and c are all correct.
c. comparative advantage.
What would you expect to happen in the market for cranberries if newly released medical research reveals significant health benefits associated with increased cranberry consumption? a. The demand for cranberries will increase as people seek the added health benefits of cranberries. b. The quantity of cranberries supplied will increase as the price rises. c. The supply of cranberries will increase because more people want to eat cranberries. d. Both a and b are correct. e. Both a and c are correct.
d. Both a and b are correct.
In the market for cranberries, what would you expect to happen if the two shocks mentioned in the previous two questions happened simultaneously? a. The price of cranberries will fall and the quantity of cranberries bought and sold will rise. b. The price of cranberries will rise and the quantity of cranberries bought and sold will rise. c. The price of cranberries will rise and the quantity of cranberries bought and sold will fall. d. Either a or b could be correct depending on which shock is larger. e. Either b or c could be correct depending on which shock is larger.
d. Either a or b could be correct depending on which shock is larger.
Point X on the graph on the previous page is inefficient because a. the country is not using its resources and/or technology to its fullest potential. b. it is possible to produce more butter without giving up any tractors. c. the country is technologically backward. d. both a and b are correct. e. a, b and c are all correct.
d. both a and b are correct.
An import quota a. is a limit on the amount of goods and services imported from other countries. b. is a tax imposed on goods and services imported from other countries. c. will result in higher prices to consumers in the importing country. d. both a and c are correct. e. both b and c are correct.
d. both a and c are correct.
The economic problem is a result of a. scarcity. b. taxes that are too high and too much government spending. c. too few resources to satisfy society's wants and desires (and needs). d. both a and c are correct. e. a, b and c are all correct.
d. both a and c are correct.
Economics is primarily the study of a. money, finance and the stock market. b. how society manages its scarce resources. c. determining what to produce, how to produce it, and how to distribute what is produced. d. both b and c are correct. e. a, b and c are all correct.
d. both b and c are correct.
Which of the following best explains the economic reasoning as to why most households only own one washing machine? a. Because they only need one. b. Because the value of owning a second washing machine is significantly less than owning the first washing machine. c. Because of the phenomenon known as diminishing marginal benefit. d. both b and c are correct. e. a, b and c are all correct.
d. both b and c are correct.
Use the following information to answer questions 10-12. Suppose the unit labor requirements for Japan and the United States (US) are as listed in the table below. Hint: It takes 30 labor hours to produce 1 car in Japan and it takes 150 labor hours to produce 1 airplane in Japan. Country Cars Airplanes Labor Hours Japan 30 150 2,400 United States (US) 50 200 2,400 10. The US has an absolute advantage in the production of a. airplanes, and Japan has an absolute advantage in cars. b. cars, and Japan has an absolute advantage in airplanes. c. both cars and airplanes. d. neither cars nor airplanes.
d. neither cars nor airplanes.
Using supply-and-demand analysis, which of the following is true? Other things being equal, a. elasticity of demand does not make any difference, the tax is always split evenly between buyers and sellers. b. elasticity of demand does not make any difference, the full tax is always passed on to consumers. c. the more elastic demand is, the larger the portion of a tax that falls on buyers. d. the more inelastic demand is, the larger the portion of a tax that falls on buyers. e. There is not enough information to answer this question.
d. the more inelastic demand is, the larger the portion of a tax that falls on buyers.
What would you expect to happen in the market for cranberries if a new machine called the Ruby Slipper is introduced that dramatically improves the cranberry harvesting process? a. The supply of cranberries will increase as the marginal cost of production for farmers falls. b. The demand for cranberries would increase because more cranberries will be produced. c. The quantity of cranberries demanded will increase as the price falls. d. Both a and b are correct. e. Both a and c are correct.
e. Both a and c are correct.
Use the following information to answer questions 8 - 10. The diagram on the next page depicts the competitive market for peanuts. This market is initially in equilibrium with 400 tons being bought and sold at a price of $50 per ton. Consider a policy in which the government institutes a price regulation in the peanut market such that peanuts cannot be sold for less than $70 per ton. Hint: Use the diagram as needed to answer the questions, but you do not need to illustrate anything specific on the diagram. Assuming that there is no mechanism to deal with the excess supply of peanuts caused by this policy, how many tons of peanuts will actually be bought and sold at this regulated price? a. 600. b. 400. c. 200. d. The same amount that consumers are willing to buy at this regulated price. e. Both c and d are correct.
e. Both c and d are correct.
Based on the market for lobsters presented in the diagram below a. the equilibrium price results in the quantity demanded being equal to the quantity supplied. b. the equilibrium price facilitates all of the transactions that could make both a buyer and a seller better off. c. the 2000th lobster should be produced and consumed. d. both a and b are correct. e. a, b and c are all correct.
e. a, b and c are all correct.
Suppose you observe both an increase in the price of wheat and an increase in the quantity of wheat sold. Which of the following curve shift(s) in the market for wheat could have possibly caused this outcome? a. The demand curve shifts right and the supply curve remains unchanged. b. The demand curve shifts right and the supply curve shifts left. c. The demand curve shifts right and the supply curve shifts right. d. The demand curve shifts left and the supply curve shifts left. e. a, b, and c are all correct.
e. a, b, and c are all correct.
In year one a family had an income of $20,000 and had $50 in health care expenditures, while in the year 2 this family had an income of $40,000 and had $500 in health care expenditures. In this example a. health care is a normal good. b. health care is a necessity good. c. health care is a luxury good. d. both a and b are correct. e. both a and c are correct.
e. both a and c are correct.
Regarding the government providing goods and services to citizens a. there is no opportunity cost. b. the first layer of opportunity cost is citizens giving up the private spending of their income by paying taxes. c. the second layer of opportunity cost is forgoing the benefits of program B as program A is funded. d. the opportunity cost is the amount of money spent by the government. e. both b and c are correct
e. both b and c are correct.