ECON 201 Final

Karen sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife for as many knives as Karen is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $1.75, the second for $2.25,the third for $2.75, and the fourth for $3.25. Assume Karen is rational in deciding how many knives to sharpen. Her producer surplus is

$1.00 1.75+2.25+2.75+3.25=10 2.5 x 4=10 NOT SURE

A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output its total costs are $3,500. When it produces 101 units of output, its total costs are &3,750. What is the marginal cost of producing the 101st unit of output?

$250

A firm's marginal cost has a minimum value of $2, its average variable cost has a minimum value of $4, and its average total cost had a minimum value of $5. Then the firm will shut down if the price of its product falls below

$4 when price of production < AVC

Jane decides to open her own business and earns $50,000 in accounting profit the first year, When deciding to open her business, she turned down three separate job offers with annual salaried of $30,000, $40,000 and $45,000. What is Jane's economic profit from running her own business?

$5,000

A profit-maximizing charges a price of $12. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5. What is the monopolist's profit?

$70 p = TR-TC = QxP - (FC + VC) (12 x 10) - (5 x 10) = 70

The tragedy of the Commons for sheep grazing on common land can be eliminated by the government

-assigning land property rights -auctioning off sheep-grazing permits -taxing sheep flocks NOT: subsidizing sheep flocks (would make problem worse) *when common goods becomes depleted

What causes the labor demand curve to shift?

-changes in productivity -changes in output prices NOT: changes in wages

Characteristic of a perfectly competitive market:

-different sellers sell identical products -there are many sellers -sellers must accept the price the market determines

Taxes cause dead weight losses because they

-lead to losses in surplus for consumers and for producers that, when taken together, exceed tax revenue collected by the government -distort incentives to both buyers and sellers -prevent buyers and sellers from realizing some of the gains from trade

Natural Monopoly

-single firm can supply a good or service to an entire market at a smaller cost than could two or more firms -an industry/firm that realizes long-run economies of scale over total industry demand -marginal cost is low and constant

Correct statements

-the demand for flat-screen computer monitors is more elastic than the demand for monitors in general -the demand for a grandfather clock is more elastic than the demand for clocks in general -the demand for cardboard is more elastic over a long period of time than over a short period of time

Suppose the government designated certain areas within a community to be "wetlands," making it illegal to build on the land. What happens to land not classified as "wetlands" within the community?

-the price of non-wetland land will rise -the marginal product of non-wetland land will rise

Laffer curve:

-the tax rate is very low, and tax revenue is very low -the tax rate is very high, and the tax revenue is very low -the tax rate is moderate (btwn very high and very low), and tax revenue is relatively high -->cutting tax rated will increase tax revenue NOT: the tax rat is very high, the tax revenue is very high

Assume that Greece has a competitive advantage in fish and Germany has the competitive advantage in cars. Also assume that Greece has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then

-the two countries' combined output of both goods will be higher than it would be in the absence of trade -Greece will produce more fish than it would produce in the absence of trade -Germany will produce more cars than it would produce in the absence of trade

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 unites per month. Using the midpoint method, the price elasticity of demand is about

0.67 (100-80)/((100+80)/2) ---------------------------- = 0.67 aka inelastic (5-7)/((5+7)/2)

Suppose a gardener produces both green beans and corn in her garden. If she must give up 14 bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is

2.8 bushels of corn

Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that is her income increases by 20%, she will buy

30% more football tickets x/20%=1.5 x=30%

Correct statement about production possibilities frontiers

An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier

Suppose the demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good?

Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous

Suppose the demand for nachos increases. What will happen to producer surplus in the market for nachos?

It increases

Jim and Tom can both produce two goods; baseball bats and hockey sticks. What is not possible?

Jim had the comparative advantage in the production of baseball bats and in the production of hockey sticks.

Kelly and Dave are both capable of repairing cars and cooking meals. What is not possible?

Kelly has the comparative advantage in repairing cars and in cooking meals (can have absolute advantage in both)

A minimum wage that is set below a market's equilibrium wage will result in

NONE OF THESE: -excess demand for labor, that is, unemployment -excess demand for labor, that is a shortage of workers -an excess supply of labor, that is, enemplyment *nothing happens*

Reggie, Rachel, and Rudy all enjoy looking at flowers blooming in gardens in their neighborhood. The neighborhood association is considering planting a flower garden around a sign at the entrance to the neighborhood. Reggie values the garden at $20, Rachel at $35, and Rudy at $50. The flowers and labor for the garden coast $85. What should the neighborhood association do?

Plant the garden because the benefits outweigh the costs 20+35+50=105 garden=85 105>85 --> worth planting

Positive statement:

Prices rise when the government prints too much money Normative: -inflation is more harmful to the economy than unemployment -if welfare payments increase, the world will be a better place -when public policies are evaluated, the benefits to the economy of improved equality should be considered more important than the cots of reduced efficiency

A positive statement

Prices rise when the government prints too much money social > private

Types of goods

Private good: excludable and rival Club good: excludable and non-rival Common good: non-excluadable and non-rival Public good: non-excluadable and non-rival

Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

The equilibrium quantity is less than the socially optimal quantity

University researchers create a positive externality because what they discover in their research labs can easily be learned by other who haven't contributed to the research cost. Suppose that the federal government gives grants to these researchers equal to their pre-unit production externality. What it the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced?

They are equal

A normative statment

Universal health care would be good for US citizens

A positive statement:

When the quantity of money grows rapidly, inflation is a predictable consequence

You purchase $30, nonrefundable ticket to play at a local theater. Ten minuted into the show you realize that it is not a very good shoe and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home to watch TV or read a book. You place a $8 value on watching TV and $12 value on reading a book.

You should go home and read a book

A surplus results when

a binding price floor is imposed on a market

Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized mutually beneficial trades are

a dead weight loss to society inelastic- small DWL elastic- large DWL

When an industry is a natural monopoly

a larger number of firms will lead to a higher average cost

A weaker demand together with a stronger supply would necessarily result in

a lower price

If a competitive firm is currently producing a level of output at which marginal revenue exceed marginal cost, then

a one-unit increase in output will increase the firm's profit

Cause an increase in consumer surplus:

a technological improvement in the production of the good

Trade between countried

allows each country to consume at a point outside its production possibilities frontier

If a good is normal, then an increase in income will result in

an increase in the demand for the good

A price ceiling will be binding only if is it set

below the equilibrium price

It does not matter whether a tax is levier on the buyers of the sellers of a good because

buyers and seller will share the burden of the tax

Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because

buyers ten to be much more sensitive to a change in price given more time to react

At the local, park there is a playground for children to use. While anyone is allowed to use the playground, it is often very busy, reducing the enjoyment of many of the children who use it. The play ground is a

common resource

In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,600 when output is 40 units. Firm A exhibits

constant returns to scale because average total cost is constant as output rises 1200/30=40 1600/40=40

private markets fail to account for externalities because

decision makers in the market fail to include the costs of their behavior to third parties

As new firms enter a monopolistically competitive market, profits of existing firms

decline, and product diversity in the market increases

Holding all other things constant, a higher price for ski lift tickers would

decrease the number of skis sold

When new firms have an incentive to enter a competitive market, their entry will

drive down profits of existing firms in the market

When the price of gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increase to 600. We know that the demand for bubble gum is

elastic. (600-400)/((600+400)/2) --------------------------------- = 1.8 (.4-.5)/((.4+.5)/2)

A profit-maximizing firm in a monopolistic competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market

faces a downward-sloping demand curve for its product

An economic outcome is said to be efficient if the economy is

getting all it can get from the scarce it had avaliable

An increase in the price of a good would

give the producers an incentive to produce more

To achieve the optimal provision of public goods, the

government must either provide the goods or subsidize their production

A consumer's willingness to pay directly meansures

how much a buyer values a good

If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will

increase producer surplus

If the demand for donuts is elastic, then a decrease in the price of donuts will

increase total revenue of donuts sellers

As the number of firms in an oligopoly market

increase, the market approached the competitive market outcome

When a possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good

increases as more of the good is produced

Economies of scale occur when

long-run average total costs fall as output increases

You lose your job and, as a result, you buy fewer romance novels. This shows that you consider romance novels to be a

normal good

Production is efficient if the economy is producing at a point

on the production possibilities frontier

Price takers refers to buyers and sellers in

perfectly competitive markets

Assume that a 4% increase in income results in a 2% increase in the quantity demanded of a good. The income elasticity of demand for the good is

positive and therefor the good is a normal good

When a supply and demand both increase, equilibrium

price may increase, decrease, or remain unchanged

Because of the free-rider problem

private markets tend to undersupply public goods -when someone receives a benefit without having to pay for it

Rainman's Shoe repair produced custom-made shoes. When Mr. Rainman produced 12 pairs per week, the marginal cost of the twelfth pair is $84, and the marginal revenue of the twelfth pair is $70. What would you advise Mr. Rainman to do?

produce fewer custom-made shoes

An optimal tax on pollution would result in

producers internalizing the cost of pollution

Markets fail to allocate resources efficiently when

property rights are not well established

Since restored historic buildings convey a positive externality, local governments may choose to

regulate the demotion of them AND provide tax breaks to owners who restored them (subsidizing)

Economists believe that production possibilities frontiers are often bowed because

resources are not completely adaptable (specialized)

If a price floor is a binding constraint on a market, then

sellers cannot sell all they want at the floor price (theres a surplus)

Markets are often inefficient when negative externalities are present becuase

social costs exceed private costs at the private market solution social MC > private MC

Since air pollution created a negative externality,

social welfare will be enhanced when some, but not all air pollution in eliminated

Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the

supply of the product is more elastic than the demand for the product

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is 430 per dozen. We would expect a

surplus to exist and the market price of roses to decrease

One result of a tax, regardless of whether the tax is placed on the buyers of the sellers, us that the

tax reduces the welfare of both buyers and sellers (bigger burden on more elastic curve)

For a large firm that produced and sells automobiles,a variable cost would be

the cost of the steel that is used in producing the automobiles

If a change in the price of a good results in no change in total revenue, then

the demand for the good must be unit elastic

What event would explain the shift in the production possibilities going up?

the economy experienced a technological advance in the production of batteries

A production possibilities frontier shifts outward when

the economy experiences economic growth

If the price floor is not biding, then

the equilibrium price is above the price floor

Consider the labor market for health care workers. Because of the aging population in the US, the output price for health care services had increases. Holding all else equal, what effect does this have on the equilibrium wage of health care employees?

the equilibrium wage increases

You are in charge of a local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic

In markets characterized by oligopoly,

the oligopolosts ear the highest profit when they cooperate and behave like monoplist

The bowed shape of the production possibilities frontier can be explained by the fact that

the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing

When quantity demanded had increases at every price, it might be because

the price of a complementary good has decreased

If the minimum wage exceeds the equilibrium wage, then

the quantity supplied of labor will exceed the quantity demanded

Diminishing marginal products affects the shape of the production function in what way?

the slope of the production function decreases as the quantity of input increases

A university's football stadium is never more than half-full during football games. This indicated

the ticket price is above the equilibrium price

When price is greater than marginal cost for a firm in a competitive market,

there are opportunities to increase profit by increasing production

A production possibilities frontier can shift outward if

there is a technological improvement

When an economy is operating at a point on its possibilities frontier, then

there is no way to produce more of one good without producing less of the other

If a price ceiling is not binding, then

there will be no effect on the market price of quantity sold

We can say that the allocation of resources is efficient if

total surplus is maximized

The supply curve for cookbooks shifts

when a determinant of the supply of cookbooks OTHER THAN the price of cookbooks changes -technology change would be a shift

The Coase theorem suggest that private solutions to an externality problem

will usually allocate resources efficiently if private partied can bargain without cost

A normative economic statement such as "The minimum wage should be abolished"

would require values and data in order to be evaluated