ECON 202 CH. 9-12
Which of the following statements about rent seeking is false?
Because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law. TRUE: -If a firm can benefit from government intervention in the economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market -A person is engaging in rent-seeking behavior when he uses the political process to acquire ownership of a resource that belongs to the public. -Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for.
Economics shows that it is inefficient to recycle plastic bottles because they have little value.
False
Recycling is an economic problem because the land is substantially damaged by the creation of garbage dumps.
False
Recycling is not an economic problem because there is only so much land on Earth.
False
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
False
The best solution to water pollution is to make the responsible people clean the water and return it to its natural state.
False
The government can be relied on to efficiently solve problems associated with pollution through (Pigovian) taxes.
False
The point of the video is that the government can seldom enhance economic efficiency.
False
The social problem of smoking in restaurants is caused because smokers want to pollute the air, causing harm to people around them.
False
The substitution effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to consume goods and services.
False
The use of landfills means the land will lose all its value for subsequent use.
False
The possibility of "government failures" should be evaluated before getting the government involved in addressing "market failures."
True
The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.
True
The social problem of smoking in restaurants because smokers and nonsmokers want to use the air in different ways.
True
The video indicated that there is a significant difference between recycling fluorescent lights and plastic bottles.
True
Unlike a perfect competitor, a monopolist faces the market demand curve.
True
The Clayton Act prohibited
any merger if its effect was to substantially lessen competition or create a monopoly.
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
A private good is
a good that is rivalrous and excludable.
A firm can use anchoring to influence consumer choices so as to increase sales by marking
a high "regular price" on a product, which makes the discounted "sale price" appear to be a bargain.
Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
a larger proportion of lemons being sold and consequently, producer surplus is increased.
Information asymmetry in a market can lead to ________.
a market failure
"Free riding" is a characteristic of which type of good?
a public good
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use.
The market demand for a public good can be determined by
adding up how much each consumer is willing to pay for each unit of the public good.
In the United States, government policies with respect to monopolies and collusion are embodied in
antitrust laws
The public choice model
applies economic analysis to government decision making.
The public choice model assumes that government policymakers
are likely to pursue their own self-interests, even if their self-interests conflict with the public interest.
Marginal revenue product of labor for a competitive seller is
equal to the marginal product of labor multiplied by the output price.
Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behavior known as
free riding.
A monopoly firm's demand curve
is the same as the market demand curve.
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
A product is considered to be nonexcludable if
you cannot keep those who did not pay for the item from enjoying its benefits.
Average variable cost can be calculated using any of the formulas below except
Δ(TC - FC)/ΔQ.
Refer to Table 11-7. What is the variable cost of production when the firm produces 115 lanterns?
$1,157
Wendell can sell five motor homes per week at a price of $22,000. If he lowers the price of motor homes to $20,000 per week he will sell six motor homes. What is the marginal revenue of the sixth motor home?
$10,000
Refer to Table 11-7. What is the average total cost of production when the firm produces 120 lanterns?
$14
When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is
$145
Refer to Figure 11-7. When output level is 100, what is the total cost of production?
$2,000
Refer to Table 15-1. What is the marginal revenue from the sale of the 12th unit?
$20
If a worker can produce 20 units of output which can be sold for $4 per unit, what is the maximum wage that firm should pay to hire this worker?
$80
To evaluate recycling, you must consider
-The demand for recycled products, -The incremental costs to society for recycling products, -The value of the land used for landfills
The appropriate charge for trash disposal should be set by
-The opportunity cost of using the landfill, -The cost of the trucks and labor needed to haul trash away
Restaurant owners have an incentive to
-Fully account for the value impact of restaurant smoking on nonsmokers. -Fully account for the value of restaurant smoking to smokers. -Take into account how smoking shifts the overall demand curve for restaurant meals
Key limitations on the government correcting "market failures" include:
-Information, -misaligned incentives between the government and citizens, and -the incentive of the government to tax and spend to help politicians get elected or re-elected.
The key problem(s) with externalities is that
-Private costs do not equal social costs. -Private benefits do not equal social benefits.
Due to adverse selection, very few lemons will be sold in the market for used cars.
False
Refer to Table 11-7. What is the average variable cost per unit of production when the firm produces 90 lanterns?
$5.44
When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is
$50
Refer to Figure 11-1. The marginal product of the 3rd worker is
15
Suppose an industry is made up of 25 firms, all with equal market share. The four-firm concentration ratio of this industry is
16%
Refer to Table 15-4. What is the economically efficient output level?
5 units
Other things remaining the same, which of the following is likely to cause a left shift in the supply curve for labor?
A decrease in population
What is the difference between a public franchise and a public enterprise?
A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government.
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account.
Sewage treatment is an example of
An externality
The key to solving problems associated with smoking in restaurants is to
Assign property rights to restaurant owners.
Refer to Figure 11-6. In the figure above which letter represents the average total cost curve?
B
Which of the following is an example of signaling in a market with asymmetric information?
Certification of used cars by third parties
in the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?
Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
The central question In trying to determine whether to involve the government in an economic issue is
Determining whether or not the government can be relied on to make things better.
Which of the following is a reason why it is difficult to estimate the extent of economic discrimination in the labor market?
Differences in wages can be attributed to many other factors as well, such as differences in productivity and preferences.
Refer to Figure 11-5. Identify the curves in the diagram.
E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H = average fixed cost curve.
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?
Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue.
Which of the following statements is true?
Employers are willing to forego profits when engaging in taste-based discrimination.
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forego profits, whereas employers engaging in statistical discrimination are trying to enhance profits.
A monopoly is defined as a firm that has the largest market share in an industry.
False
According to the video, the government should ban smoking in restaurants because of the diseases caused by passive smoking.
False
Banning smoking in restaurants is clearly economically efficient because passive smoke is harmful.
False
FIRM X-Y FIGURE Scenario: Two firms in a market must choose between two alternative strategies—X and Y. The figure below shows the game tree that these firms can use to make their decisions. Refer to the figure above. In equilibrium, ________.
Firm 1 will follow Strategy Y, and Firm 2 will follow Strategy X
Some economists who use the public choice model to explain the ways government intervenes in the economy believe that regulatory capture results when an agency or commission is given authority over a particular industry or product. Which of the following is the best example of regulatory capture?
Firms that were regulated by the Interstate Commerce Commission (ICC) attempted for many years to influence the ICC's actions.
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
________ discourage low-risk individuals from seeking health insurance.
High premiums
Which of the following explains why the marginal cost curve has a U shape?
Initially, the marginal product of labor rises, then falls
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
Insurance mandates
The net effect of smoking in a restaurant is to
It depends - there is no general answer.
For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?
It evaluates the costs and benefits of producing the good.
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players.
What is regulatory capture?
It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.
What is moral hazard?
It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.
What is adverse selection?
It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
An example of a monopoly based on control of a key resource is
Major League Baseball.
Which of the following is true at the output level where average total cost is at its minimum?
Marginal cost equals average total cost.
Which of the following statements is false?
Marginal cost will equal average total cost when marginal cost is at its lowest point. TRUE: -Marginal cost will equal average total cost when average total cost is at its lowest point. -When marginal cost is less than average total cost, average total cost will fall. -When marginal cost is greater than average total cost, average total cost will rise.
According to the video, W. Kip Viscusi studied tobacco smoking and concluded that
NONE OF FOLLOWING: -There were significant negative externalities associated with smoking, -There were significant net social benefits to smoking. -Smokers, in general, made poor decisions.
A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a
Nash equilibrium
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium.
Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly?
No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station.
Beginning in the 1950s economists began to investigate incentives within government. They found that:
One should be cautious in calling on the government to improve economic performance.
Let MP = marginal product, P = output price, and W = wage, then the equation that represents the condition where a competitive firm would hire another worker is
P × MP > W.
Refer to Figure 15-15. The profit-maximizing price is
P3
Refer to Figure 15-2. The firm's profit-maximizing price is
P3
According to the video, the key to Viscusi's findings about the net impact of smoking on healthcare costs is that
People who smoke need more medical care, but they also (unfortunately) tend to die younger, and that creates an offsetting reduction in health care costs.
There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the result of government action?
Public Franchise
Refer to figure 15-16. In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.
Q2 units; P2
Refer to Figure 15-2. To maximize profit, the firm will produce at output level
Q2.
Refer to Figure 15-16. If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________.
Q3 units; P4
The economically efficient amount of recycling will occur if
Recyclers pay the full cost of picking up recycled products
Megan McArdle argues that regulatory capture happens for all of the following reasons except
Regulators want the regulated industry to spend a lot of time and effort on compliance.
Refer to Figure 15-1. Which of the following statements about the firm depicted in the diagram is true?
The fact that this firm is a natural monopoly is shown by the long-run average total cost curve still falling when it crosses the demand curve.
In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods, and Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close at 9 pm. Which of the following statements is true?
Safeway has a monopoly at midnight but not during the day.
Which of following is the best example of a monopoly if we use a broader definition of monopoly?
Santos Tacos, the only taqueria in the small town of Santosville
A key advantage of assigning property rights to owners of restaurants is that
Smokers and nonsmokers are likely to be able to eat meals the way they like.
The U.S. government has imposed quotas on the importation of sugar that makes sugar prices higher because
Sugar farmers lobbied for regulation that would increase their profits by limiting competition.
The difference between the salaries paid to movie stars and to actors who play supporting roles is much greater today than it was in the 1930s and 1940s. What factor explains this increase in relative salaries over time?
Technological advances in the entertainment industry increase the revenue that successful movies can earn. This has increased the movie studios' willingness to pay high salaries to movie stars.
Which of the following exemplifies the tragedy of the commons?
The Malaysian tapir, distinguished for its unusual coloration, is a target for poachers who hunt it for its tough and leathery hide.
Which of the following is likely to be used as a signal in the job market?
The degree obtained by the applicant
Which of the following would cause an increase in the equilibrium wage?
The demand for labor increases faster than the supply of labor.
What happens to the equilibrium wage and quantity of labor if output price rises?
The equilibrium wage and the equilibrium quantity of labor rise.
Suppose the government grants child care subsidies to mothers entering the labor force. What is likely to happen to the equilibrium wage and quantity of labor?
The equilibrium wage falls and the equilibrium quantity of labor rises.
Which of the following is likely to lead to a left shift in the supply curve for labor to a firm?
The establishment of a new firm nearby that offers higher wages
Which of the following statements is true?
The income effect and the substitution effect of a wage rate change work in opposite directions.
Jill Johnson owns a pizzeria. She currently produces 10,000 pizzas per month at a total cost of $500. If she produced one more pizza her total cost rises to $500.11. What does this tell us about Jill's marginal cost of producing pizzas?
The marginal cost of producing pizzas is rising.
What is the difference between labor's marginal product and marginal revenue product?
The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
In which of the following markets are buyers likely to have private information?
The market for health insurance
Refer to Figure 15-9. What is the difference between the monopoly's price and perfectly competitive industry's price?
The monopoly's price is higher by $13.
The typical labor supply curve is upward sloping but it is possible for the curve to be backward bending — negatively sloped — at very high wage levels. Which of the following would cause a backward-bending supply curve?
This would occur when the income effect from an increase in the wage becomes larger than the substitution effect.
Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real-world results?
The prisoner's dilemma does not apply to most business situations that are repeated over and over.
Which of the following leads to the tragedy of the commons?
The use of common pool resources above the socially optimal level
The opportunity cost of using land for a landfill is determined by:
The value of the land before the landfill was developed, minus the cost of the land after the landfill is full.
Other things remaining the same, which of the following is likely to happen if there is a decrease in the price of flour products?
There will be a decrease in both the wage rate and the employment levels in the flour industry.
The most important factor contributing to wage differences in the labor market is differences in the level of education and training among workers.
True
A monopoly is a firm that is the only seller of a good or service that does not have a close substitute.
True
Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
True
An increase in the price of grape juice causes an increase in the marginal revenue product of labor used to produce grape juice.
True
Higher wages that compensate workers for unpleasant aspects of a job are called compensating differentials.
True
Increases in population shift the market supply curve for labor to the right.
True
Moral hazard refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
True
One problem with using taxes to solve economic externalities is that politicians may spend the money on things they like, rather than things their constituents want.
True
Recycling is an economic issue because the goods that are recycled, the land for landfills, and the trucks and labor needed for both recycling and trash disposal are all examples of scarce resources.
True
Rent-seeking behavior, unlike profit-maximizing behavior in competitive markets, wastes society's scarce resources.
True
Which of the following is an example of rent seeking behavior?
U.S. sugar firms convinced Congress to impose a quota on imports of sugar.
The total value to society of having garbage removed is greater than the value of baseball games. Why, then, are baseball players paid more than garbage collectors?
Wages do not depend on total values but marginal values. The marginal revenue product of baseball players exceeds the marginal revenue product of garbage collectors.
________ is an example of a common pool resource.
Water (not National defense, Food, or Wi-Fi)
Which of the following is a likely reason for wage inequality between men and women?
Women tend to spend more time out of the labor force as compared to men.
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you. Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate.
Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground. Larry's higher wage rate is the result of
a compensating differential.
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
A monopolist faces
a downward-sloping demand curve.
For a natural monopoly to exist
a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand.
Relative to a perfectly competitive market, a monopoly results in
a gain in producer surplus less than the loss in consumer surplus.
Marginal cost is the
additional cost of producing an additional unit of output.
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
Consider a used car market in which half the cars are good and half are bad (lemons). Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price. What is the term used to describe this situation?
adverse selection
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Refer to the scenario above. Which of the following problems is likely to arise in the market for used cell phones in Barylia?
adverse selection
________ occurs when one agent in a transaction knows about a hidden characteristic of a good.
adverse selection
An increase in the supply of capital, which is a complement to labor, will lead to
an increase in the demand for labor.
An increase in the demand for orthodontic services leads to
an increase in the demand for orthodontists.
An increase in a perfectly competitive firm's demand for labor could be caused by
an increase in the market demand for the firm's product.
Which of the following will not cause the labor demand curve to shift?
an increase in the market wage rate
If the demand for labor is unchanged, an increase in the supply of labor will lead to
an increase in the quantity of labor demanded and a decrease in the equilibrium wage.
A decrease in the wage rate causes
an increase in the quantity of labor demanded.
To maintain a monopoly, a firm must have
an insurmountable barrier to entry.
Refer to Figure 15-10. Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the
area P1P2EF.
At low wages, the labor supply curve for most people slopes upward because
as wages increase the opportunity cost of leisure increases.
Signaling takes place in markets with ________.
asymmetric information
The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
asymmetric information.
Refer to Figure 15-15. Erickson Power is a natural monopoly because
average total cost is still declining when it intersects demand.
If the marginal cost curve is below the average variable cost curve, then
average variable cost is decreasing.
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. A player should use ________ to play this game.
backward induction
Scenario: You walk onto a used-car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality but you value a lemon at $0.You are now wondering whether you should trust the car dealer regarding the quality of the car. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, neither will he earn money nor will you be able to buy a car and use it. If you trust him and he cooperates, both of you will gain because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000 while you will not derive any satisfaction. Refer to the scenario above. You should use ________ to arrive at a decision.
backward induction
The first mover in an extensive-form game should use ________ to win the game.
backward induction
As more output is produced, the marginal product of labor declines
because of the law of diminishing returns.
Which of the following explains why talented major league baseball players command much higher salaries than neurosurgeons?
because the supply of talented major league baseball players is low relative to its demand compared to the supply of neurosurgeons. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon.
A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational. This area is called
behavioral economics
Which branch of economics considers that economic agents do not always act rationally?
behavioral economics
Adverse selection arises in the health insurance market because ________.
buyers have private information
For-profit producers will produce only private goods because
buyers will be willing to pay for the goods since the benefits are excludable.
Marginal cost is equal to the
change in total cost divided by the change in output.
Governments grant patents to
compensate firms for research and development costs
A game in which each player adopts its dominant strategy
could result in a Nash equilibrium.
Customer discrimination occurs when
customers refuse to buy products produced by a racially diverse workforce.
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
In order to be useful as a signal in a market with information asymmetry, the signal must be ________.
difficult to obtain
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
In a simultaneous move game, ________.
each player has to make his choice without knowing his rival's choice
A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of
economies of scale.
Which of the following is an example of a common resource?
elephants in the wild
Financial contributions to the campaigns of members of Congress, state legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are
examples of rent seeking.
FIRM X-Y FIGURE Scenario: Two firms in a market must choose between two alternative strategies—X and Y. The figure below shows the game tree that these firms can use to make their decisions. Refer to the figure above. This is an example of a(n) ________.
extensive-form game
The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called
game theory
A ________ is an extensive -form representation of a game
game tree
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap?
geographic location
A profit maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
Adverse selection occurs in the market for used cars because used car buyers
have less information than used car sellers.
Compensating differentials are associated most closely with which of the following?
hazardous jobs
In an extensive-form game, payoff to a player is usually higher if ________.
he is the first mover
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers money to fairness, ________.
he will always accept any offer made to him
Firms use information on labor's marginal revenue product to determine
how many workers to hire at each wage rate.
A person's stock of skills to produce economic value is referred to as:
human capital
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.
In situations where new technologies are considered complementary to workers, demand for these workers will ________, resulting in ________ in the equilibrium wage.
increase; an increase
A public franchise
is a government designation that a private firm is the only legal producer of a good or service.
The substitution effect of a wage increase is observed when
leisure's higher opportunity cost causes workers to take less leisure and work more.
Refer to Figure 15-3. Suppose the monopolist represented in the diagram above produces positive output. What is the profit/loss per unit?
loss of $7 per unit
If the average variable cost curve is above the marginal cost curve, then
marginal costs can be either increasing or decreasing.
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is the value of the:
marginal product of the worker should be equal to or greater than the wage rate.
If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
marginal revenue of the sixth performance is $38,000.
Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to
moral hazard
Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________.
moral hazard
More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________.
moral hazard
State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or consumption of alcohol. This is an example of ________.
moral hazard
The free-rider problem exists for goods that are ________.
non-excludable
A green pasture has turned barren due to overgrazing. This happened because the pasture was ________.
non-excludable but rival
The tragedy of the commons occurs because some goods are ________ in consumption.
non-excludable but rival
A Nash equilibrium occurs when ________.
none of the players can increase their payoffs by choosing a different strategy
Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
A best response is ________.
one player's optimal action choice taking the other player's action as given
In economics, the term "free rider" refers to
one who waits for others to produce a good and then enjoys its benefits without paying for it.
The highest-valued alternative that must be given up to engage in an activity is the definition of
opportunity cost
Painters who paint water towers earn higher wages relative to painters who paint houses because
painting water towers is more risky than painting houses.
The free rider problem refers to a situation in which
people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.
The "tragedy of the commons" refers to the phenomenon where
people overuse a common resource.
The basic idea behind moral hazard is that ________.
people tend to take more risks if they do not have to bear the costs of their behavior
A street light is a ________.
public good
Governments grant patents to encourage
research and development on new products.
Which of the following is an example of a common resource?
sea otters in the coastal waters of the Pacific Ocean
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use
sequential games
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
If an industry introduces a labor-saving technology in production, the demand curve for labor in that industry is likely to:
shift to the left
Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's Website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his Website, despite the nearly $200,000 he had invested in his education. In making his decision, the $200,000 he spent on his education
should be ignored since it represents a sunk cost.
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people.
You decide to carry a letter of recommendation from your college professor while going for your first interview. This is an example of ________.
signaling
Sequential games are used to analyze
situations in which one firm acts and other firms respond.
Employers engaging in ________ try to enhance their profits.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination
A ________ is a complete plan describing how a player will act.
strategy
A Herfindahl-Hirschman Index is calculated by
summing the squares of the market shares of each firm in the industry.
Economically rational means that consumers and firms
take actions that are appropriate to reach goals given available information.
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste-based discrimination.
The law of diminishing marginal returns states
that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline.
The marginal product of labor is defined as
the additional output that results when one more worker is hired, holding all other resources constant.
The demand for labor depends primarily on the additional output produced as a result of hiring an additional worker and
the additional revenue received from selling the output produced as a result of hiring an additional worker.
In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was
the area of pasture was nonexcludable and the consumption of the grass was rival.
Marginal revenue product for a perfectly competitive seller is equal to
the change in total revenue that results from hiring another worker.
The change in a firm's total cost from producing one more unit of a good or service is
the definition of marginal cost.
As output increases
the difference between average total cost and average variable cost decreases.
The firm's gain in profit from hiring another worker is
the difference between marginal revenue product and the wage of the worker.
What is likely to happen in a used-car market if the buyers feel that the best they can do is to buy a lemon?
the entire market shuts down why: A fundamental economic principle is that demand must exist for transactions to take place. Here, the buyers feel that the market is full of lemons so they will likely not buy, and certainly would not pay high prices to the sellers of lemons.
A firm's primary interest when it hires an additional worker is
the extra revenue the firm realizes from hiring that worker.
If Alan Shaw reduces his work hours when his salary increases, then
the income effect of his salary increase dominates the substitution effect.
Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?
the individual who is applying for the health insurance policy
Other things remaining the same, which of the following is likely to cause a decrease in both the wage rate and the number of workers hired in a glass factory?
the introduction of labor-saving technology in the factory
The shape of the average total cost curve is determined by the shape of
the marginal cost curve.
One reason why the average salary of Major League Baseball players is higher than the average salary of college professors is
the marginal revenue product of baseball players is greater than the marginal revenue product of college professors.
A possible advantage of a horizontal merger for the economy is that
the merged firm might reap economies of scale which could translate into lower prices.
If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
the moral hazard problem.
The labor supply for an industry would decrease if
the percentage of the population from age 16 to 65 decreases.
Mr. Smith put his laptop up for sale. He is aware of the fact that the laptop malfunctions frequently. However, none of the potential customers who came to buy the laptop were able to discover the problem and one of them actually bought it at a remunerative price. This occurred due to ________.
the presence of asymmetric information
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
the principle-agent problem.
The government of Eduland provided generous unemployment benefits to all the unemployed workers. However, the new government that came into power reduced the amount of unemployment insurance paid to each worker. This increased the average number of hours spent daily by unemployed workers in looking for jobs. This suggests that ________ exists in the labor market in Eduland.
the problem of moral hazard
An individual's labor supply curve shows
the relationship between wages and the quantity of labor that she is willing to supply.
A payoff matrix shows ________.
the return from each action that players can take in a game
What is behavioral economics?
the study of situations in which people act in ways that are not economically rational
If Molly Bee increases her work hours when her wage increases, then
the substitution effect of the wage increase outweighs the income effect.
Overfishing leading to a rapid depletion of the stock of fish is an example of ________.
the tragedy of the commons
Worker discrimination occurs when
workers refuse to work with persons of a different race
Refer to Figure 15-10. What is the area that represents consumer surplus under a monopoly?
the triangle P0P1F
Which of the following factors will not cause the labor demand curve to shift?
the wage rate
A monopoly is characterized by all of the following except
there are only a few sellers, each selling a unique product. TRUE: -the firm has market power. -there are no close substitutes to the firm's product. -entry barriers are high.
The lawsuit the Justice Department brought against Apple regarding the pricing of e-books for its iPad is an example of attempts by the government
to keep firms from artificially restricting competition to raise prices.
If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then
to maximize profit the firm should continue to produce the output it is producing.
The function of the agent in the principal-agent relationship is
to perform tasks for the principal.
Health insurance companies impose deductibles on policies and co-payments on claims
to reduce moral hazard problems.
Average total cost is equal to
total cost divided by the level of output.
Which of the following costs will not change as output changes?
total fixed cost
A retired athlete built a gym near his house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________.
tragedy of the commons
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered.
true
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Common resources differ from public goods in that
unlike public goods, common resources are rivalrous in consumption.
Because warranties are potentially ________, low-quality goods are ________ to have warranties.
very expensive; less likely
Few firms in the United States are monopolies because
when a firm earns profits, other firms will enter its market
A monopolist's profit-maximizing price and output correspond to the point on a graph
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
One difference between the demand for a private good and that for a public good is that
with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity.