Econ Exam #3

local clean air standards. This decision provides an example of a. a direct regulation of an externality. b. corrective taxes. c. a Coase theorem solution to an externality. d. the misuse of a subsidy.

a. a direct regulation of an externality.

Transaction costs a. can keep private parties from solving externality problems. b. are incurred in the production process due to externalities. c. increase when taxes are imposed to correct negative externalities. d. are eliminated when the government intervenes in a market with externalities.

a. can keep private parties from solving externality problems.

In the long run a company that produces and sells laundry detergent incurs total costs of $2,500 when output is 1,250 units and $2,750 when output is 1,500 units. For this range of output, the laundry detergent company exhibits a. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. efficient scale.

a. economies of scale.

If firms are competitive and profit maximizing, the price of a good equals the a. marginal cost of production. b. fixed cost of production. c. total cost of production. d. average total cost of production.

a. marginal cost of production.

Cost-benefit analysts often encounter the problem that those who would benefit from government provision of a public good tend to a. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. b. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good. c. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. d. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good.

a. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good.

When comparing short-run average total cost with long-run average total cost at a given level of output, a. short-run average total cost is typically above long-run average total cost. b. short-run average total cost is typically the same as long-run average total cost. c. short-run average total cost is typically below long-run average total cost. d. the relationship between short-run and long-run average total cost follows no clear pattern.

a. short-run average total cost is typically above long-run average total cost.

When price is below average variable cost, a firm in a competitive market will Correct! a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.

a. shut down and incur fixed costs.

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $3,000; $1,500 b. $4,500; $3,500 c. $4,500; $4,000 d. $4,500; $2,500

b. $4,500; $3,500

Excludability is the property of a good whereby a. one person's use diminishes other peoples' use. b. a person can be prevented from using it. c. the government rations the quantity of a good that is available. d. the resource is congestible.

b. a person can be prevented from using it.

The Tragedy of the Commons can be corrected by a. conducting a cost-benefit analysis. b. assigning property rights to individuals. c. providing government subsidies for the resource. d. making certain everyone in the economy has access to the resource.

b. assigning property rights to individuals.

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run.

b. continue to operate in the short run but shut down in the long run.

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will a. rise in the short run. Some firms will enter the industry. Price will then rise to reach the new long-run equilibrium. b. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium. c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. d. not rise in the short run because firms will enter to maintain the price.

b. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.

Which of the following is an example of the free-rider problem? a. Both Zoe and Zach receive low-cost dental care at the local dental school, so neither of them pays the full cost of the care. b. Alfred receives a free lunch from the local "Meals on Wheels" program because of his low monthly income. Yet his next door neighbor, Alice, is not eligible for the free lunch. c. Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Betty receives free protection from burglars because of Buster's barking. d. Sam purchases a burger at a fast food restaurant and gets a second burger free because the restaurant is having a buy one, get one free sale.

c. Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Betty receives free protection from burglars because of Buster's barking.

Jennifer is a junior in college. Her current cumulative grade point average (GPA) is 3.5 out of a 4.0 scale. Jennifer is hoping that by the time she graduates, she can raise her cumulative GPA to a 3.7. Which of the following statements is correct? a. If Jennifer earns between a 3.5 and a 3.7 GPA in her senior year, she will be able to raise her cumulative GPA to a 3.7. b. If Jennifer earns a 3.7 GPA in her senior year, she will be able to raise her cumulative GPA to a 3.7. c. Jennifer must earn above a 3.7 GPA in her senior year in order to raise her cumulative GPA to a 3.7. d. Either b or c could be correct.

c. Jennifer must earn above a 3.7 GPA in her senior year in order to raise her cumulative GPA to a 3.7.

Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that a. Jenny pays Abe $150 to give the dog to his parents who live on an isolated farm. b. Abe pays Jenny $350 for her inconvenience. c. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm. d. There is no private transaction that would improve this situation.

c. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

Which of the following is usually true about government-provided goods? a. These goods have a zero opportunity cost. b. These goods are not scarce. c. People do not have to pay a fee to enjoy these goods. d. The invisible hand is at work to ensure these goods are provided in the market

c. People do not have to pay a fee to enjoy these goods.

Randy is a minor-league baseball player. His current cumulative batting average is 0.270. Randy believes that if he can raise his cumulative batting average to 0.300, he will have a chance to play in the major leagues. Which of the following statements is correct? a. If Randy gets between 27 and 30 hits out of his next 100 at bats, he will be able to raise his cumulative batting average to 0.300. b. If Randy gets 30 hits out of his next 100 at bats, he will be able to raise his cumulative batting average to 0.300. c. Randy must get more than 30 hits out of his next 100 at bats in order to raise his cumulative batting average to 0.300. d.Either b or c could be correct.

c. Randy must get more than 30 hits out of his next 100 at bats in order to raise his cumulative batting average to 0.300.

The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. Which of the following statements about the aquifer is correct? a. The aquifer is a public good which must be publicly owned to be used efficiently. b. The aquifer is a private good which must be privately owned to be used efficiently. c. The aquifer is a common resource which will be overused if no one owns it. d. The aquifer is a club good which should be left as it is.

c. The aquifer is a common resource which will be overused if no one owns it.

Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $6-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c. The equilibrium quantity is less than the socially optimal quantity.

Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil needs a lot of practice to earn $250, which is his share of the band's profit. Thurman gets distracted by Phil's drumming but he needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution? a. Phil offers Thurman $499 to allow Phil to continue drumming. Thurman accepts and both are better off. b. Phil offers Thurman $249 to allow Phil to continue drumming. Thurman accepts and both are better off. c. Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off. d. Thurman offers Phil $501 to stop practicing his drumming. Phil agrees and both are better off.

c. Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off.

Suppose that the organic-produce industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will a. shift the demand curve outward so that price will rise to the level of production cost. b. cause the remaining firms to collude so that they can produce more efficiently. c. cause the market supply to decline and the price of organic produce to rise. d. cause firms in the organic-produce industry to suffer long-run economic losses.

c. cause the market supply to decline and the price of organic produce to rise.

Scenario 13-14 If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Refer to Scenario 13-14. Farmer Brown's production function exhibits a. increasing marginal product. b. constant marginal product. c. diminishing marginal product. d. The production function is unrelated to the marginal product.

c. diminishing marginal product.

For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms' costs of production in that market. d. interest rates on government bonds.

c. firms' costs of production in that market.

When externalities exist, buyers and sellers a. neglect the external effects of their actions, but the market equilibrium is still efficient. b. do not neglect the external effects of their actions, and the market equilibrium is efficient. c. neglect the external effects of their actions, and the market equilibrium is not efficient. d. do not neglect the external effects of their actions, and the market equilibrium is not efficient.

c. neglect the external effects of their actions, and the market equilibrium is not efficient.

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as a. the externalities that are present are positive, not negative. b. government assigns property rights to the harmed party. c. private parties can bargain with sufficiently low transaction costs. d. businesses determine an appropriate level of production.

c. private parties can bargain with sufficiently low transaction costs.

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. explicit costs. b. implicit costs. c. sunk costs. d. opportunity costs.

c. sunk costs.

Stick Storage manufactures and sells computer flash drives. Last year it sold 2 million flash drives at a price of $10 each. For last year, the firm's a. accounting profit was $20 million. b. economic profit was $20 million. c. total revenue was $20 million. d. explicit costs was $20 million.

c. total revenue was $20 million.

Scenario 13-9 Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Refer to Scenario 13-9. According to an economist, which of the following revenue totals will yield Ellie's business $50,000 in economic profits? a. $55,200 b. $100,200 c. $132,500 d. $185,700

d. $185,700

Why does a firm in a competitive industry charge the market price? a. If a firm charges less than the market price, it loses potential revenue. b. If a firm charges more than the market price, it loses all its customers to other firms. c. The firm can sell as many units of output as it wants to at the market price. d. All of the above are correct.

d. All of the above are correct.

The ocean remains one of the largest unregulated resources for each of the following reasons except a. many countries have access to the ocean. b. it is difficult to get international cooperation among countries that hold different values. c. the oceans are so vast that enforcing any agreements would be difficult. d. All of the above are reasons the ocean remains one of the largest unregulated resources.

d. All of the above are reasons the ocean remains one of the largest unregulated resources.

The marginal product of any input is the a. increase in total cost associated with a one-unit increase in production. b. change in total output associated with a $1.00 increase in total cost. c. increase in total cost resulting from the hiring of an additional worker. d. increase in total output obtained from one additional unit of that input.

d. increase in total output obtained from one additional unit of that input.

Mike Miller is the town manager of Medfield, a town with 50,000 residents. At a recent town meeting, several citizens proposed building a large public swimming pool in the center of town for all of the residents to enjoy. A survey of all 50,000 residents revealed that the pool would be worth $50 to each of them. Because the cost to build the swimming pool is only $1,000,000, Manager Miller arranges to have the pool built. Everyone in town enjoys the pool, but when Manager Miller asks for donations to pay for the pool, he only collects $250,000. Manager Miller soon realizes that a. the survey was conducted improperly. b. the cost of the pool exceeded the social benefits. c. the pool is a club good. d. most residents of the town are probably free-riders at the pool.

d. most residents of the town are probably free-riders at the pool.

A cost imposed on someone who is neither the consumer nor the producer is called a a. corrective tax. b. command and control policy. c. positive externality. d. negative externality.

d. negative externality.

When buyers in a competitive market take the selling price as given, they are said to be a. market entrants. b. monopolists. c. free riders. d. price takers.

d. price takers.

Which of the following industries is least likely to exhibit the characteristic of free entry? a. bookstores b. hairstyling salons c. yoga studios d. satellite radio

d. satellite radio