Econ Final

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Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb. The market price of an apple is $0.50. What is Sam's marginal revenue for selling apples?

Sam's marginal revenue is $0.50 for each apple.

Which type of industry will charge lower prices for the same output, a monopoly or a competitive industry?

A competitive industry will charge a lower price.

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $100,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much producer surplus goes to Vincent?

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If he stays in the apartment, how much consumer surplus does he enjoy?

$1,700

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20-cent-per-donut tax, which would decrease donut sales by 50,000 per day; a 25-cent-per-donut tax, which would decrease donut sales by 100,000 per day; and a 50-cent-per-donut tax, which would decrease donut sales by 150,000 donuts per day. What would be the deadweight loss generated by each tax respectively?

$10,000, $25,000, $75,000

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. What is Sandy's accounting profit?

$100,000

Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod?

$300

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

$35

In the highly competitive memory key industry, a new innovation makes it possible to cut the average cost of a 20-megabyte memory key, small enough to fit in your pocket, from $5 to $4. In the long run, what will the price of a 20-megabyte memory key be?

In the highly competitive TV manufacturing industry, a new innovation makes it possible to cut the average cost of a 50-inch plasma screen from $1,000 to $400. Most TV manufacturers quickly adopt this new innovation, earning massive short-run profits. In the long run, what will the price of a 50-inch plasma TV be?

$400

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $50,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

$50,000

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20-cent-per-donut tax, which would decrease donut sales by 50,000 per day; a 25-cent-per-donut tax, which would decrease donut sales by 100,000 per day; and a 50-cent-per-donut tax, which would decrease donut sales by 150,000 donuts per day. What would be the amount of tax revenue generated by each tax respectively?

$50,000, $50,000, and $75,000

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase?

$99,990

If the price for a 50-inch plasma TV is $2,010 and Newhart is willing to pay $3,000, what is Newhart's consumer surplus?

$990

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

-$150,000

Enrollments at Upper Tennessee State University fell from 40,000 to 39,000 as a result of a tuition increase from $6,000 to $9,000. Using the midpoint method, the elasticity of demand is:

-0.06.

The price of a round-trip ticket from New York to San Francisco increased from $500 to $1,000. As a result, the number of tickets sold each week fell from 10,000 to 9,000. Using the midpoint method, the elasticity of demand is:

-0.16.

The price of a movie ticket in Denver, Colorado, rose from $6 to $10. When this happened, the quantity of tickets sold per day fell from 50,000 to 40,000. Using the midpoint method, the elasticity of demand is:

-0.44.

The price of milk at Loma Visa Elementary School rose from $1 to $1.50. As a result, the quantity of milk sold each week fell from 1,000 to 800. Using the midpoint method, the elasticity of demand is:

-0.56.

How many famines have occurred in functioning democracies?

The Department of Energy's Energy Information Service (EIS) predicts that production from The Arctic National Wildlife Refuge (ANWR) will average about 800,000 barrels per day, or about 1% of worldwide oil production. The elasticity of demand for oil is about 0.5 and the best estimate of the elasticity of supply is about 0.3. Given this information, what will be the percentage increase in quantity supplied of oil if ANWR raises supply by 1%?

0.625%

Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. If the long-run elasticity of demand for oil in the United States is -0.5, estimate how much would the price of oil have to permanently rise in order to cut oil consumption by 50%?

100%

What percentage of famines have occurred in countries without functioning democracies?

100%

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for pretzels and sodas sold from street carts in the Wall Street financial district in New York?

2-3 days

Solve the following equations for q to find the output level where MC1 = MC2 making the output level, q, optimal in a free market.

2.5

The long-run elasticity of demand for oil in the United States is -0.5. If the price of oil rises by 10%, by how much will the quantity of oil demanded fall?

In a constant cost industry, what happens to the price of the good in the long run when there is a rise in demand?

Price stays the same.

Katie works at a customer service center, and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 e-mails per hour. What is the opportunity cost of responding to 400 phone calls?

800 e-mails

Which of the following is NOT an example of price discrimination?

A restaurant charges lower prices for kids' meals than adult meals.

Which of the following is an example of price discrimination?

A restaurant has an early bird special, which means that eating dinner before 6:00 PM is cheaper than eating dinner later, even though the food is the same.

Which of the following reasons explains why telephone service is no longer considered a natural monopoly?

Advances in communications technology reduced the cost of providing phone service, allowing new firms to enter the industry.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that on average boys create more trouble in class, which makes it harder for everyone to learn. Economists would say that "boys are a tax on every child's education." Just based on this study, if you are a parent of a boy, would you rather your son be in a class with mostly boys or mostly girls? What if you are the parent of a girl?

All parents would prefer their children to be placed in classes with mostly girls.

Let's suppose that the demand for allergists increases in California. How does the invisible hand respond to this demand

Allergists from other states (or countries) could move to California. Surgeons, hematologists, and other doctors in California could become allergists after some retraining. More people could enter medical school, specialize in allergy, and move to California.

Why does the chapter say that elasticity = escape?

Because those with high elasticities can easily escape to another market, either as a supplier or demander.

Characterize each of the following items as excludable or nonexcludable. I. apples II. open-heart surgery

Both I and II are excludable.

Characterize each of the following items as excludable or nonexcludable. I. farm-raised salmon II. Yosemite National Park

Both I and II are excludable.

Characterize each of the following items as excludable or nonexcludable. I. the Chinese language II. the idea of calculus

Both I and II are nonexcludable.

Characterize each of the following items as rival or nonrival. I. Central Park, New York, when it's nearly empty

Both I and II are nonrival.

Characterize each of the following items as rival or nonrival. I. the Chinese language II. the idea of calculus

Both I and II are nonrival.

Characterize each of the following items rival or nonrival. I. apples II. open-heart surgery

Both I and II are rival.

When the market price of a good is above the equilibrium price, what does greed (in other words, self-interest) on the part of sellers tend to do to the price?

It pushes the price down.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would you expect to happen to the quality of bread?

Bread quality will fall.

In order for a monopolist to successfully price discriminate, it must be able to prevent arbitrage. What is arbitrage?

Buying at a low price in one market and selling at a higher price in another market.

Universities face high fixed costs in producing college educations. How do price discrimination mechanisms like scholarships and grants for low-income students actually benefit students who pay the full tuition price for attending college?

By increasing enrollment, the university is able to spread its high fixed costs over more students, thus reducing tuition for everyone.

In what way will market segmentation and price discrimination increase a monopolist's profits?

By selling the same good to different consumers at different prices according to individual demand conditions, the monopolist can earn greater profit.

This chapter noted that chickens and the "chicken of the sea" (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins. What difference between these two species does this chapter identify as the explanation for this seemingly strange puzzle?

Chickens are an owned resource; tuna is not an owned resource.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to consumer surplus if people must wait in line to get bread at the controlled price?

Consumer surplus will fall.

When a drought hits a country and a famine is possible, what probably falls more: the demand for food or the demand for haircuts? Why?

Demand for haircuts falls more because haircuts are more of a luxury good than food.

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. What needs to be TRUE for the tax to actually deter the most people from eating junk food?

Demand for junk food must be elastic.

Another way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is TRUE about the demand for luxuries? Consider jewelry. Is a luxury tax on jewelry more likely to hurt the buyers of jewelry or the sellers of jewelry?

Demand for luxuries is relatively elastic. A luxury tax is more likely to hurt the sellers of jewelry.

If the price of margarine decreases, what happens to the demand for butter? What happens to the equilibrium quantity and price for butter?

Demand for butter decreases and the equilibrium price and quantity of butter decrease.

Decades ago, Washington, DC, a fairly small city (in geographic area), wanted to raise more revenue by increasing the gas tax. Washington, DC, shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states without even really noticing; the suburbs seem to blend together. How elastic is the demand for gasoline sold at stations within Washington, DC? When the price of gas in Washington, DC, rose, while the prices in Maryland and Virginia stayed the same, what happened to gasoline sales at Washington, DC, stations?

Demand is elastic and sales of gasoline in Washington, DC, fell a lot.

If everyone believes that the price of tomatoes will increase next week, what is likely to happen to demand for tomatoes today?

Demand will increase as people buy more tomatoes now, hoping to beat the price rise

If everyone thinks that the price of gasoline will increase next week, what is likely to happen to the demand for gasoline today?

Demand will increase, mostly because owners of gas stations will want to fill up their storage tanks before the price increases

Which country shows specialization in knowledge and as a result would have more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle in the evening," or Drudgia, where one-third of the population learns only about hunting, one-third only about fishing, and one-third only about cattle raising?

Drudgia, because specialization allows for more productivity

Economics is sometimes called "the dismal science." Of the following big ideas in Chapter 1, which one sounds dismal—like bad news?

Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

When someone is sick, the patient's decision to take an antibiotic imposes costs on others—it helps bacteria evolve resistance faster. But it also gives free benefits to others: It may slow down the spread of infectious disease the same way that vaccinations do. Thus, antibiotics can create external costs as well as external benefits. In theory, these could cancel each other out, so that just the right amount of antibiotics is being used. But economists think that on balance, there is overuse of antibiotics, not underuse. Why? (Hint: Think on the margin!)

Economists believe that the marginal social cost of using antibiotics is greater than the marginal social benefit of using antibiotics

Is college education—a college course, for instance—excludable? Is it rivalrous? If your class has more students, do you get a worse education, on average?

Education is excludable and rival.

A government is torn between auctioning annual pollution allowances and setting an annual pollution tax. Unlike in the messy real world, this government is quite certain that it can achieve the same price and quantity either way. If the government wants to choose the method that will pull in more government tax revenue, which method should it choose?

Either of these methods would generate the same revenue.

When demand increases what happens to price and quantity in equilibrium?

Equilibirum price increases and equilibrium quantity increases.

When demand decreases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity decreases.

When supply increases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity increases.

When supply decreases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity decreases.

Which of the following categories is the smallest fraction of the U.S. federal budget? Which are the two largest? Welfare Interest on the federal debt Defense Foreign aid Social Security Medicare

Foreign aid is the smallest and Social Security and defense are the largest.

France has the largest long-run elasticity of oil demand (-0.6) of any of the large, rich countries. What does this say about France's ability to respond to long-run price changes compared with other rich countries?

France is more responsive to changes in oil prices.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that boys create more trouble in class, on average, which makes it harder for everyone to learn. Economists would say that "Boys are a tax on every child's education." Do girls in a classroom provide positive or negative externalities? What about boys?

Girls provide positive externalities and boys provide negative externalities.

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If Harry illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law? By how much?

He would be $500 better off.

Labor unions are some of the strongest proponents of the minimum wage. Yet in 2008, the median full-time union member earned $886 per week, an average of more than $22 per hour. Therefore, a rise in the minimum wage doesn't directly raise the wage of many union workers. So why do unions support minimum wage laws?

High-skilled workers and low-skilled workers are substitutes. Thus, if the wages of low-skilled workers rise, the demand for high-skilled workers will go up and the wages of high-skilled workers will go up.

Characterize each of the following items as excludable or nonexcludable. I. Central Park, New York II. cable television

I is nonexcludable, II is excludable.

Characterize each of the following items as rival or nonrival. I. farm-raised salmon II. Yosemite National Park

I is rival, II is nonrival.

Perhaps it was in elementary school that you first realized that if everyone in the world gave you a penny, you'd become fantastically rich. This insight is at the core of modern politics. Sort the following government policies into "concentrated benefits" and "diffuse benefits." I. Social Security II. Tax cuts for families III. Social Security Disability Insurance for the severely disabled IV. National Park Service spending for remote trails V. National Park Service spending on the National Mall in Washington, D.C. VI. Tax cuts for people making more than $250,000 per year VII. Sugar quotas

I, II, and V are examples of diffuse benefits, while III, IV, VI, and VII represent concentrated benefits.

How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those firms have different owners, are in different locations, and have unique cost functions known only to the firms themselves? Why don't these different firms need to have one shared owner or one shared manager to coordinate this "equal marginal cost" condition? Assume that the market is perfectly competitive.

In a free market, each firm owner has an incentive to choose the level of output such that such that price equals marginal cost.

Every year, American television introduces many new shows, only about one-third of which survive past their first season. The few shows that last, however, prove to be very profitable. How does creative destruction explain why studios bother to make new shows if most of them will fail?

It allows for new ideas to be tested and to see what is going to work for greater future profit.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the market for snow shovels?

It causes an increase in demand for snow shovels.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the supply side of the market for snow shovels?

It causes an increase in the quantity supplied of snow shovels.

If the price of oil falls, what will happen to the quantity of oil supplied?

It decreases, because some oil deposits are no longer worth tapping

The rise of the Internet and file sharing has turned media such as movies and music into public goods. How?

It has made those goods nonexcludable.

It is a rival good because it can only be owned by one person at a time.

It makes the marginal cost curve shift upward and to the left.

Driving along America's interstates, you'll notice that few rest areas feature commercial businesses. Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association of Truck Stop Operators (NATSO), who consistently lobby the U.S. government to deny commercialization in these areas. They argue that: "Interchange businesses cannot compete with commercialized rest areas, which are conveniently located on the highway right-of-way. . . . [R]est area commercialization results in an unfair competitive environment for privately operated interchange businesses and will ultimately destroy a successful economic business model that has proven beneficial for both consumers and businesses." How does the NATSO argument affect travel for consumers?

It makes travel more expensive and less convenient.

Let's apply the economics of taxation to romantic relationships. What does it mean to have an inelastic demand for your boyfriend or girlfriend?

It means that you cannot live without him or her.

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour. Where will it be easier to find parking: in Freedonia or Meterville? Which town will attract shoppers with higher incomes?

It will be easier to find parking in Meterville and Meterville will attract higher-income shoppers.

If junk food supply is highly elastic—perhaps because it's not that hard to start selling salads with low-fat dressing instead of burgers smothered in mayonnaise and cheese—what does that mean for the impact of a junk food tax?

It will be more effective than if supply were inelastic.

If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

It will go down because insurance companies will only sell insurance to healthy people now that the rates are set at lower levels. The quantity of coverage supplied will decrease.

We mentioned that carpet manufacturing looks like a decreasing cost industry. In American homes, carpets are much less popular than they were in the 1960s and 1970s, when wall-to-wall carpeting was fashionable in homes. Suppose that carpeting became even less popular than it is today: What would this fall in demand probably do to the price of carpet in the long run?

It would cause the price of carpet to rise.

During the Middle Ages, the African city of Taghaza quarried salt in 200-pound blocks to be sent to the salt market in Timbuktu, in present-day Mali. Travelers report that Taghazans used salt instead of wood to construct buildings. How would the elasticity of demand for wood in Taghaza have compared with the elasticity of demand for wood in other towns without big salt mines?

It would have been more elastic.

An initiative on Arizona's 2006 ballot would have a $1 million lottery prize handed out every election. The only way to enter the lottery would be to vote in a primary or general election. How do you think a lottery like this would influence voter ignorance?

It would increase voter ignorance.

How would the fact that a very large share of oil output was used to make plastic affect the elasticity of the supply curve for plastic?

It would result in a less elastic supply, as goods that use a large share of the market for inputs tend to be less reactive to changes in their own price.

Canada's Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to the Montagnes, an indigenous group who, in contrast to their counterparts in the American Southwest, established property rights over land. This institutional change was a direct result of the increase in the fur trade after European traders arrived. Before these traders came, the amount of land in the Labrador Peninsula far exceeded the indigenous people's needs. Hunting animals specifically for fur was not yet widely practiced. What can you conclude about the relative scarcity of land or animals?

Land and animals were not scarce since the supply of them exceeded the demand.

According to the elimination principle, how would you characterize the long-run profits in Industry X after demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

Long-run profits are zero.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is an increasing cost industry, how much will this new safety regulation change the average pajama maker's profits in the long run?

Long-run profits will remain the same.

Maxicon is opening a new coal-fired power plant, but the government wants to keep pollution down. Which is a more efficient way to reduce pollution: requiring Maxicon to use one particular air-scrubbing technology that will reduce pollution by 25% or commanding Maxicon to reduce pollution by 25% in any way they can?

Mandating the pollution reduction only will be more efficient, since Maxicon will be better equipped to find lower cost ways of performing the reduction.

Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb. What does this suggest about the marginal cost of apples?

Marginal cost is increasing.

In 30 minutes, Kara can either make miso soup or clean the kitchen. In 14 minutes Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in making miso soup?

Mitchell has the comparative advantage in making miso soup.

Suppose the elasticity of demand for ballpoint pens with blue ink is -20. What do you suppose explains why demand for this good is so elastic?

Most people view blue-ink pens and black-ink pens as very close substitutes.

In 2005, American studios released 563 movies and American publishers produced 176,000 new books. How does the fixed cost of producing movies and books explain such a wide difference? Which is riskier: publishing a book or producing a movie?

Movies have higher fixed costs and are therefore more risky than books.

Driving along America's interstates, you'll notice that few rest areas feature commercial businesses in these areas. Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association of Truck Stop Operators (NATSO), who consistently lobby the U.S. government to deny commercialization. They argue that "Interchange businesses cannot compete with commercialized rest areas, which are conveniently located on the highway right-of-way. . . . [R]est area commercialization results in an unfair competitive environment for privately operated interchange businesses and will ultimately destroy a successful economic business model that has proven beneficial for both consumers and businesses." Why does NATSO often succeed in its lobbying efforts despite the fact that it inconveniences a large number of travelers?

NATSO succeeds because each traveler is only slightly inconvenienced, while truck stop operators see large benefits.

Assess the validity of the following statements. I. Compared with most other countries, full democracies tend to put a lot of restrictions on markets and property rights. II. When it comes to disposable income, American presidents seem to prefer "making a good first impression" rather than "going out with a bang."

Neither I nor II is true.

In this chapter, we discussed the story of Dalton, Georgia, and its role as the carpet capital of the world. A similar story can be used to explain why some 60% of the motels in the United States are owned by people of Indian origin or why, as of 1995, 80% of doughnut shops in California were owned by Cambodian immigrants. Let's look at the latter case. In the 1970s, Cambodian immigrant Ted Ngoy began working at a doughnut shop. He then opened his own doughnut shop (and later, more shops). Ngoy was drawn to the doughnut industry because it required little English, start-up capital, or special skills. Speaking the same language as your workers, however, helps a lot. As other Cambodian refugees came to Los Angeles fleeing the tyrannical rule of the Khmer Rouge, which group—the refugees or existing LA residents—was Ngoy more likely to hire from? Did this make it more or less likely that other Cambodian refugees would open doughnut shops?

Ngoy was more likely to hire Cambodian refugees, which made it more likely that other Cambodian refugees would open doughnut shops

Arguing about economics late one night in your dorm room, your friend says, "In a free market economy, if people are willing to pay a lot for something, then businesses will charge a lot for it." One way to translate your friend's words into a model is to think of a product with highly inelastic demand: items like lifesaving drugs or basic food items. Let's consider a market in which costs are roughly constant: perhaps they rise a little or fall a little as the market grows, but not by much. In the long run, is your friend right?

No, because competition will ensure that the price falls to the zero profit level in the long run, and because the price in the long run is determined by the location of the average cost curve, not the demand curve. DR.

Carbon dioxide is a byproduct of the burning of fossil fuels, something necessary for many modes of transportation and manufacturing processes. It has been asserted by scientists that carbon dioxide is the cause of global warming, which imposes negative externalities on the entire world population. Considering what we've learned about externalities, should human-caused global warming be completely stopped? What is the optimal level of human-made carbon dioxide, compared with the current level?

No, we shouldn't eliminate the entire externality, but the optimal level of human-made carbon dioxide is likely less than today's amount.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. Surely, more workers will want to work at Galt Inc. now that it pays higher wages. Will more workers actually work at Galt Inc. after the labor agreement is struck? Why or why not?

No. Fewer workers will work at Galt because the higher marginal cost after the labor deal means Galt will be making fewer motors.

If a corrupt government grants Maxicon, the operator of a new coal-fired power plant, all of the (tradable) pollution permits in the entire nation (even though there are many energy companies), does this guarantee that Maxicon will engage in an enormous amount of pollution? Why or why not?

No. If the permits are tradable, Maxicon may reduce its pollution and sell many of the permits.

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. When Congress gives subsidies for the alternative energy market, they are hoping that a small subsidy can get a big increase in output. In other words, they are hoping that the equilibrium quantity will be elastic. At the same time, the groups most likely to lobby Congress for a big alternative energy subsidy are the groups that get the most extra surplus from it. After all, if the subsidy doesn't give them much surplus they're not likely to ask for it. So, here's the big question: Will the groups that are most likely to lobby for a subsidy be the same groups that are mostly likely to respond to the subsidy?

No. The inelastic group is likely to lobby for a subsidy, while the elastic group is most likely to respond to a subsidy.

The U.S. Postal Service (USPS) has a legal monopoly in the delivery of first-class mail. Does this monopoly extend into other markets in which the USPS operates?

No. There are plenty of other methods of sending documents and parcels.

In Chapter 6 we said that taxes create deadweight losses. When we tax goods with negative externalities should we worry about deadweight losses? Why or why not?

No. When the government taxes a good with a negative externality, it will remove the deadweight loss generated by the externality.

Assess the validity of the following statements. I. During Bangladesh's politically created famine, the average amount of food per person was much lower than usual. II. Democracies are less likely to kill their own citizens than other kinds of governments.

Only II is true.

Which of the following people are paying for public goods? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only example II is a person paying for public goods

Which of the following are forced riders? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only examples I and IV are forced riders.

Which of the following are free riders? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only examples III and V are free riders.

Some people with diabetes absolutely need to take insulin on a regular basis to survive. At the same time, pharmaceutical companies that make insulin could find a lot of other ways to make some money. If the U.S. government imposes a tax on insulin producers of $10 per cubic centimeter of insulin, who will bear most of the burden of the tax?

People with diabetes will bear most of the burden.

Some people with diabetes absolutely need to take insulin on a regular basis to survive. At the same time, pharmaceutical companies that make insulin could find a lot of other ways to make some money. Suppose that insulin manufacturers convince the U.S. government to pay a subsidy to insulin makers of $10 per cubic centimeter of insulin. Who will get most of the benefit of this subsidy: insulin producers or people with diabetes?

People with diabetes will receive most of the benefit.

This chapter noted that chickens and the "chicken of the sea" (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins. As population and prosperity has increased, the demand for chicken has increased. What happens to the price of chickens as a result? What happens to the number of people raising chickens as a result of the price change?

Price increases. More people will raise chickens.

If a price-discriminating monopolist were unable to prevent arbitrage, what would happen to the prices in the two markets in which price discrimination is occurring?

Prices across the two markets would eventually converge on one common price.

Suppose there are two industries: a high-profit industry, Industry H, and a low-profit industry, Industry L. If the two industries have similar costs, what must be TRUE about prices in the two industries?

Prices in Industry H must be higher than Industry L.

Which of the following best describes when a price ceiling is effective in keeping the actual market price below the equilibrium market price?

Quantity supplied is less than quantity demanded.

Suppose that drug addicts pay for their addiction by stealing. Therefore, the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic?

Stealing will decrease.

Stealing will increase.

According to the elimination principle, what happens to the short-run supply in Industry X when demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

Supply will increase.

Palm Springs, California, was once the playground of the rich and famous—for example, the town has a Frank Sinatra Drive, a Bob Hope Drive, and a Bing Crosby Drive. The city once had a law against building any structure that could cast a shadow on anyone else's property between 9 AM and 3 PM (Source: Armen Alchian and William Allen. 1964. University Economics, Belmont, CA: Wadsworth). What are some alternatives to this command and control solution?

Taxes levied on buildings that cast shadows. Subsidies on buildings that do not cast shadows. Tradable allowances for buildings that cast shadows.

In which of the following cases are the Coase theorem's assumptions likely to be TRUE? In other words, when will the parties be likely to strike an efficient bargain? How do you know? Case 1: My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes a negative externality on him and on his property value. Case 2: My neighbors all would love for me to get that broken-down Willys Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6-foot ditch in the front yard? The whole neighborhood is annoyed. Case 3: A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing all the fish. Thousands of homes line the banks of the lake. Case 4: A coal-fired electricity plant dumps its leftover hot water into the nearby river, killing all the fish for a mile downstream. There is one large privately owned fishery one-mile downstream affected by this. After that, the water cools enough so it's not a problem.

The Coase theorem's assumptions would hold in cases 1 and 4, but not in cases 2 and 3.

In what way do rules about new National Basketball Association (NBA) franchises constitute a barrier to entry?

The NBA controls whether a new team can enter the league, thus limiting the number of teams, creating a monopsony in the sports industry.

Cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases?

The demand curve for gasoline will shift upward and to the right.

Suppose that wages for nurses are increasing. How would this affect the elasticity of supply for nurses over a period of several years as compared with the elasticity of supply over the next month?

The elasticity of supply would be larger over a period of several years because the supply will be more reactive to changes in wages over the long run.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the equilibrium price and quantity of snow shovels

The equilibrium price and quantity would both rise.

A flu shot typically costs between $25 and $50, but some firms offer their employees free flu shots. Why might a firm prefer to offer its employees free flu shots if the alternative is an equally costly wage increase?

The firm wants to encourage employees to get flu shots because they want to avoid a loss of productivity because of days lost to illness, and because they have positive externalities on those around them (other employees).

Fires create external costs because they spread from one building to another. If the government wants to reduce the external costs of fires, should it encourage subsidies for sprinkler systems or should they just mandate that everyone have sprinklers?

The government should subsidize sprinkler systems.

When government is trying to raise tax revenue, it sometimes attempts to target higher-income people because they are in a better position to bear the burden of a tax. However, it can be very difficult to earn tax revenue from wealthy people. Consider the progressive nature of the U.S. federal income tax system: It's designed so that higher incomes are taxed at higher tax rates. Thinking about the elasticity of labor supply, why might it be more difficult to collect tax revenue from a wealthy individual than from a poor person, all else equal?

The labor supply curve for a wealthy individual may be more elastic than a poor person's labor supply curve.

Is the minimum wage a "price ceiling" or a "price floor?" What about rent control?

The minimum wage is a price floor, while rent control is a price ceiling.

If the government imposes a price control on a natural monopoly, forcing it to charge a price equal to its average cost, what will be the result?

The monopolist will earn zero economic profit.

If a monopolist sells in two markets, one in which demand is very elastic, the other in which demand is very inelastic, how would this affect the monopolist's pricing behavior?

The monopolist would charge a relatively high price in the very inelastic market.

According to the elimination principle, what happens to the number of firms, number of workers, and the quantity of capital in Industry X when demand rises in Industry X? You can assume that Industry X is a decrease cost industry.

The number of firms and workers and the quantity of capital all increase.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. What will happen to the number of motors produced by Galt Inc.?

The number of motors produced will fall.

Let's apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?

The one with more inelastic demand will do most of the driving.

Consider farmers who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat, but the price of soybeans rises dramatically. How does this affect the opportunity cost of producing wheat?

The opportunity cost of wheat production increases.

In rich countries, governments almost always set the fares for taxi rides. The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Because of this, it is generally easier to find a cab in safe neighborhoods. If these taxi price controls were ended, what would probably happen to the price and quantity of cab rides in dangerous neighborhoods?

The price and quantity would both rise.

In comparing the supply of breakfast cereal with the supply of food, which of the following statements is TRUE?

The supply of breakfast cereal is more elastic than the supply of food.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is an increasing cost industry, then what happens to the price of children's pajamas in the long run?

The price increases by less than $2.

If the elasticity of demand for spring break packages to Cancun is -5, and if you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation packages?

The price of Cancun vacations packages fell by 2%.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. In this competitive market, what will the Galt Inc. labor agreement do to the market price of motors?

The price of motors will remain the same.

When the United States had price controls on oil and gasoline, some parts of the United States had plenty of heating oil while other states had long lines for heating oil. As in the chapter, let's assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls, what would have happened to the prices of heating oil in New Jersey and in California? And how would "greedy businesspeople" have responded to these price differences?

The price of oil would have been higher in New Jersey and producers would have responded by sending more oil to New Jersey.

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation?

The price of trucking services fell, truckers earned less money, and consumers saved a lot of money.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is a constant cost industry, then what happens to the price of children's pajamas in the long run?

The price rises by exactly $2.

Replacement parts for classic cars are expensive, even though these parts aren't any more complicated than parts for new cars. If people began recycling old cars more in the United States—repairing them rather than sending them off to junkyards—what would likely happen to the price of spare parts in the long run?

The price would decrease.

If the elasticity of demand for ballpoint pens with blue ink is -20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded?

The quantity demanded will decrease by 20%.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread?

The quantity supplied will fall.

Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. How will the tax affect the market for sugar?

The supply curve will shift up and to the left.

In comparing the supply of construction workers in Binghamton, New York, with the supply of construction workers in the entire state of New York, which of the following statements is TRUE?

The supply of construction workers in Binghamton, New York, is more elastic than the supply of construction workers in the entire state of New York because supply is more reactive to changes in the price over a smaller geographic area.

Ticket prices for Major League Baseball and National Football League games are an example of how barriers to entry can affect prices. How so?

The tickets can be purchased only at approved locations, limiting the number of firms that can sell them.

Suppose you're doing some history research on shoe production in ancient Rome during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn't tell you the price of shoes. You find a document that says that in the year 301, Emperor Diocletian issued an "Edict on Prices," but you don't know whether he imposed price ceilings, price floors, or subsidies—your Latin is a little rusty. However, you can clearly tell from the documents that the number of shoes actually sold in markets fell dramatically, and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell what Diocletian imposed? (Yes, there really was an Edict of Diocletian.)

The type of price control cannot be determined from the information given.

In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. At that time, federal price floors didn't apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. How do you think meals on AirCal flights compared with those on flights from Chicago to Cleveland?

Their meals would have been worse.

The Canadian government has wage controls for medical doctors. To keep things simple, let's assume that they set one wage for all doctors: $100,000 per year. It takes about six years to become a general practitioner or a pediatrician, but it takes about eight or nine years to become a specialist like a gynecologist, surgeon, or ophthalmologist. (Note: The actual Canadian system allows specialists to earn a bit more than general practitioners, but the difference isn't big enough to matter.) What do you suppose the situation is in the Canadian health system?

There are lots of general practitioners and pediatricians, but few specialists.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens in the market for toys made in China?

There is a decrease in market demand.

In the market for really good ideas—ideas that will dramatically change the world for the better—the private benefit of one more really good idea (from speaker's fees, book sales, patents, etc.) is $1,000,000.The marginal social benefit is $100,000,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality

There is an external benefit of $99,000,000 per new idea and a subsidy is necessary to compensate for it.

In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $10,000 per SUV and a tax would be necessary to compensate for it.

In the market for fashionable clothes, the marginal social benefit of one more dress per person is $100, and the marginal private benefit is $500. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $400 per dress and a tax would be necessary to compensate for it.

The long-run elasticity of demand for oil in the United States is -0.5. How does a 10% increase in oil prices affect the total revenues to the oil producers?

Total revenues increase.

Assume that a drug named Columbir that treats HIV is being sold at a higher price in Europe than in Africa by a company called CLB. Is total producer and consumer surplus likely to be greater with price discrimination than without?

Total surplus would be greater with price discrimination than without, as consumers in Africa would be able to purchase output that they otherwise couldn't afford.

You've been hired as a management consultant to four different companies in competitive industries. They're each trying to figure out if they should produce a little more output or a little less output to maximize their profits. The firms all have typical marginal cost curves: They rise as the firm produces more. Your staff did all the hard work for you of figuring out the price of each firm's output and the marginal cost of producing one more unit of output at their current level of output. WaffleCo, maker of generic-brand frozen waffles: price = $4 per box; marginal cost = $2 per box Rio Blanco, producer of copper: price = $32 per ounce; marginal cost = $45 per ounce GoDaddy.com, domain name registry: price = $5 per Web site; marginal cost = $2 per Web site Luke's Lawn Service: price = $80 per month; marginal cost = $120 per month Which firms should produce more, which should produce less, and which are producing just the right amount?

WaffleCo and GoDaddy.com are producing too much and Rio Blanco and Luke's Lawn Service are producing too little.

When the crime rate falls in the area around a factory, what probably happens to wages at that factory?

Wage rates would fall.

How do U.S. business owners change their behavior when the minimum wage rises? How does this affect teenagers?

When the minimum wage rises, business owners hire fewer low-skilled, teenage workers and conditions get worse for teenage workers.

Butter and margarine are substitutes. When the price of margarine increases, what will happen to the demand for butter? Why?

When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right.

Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a DVD from a store. Let's see if this is the case. Suppose someone stole a DVD from a retail outlet. Regardless of how that person values the DVD, does the movie company lose any revenue as a result of the theft? Why or why not?

Yes, because someone could have bought that DVD.

An important tradition in the Santos family is that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best. Does either family have a unit elastic demand for restaurant food?

Yes, the Chen family.

Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a CD or DVD from a store. Let's see if this is the case. Suppose someone illegally downloaded a movie instead of purchasing it. If that person placed a high value on the movie (they valued it more than the price required to purchase it legally), does the movie company lose any revenue as a result of the theft? If that person placed a low value on the movie (they valued it less than the price required to purchase it legally), does the movie company lose any revenue as a result of the theft?

Yes; No

Replacement parts for classic cars are expensive, even though these parts aren't any more complicated than parts for new cars. What kind of industry is the market for old car parts?

a decreasing cost industry

Immigration will lead to a big boost in the labor supply. What field would you rather be in: a field where the demand for your kind of labor is elastic or a field where the demand for your kind of labor is inelastic?

a field where demand for your kind of labor is elastic

If the price in a market is above the equilibrium price, then the market is experiencing:

a surplus

Emeril says, "In my economics class, I learned that the only way to fund public goods was to have the government tax citizens to pay for those goods. Is that what you learned?" Rachel responds, "Actually, in my class, we used Modern Principles, and we learned that there are other ways to fund public goods, like ________________." Complete Rachel's statement.

advertising or artificially making some public goods excludable

Canada's Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to the Montagnes, an indigenous group who, in contrast to their counterparts in the American Southwest, established property rights over land. This institutional change was a direct result of the increase in the fur trade after European traders arrived. Before these traders came, the amount of land in the Labrador Peninsula far exceeded the indigenous people's needs. Hunting animals specifically for fur was not yet widely practiced. Before the Europeans' arrival, land was commonly held. Land and animals were not scarce because the supply of them exceeded the demand. Once the European traders came, the demand for fur increased. When did the tragedy of the commons occur relative to the arrival of European traders?

after European fur traders arrived

If a particular government policy—like a decision to go to war or to raise taxes— only works when citizens are informed, is that an argument for that policy or against that policy?

against the policy

We mentioned that voters are myopic, mostly paying attention to how the economy is doing in the few months before a presidential election. If they want to be rational, should they pay attention to all four years of the economy, just the first year, just the last two years, or some other combination?

all four years

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. What possible prices for the haircut would be beneficial to both Maria and Juan? How much total surplus (that is, the sum of consumer and producer surplus) would be generated by this haircut?

any price from $25 to $40 would be beneficial to both Maria and Juan; $15

Even if profit is negative, if revenues ______________, then it's best to stay open in the short run.

are greater than variable costs

Imagine that the U.S. government replaced our patent system for pharmaceutical drugs with a prize system, where companies are given a cash prize for developing a successful new drug. How large would these prizes need to be for this system to be effective?

as large as the present value of the profits the company would have earned under the patent system

Look carefully at Figure 11.6. What is represented by the space in between the average cost (AC) and average variable cost (AVC) curves?

average fixed cost (AFC)

When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _______ the activity that is taxed and will tend to gravitate _______ activity that is not taxed

away from; toward

In the process of creative destruction, what gets destroyed?

both firms and business plans

How does the free market eliminate a shortage?

by causing the price to rise

Cable television is best characterized as a:

club good.

Yosemite National Park is best characterized as a:

club good.

Central Park, New York, when it is very crowded is best characterized as a:

common resource.

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, the range of haircut prices that benefit both Maria and Juan would __________ and the total economic benefit of the haircut would ____________.

decrease by $5; decrease

If the elasticity of demand for college textbooks is -0.1 and the price of textbooks increases by 20%, the quantity demanded of textbooks will:

decrease by 2%.

When the government expands the number of pollution allowances, does that increase or decrease the cost of polluting? What about when the number of pollution allowances is cut back?

decreases; increases

In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, you should hope that demand for apartments is:

elastic

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:

elastic supply and elastic demand.

The benefit your neighbor receives from hearing you play your pleasant music is a(n):

external benefit.

The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms is a(n):

external benefit.

The annoyance your neighbor feels because she doesn't like your achingly conventional music is a(n):

external cost

The crime that is more likely to occur to your neighbor once a criminal sees a "Protected by Alarm" sticker on your window is a(n):

external cost.

When bad weather in India destroys the crop harvest, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops?

fall in supply

According to the supply curve, if the price of cars ______ car makers will produce ______ cars.

falls; fewer

When the price of a good increases, the quantity demanded ______. When the price of a good decreases, the quantity demanded ______.

falls; rises

Consider a demand curve with an elasticity of 1.1. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

Consider a demand curve with an elasticity of 10.0. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

Consider a demand curve with an elasticity of 2.0. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

In your college town, real estate developers are building thousands of new student-friendly apartments close to campus. If you want to pay the lowest rent possible, you should hope that demand for apartments is:

inelastic.

Compared with a competitive industry, a monopolist will produce:

less output.

Around 130 million voters participated in the 2008 U.S. presidential election. Imagine that you are deciding whether to vote in the next presidential election. What do you think is the probability that your vote will determine the outcome of the election?

less than 0.01%

If a monopolist wants to sell one more unit of output and move down the demand curve, what must it do?

lower its price

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for electrical engineers? [Hint: Consider the length of time a student would spend in school to get an engineering degree before entering the market.]

more than 2-3 years

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, are any externalities produced? What happens if a family moves in next door to the smelly factory; is there an externalities problem now?

no; yes

In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One of his most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices—a pricey but purely cosmetic feature. Many people enjoy looking at the illuminated façade of Torre Agbar, the third-tallest building in Barcelona. Considering that enjoyment, how would you classify the Torre Agbar: rival or nonrival? Excludable or nonexcludable?

nonrival and nonexcludable

Apples are best characterized as a:

private good.

Open-heart surgery is best characterized as a:

private good.

Jon is on eBay bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, with whom is Jon competing?

others who are bidding on the graphic novel

Which of the following serves as an incentive for firms with market power to innovate and produce new goods?

positive economic profits

The pleasure you receive from listening to your iTunes download is a(n):

private benefit.

The safety you enjoy as a result of having the security system is a(n):

private benefit.

The price you pay for a security system for your home is a(n):

private cost.

The price you pay for an iTunes download is a(n):

private cost.

Farm-raised salmon are best characterized as a:

private good

Into which of the four categories of goods does education —a college course, for instance—seem to fit best?

private good

According to the elimination principle, what initially happens to profits in Industry X when demand rises in Industry X?

profits rise

In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One of his most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices—a pricey but purely cosmetic feature. Many people enjoy looking at the illuminated façade of Torre Agbar, the third-tallest building in Barcelona. What type of good is the LED facade of this building?

public good

Central Park, New York, when it is nearly empty is best characterized as a:

public good.

The Chinese language is best characterized as a:

public good.

The idea of calculus is best characterized as a:

public good.

If a monopolist faces a very inelastic demand curve, its markup over marginal cost will likely be:

rather high.

Consider a demand curve with an elasticity of 0.2. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

steep; falling

Consider a demand curve with an elasticity of 0.9. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

steep; falling

An important tradition in the Santos family is that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best. Which family has a more elastic demand for restaurant food?

the Chen family

Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be TRUE, as long as supply and demand curves have their normal shape (demand curves are downward sloping while supply curves are upward sloping)? If there is a tax:

the equilibrium quantity must fall, and the price that buyers pay must rise.

Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be TRUE as long as supply and demand curves have their normal shape (demand curves are downward sloping while supply curves are upward sloping)? If there is a tax:

the equilibrium quantity must fall, and the price that sellers receive must fall.

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Who do you think asked Congress and the President to keep price floors for trucking in place?

the trucking companies

When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate _______ the activity that is subsidized and will tend to gravitate _______ activity that is not subsidized.

toward; away from

Deirdre has a choice between writing one more book this year or five more articles this year. What is the opportunity cost of writing half a book this year, in terms of articles?

two and a half articles

Erin has a choice between two activities. She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission?

two fuel injectors

The act of linking together two products for the purpose of price discrimination is called:

tying.

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. If the Oklakansas government wants to strongly discourage people from eating junk food will it need to set a higher tax rate when junk food demand is elastic or when it is inelastic?

when demand is inelastic

When is bundling likely to increase total surplus?

when the firm can charge different prices to different consumers based on their willingness to pay

Petroleum, natural gas, coal, and solar power are all sources used to produce energy, and, therefore, can be considered to be substitutes. When the price of petroleum increases, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______.

increases; increases; increases

Once you graduate from college, get a good job, and experience a rise in income, you will choose to buy fewer ______ goods, such as______.

inferior; Ramen noodles

A pharmaceutical business is ______ likely to hire highly educated workers and use new, experimental research methods when it expects the price of its new drug to be ______.

more; high

Bill is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down?

other translators

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). Economists would describe these as:

substitutes.

The imposition of an excise tax (production tax) on each unit produced will cause:

supply to decrease

Which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

the U.S. Federal Reserve

Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. After the tax is enacted, what price will bring forth a quantity of 10,000?

$35

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a PhD degree.) How much producer surplus does Michael enjoy?

$50,000

A headline in The New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." Given what you now understand about opportunity cost, the headline should probably read: "Study Finds Enrollment Is Up at Colleges _______ Recession.

Due to Because of (either A or C)

Conan O'Brien has been a talk show host since 1993, but he began his career in comedy as a writer: first at The Harvard Lampoon while in college, then eventually at Saturday Night Live and The Simpsons. Given that he is such an accomplished comedy writer, it might be surprising to learn that his current talk show staff includes more than a dozen writers. How can you explain this using the information covered in the chapter?

His writers have a lower opportunity cost of comedic writing than Conan.

When the price of Apple computers declines, what probably happens to the demand for Windows-based computers?

It decreases, because Apple computers and Windows-based computers are substitutes

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. So, over the last 1,000 years, what has happened to the fraction of humans who are poor?

It fell.

Olive oil and corn oil are very often considered to be substitute products. When the price of olive oil increases, what probably happens to the demand for corn oil?

It increases, because olive oil and corn oil are substitutes.

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. What happened to the total number of people living in deep poverty?

It rose.

Nobel Prize-winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet to change the temperature of the water, there won't be an actual change in the temperature for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how the water feels right now, the water is likely to swing back and forth between too hot and too cold. How does this apply to central banking?

It takes a fairly long time for central bank decisions to trickle through the economy.

What is the impact of an economic boom on the elasticity of demand for new televisions?

It would decrease the elasticity of demand for new televisions, as consumers would now be less reactive to changes in the price of new televisions.

A public awareness campaign spreads a wider understanding that bacteria and other organisms cause and spread disease. How does this affect the elasticity of demand for soap?

It would decrease the elasticity of demand for soap, as consumers would now be less reactive to changes in the price of soap.

How would new regulations banning the use of pesticides and fertilizers affect the elasticity of supply for food?

It would decrease the elasticity of supply, as producers would now find it more difficult to expand the amount they grow on their land when the price goes up.

How would the increasing prevalence of telecommuting affect the elasticity of demand for cars?

It would increase the elasticity of demand for cars, as consumers would now be more reactive to changes in the price of cars.

How would the invention of nuclear power plants affect the elasticity of demand for coal?

It would increase the elasticity of demand for coal, as consumers would now be more reactive to changes in the price of coal.

How would a new process for manufacturing diamonds affect the elasticity of supply for diamonds?

It would increase the elasticity of supply, as manufactured goods are more reactive to price changes than natural resources.

In 30 minutes, Kara can either make miso soup or she can clean the kitchen. In 14 minutes Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in cleaning the kitchen?

Kara has the comparative advantage in cleaning the kitchen.

Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens?

No, because printing lots of paper money will simply cause inflation. No, because wealth does not originate in the supply of paper money. (Both B and C are correct).

Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel?

Supply increases and the supply curve shifts down and to the right.

If oil executives read in the newspaper that new solar-power technologies have been discovered, but that these technologies won't become useful for another 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, equilibrium price will decrease, and equilibrium quantity will increase.

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean, but that these supplies won't be useful until 10 years from now, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, price will decrease, and quantity will increase.

According to The Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Using the information in the productivity table below, who has the comparative advantage in making high-quality cars?

The North has the comparative advantage in high-quality cars.

The South has the comparative advantage in low-quality cars.

In comparing the demand for Exxon gasoline at the corner of 7th and Grand with the demand for gasoline in the entire city, which of the following statements is TRUE?

The demand for Exxon gasoline at the corner of 7th and Grand is more elastic than the demand for gasoline in the entire city, as consumers are less reactive to changes in the price of gasoline in the entire city.

The demand for dangerous cars will decrease.

In comparing the demand for insulin with the demand for vitamins over the next decade, which of the following statements is TRUE?

The demand for insulin is less elastic than the demand for vitamins over the next decade because consumers are more reactive to changes in the price of vitamins.

In comparing the demand for tangerines with the demand for all fruit, which of the following statements is TRUE?

The demand for tangerines is more elastic than the demand for fruit because consumers are more reactive to changes in the price of tangerines.

In comparing the demand for beef next month with the demand for beef over the next decade, which of the following statements is TRUE?

The demand next month is less elastic than the demand over the next decade because consumers are more reactive to changes in the price over the next decade.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens to the equilibrium price and quantity of toys made in China? Are Chinese toymakers made better or worse off by such news?

The equilibrium price and quantity of toys falls and Chinese toymakers are worse off.

In recent years, the Paleo diet, which emphasizes eating more meat and fewer grains, became very popular. What do you suppose that did to the price and quantity of bread?

The price and quantity of bread fell.

The book describes Vernon Smith's experiment with supply and demand models. What happened in Vernon Smith's lab?

The price and quantity were close to equilibrium and gains from trade were close to the maximum.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. At a price of $3.50 how many units are demanded? How many units are supplied?

The quantity demanded is 2 and the quantity supplied is 3.

Assess the validity of the following statement in terms of incentives: A scientist who earns a percentage of the profits from any new medicine he or she may invent is likely to work longer hours in a laboratory researching new cures for diseases than a scientist who will get a handshake and a thank you note from the boss if he or she invents a new medicine.

True. The potential for monetary reward provides an incentive to work harder.

Evaluate the accuracy of the following statement: People search harder for substitutes for oil when the price of oil is high.

True; when oil prices are high, there are greater potential savings from oil substitutes.

Many people talk about manufacturing jobs leaving the United States and going to other places like China. Why isn't it possible for all jobs to leave the United States and go overseas, as some people fear?

U.S. productivity is still higher than China's, which is why the United States has higher wages.

Glass is an input for producing both windows and bottles. However, glass bottles are a less valuable product than glass windows. If the price of glass increases dramatically, what are we likely to see a lot less of: glass windows or glass bottles? Why

bottles

For many years it was illegal to color margarine yellow (margarine is naturally white). In some states, margarine manufacturers were even required to color margarine pink! Who do you think supported these laws? (Hint: What color spread would you like to put on your toast?

butter manufacturers and dairy farmers

By how much did national output fall during the Great Depression?

30%

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. Assuming the market works as predicted and moves to equilibrium, will the buyer who values the good at $1 be able to purchase? Why or why not?

No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good.

Part of the reason the Great Depression was so destructive was that economists didn't understand how to use government policy very well in the 1930s. Does this mean that we should lose confidence about the know-how of economists?

No. Economics is not a perfect science, since there are so many variables. Furthermore, economic conditions are continuously changing. Today, the tools of monetary and fiscal policies are better understood to reduce swings in unemployment and GDP.

Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produce enough food to feed the entire country while still exporting food overseas. What happened to all of those people who used to work on farms?

Now that our food can be produced by such a small group of workers, most Americans have moved on to work in other sectors of the economy.

Economists often say that prices are a "rationing mechanism." If the supply of a good decreases, how do prices "ration" these now-scarce goods in a competitive market?

Prices allocate goods to the people with the highest willingness to pay.

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation?

Print less money.

When supply falls, what happens to quantity demanded in equilibrium?

Quantity demanded decreases.

How do specialization and trade help you to avoid boredom and ignorance?

Specialization allows people to focus on one thing, thus learning more about it, than if they had to learn a little about everything, alleviating ignorance; trade introduces us to new items to prevent boredom

The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. Since the same test is given to all students in the same grade in the state, this encourages all schools within a state to cover the same material. According to the division of knowledge model (specialization), what are the costs of this approach (or what are the costs from reducing the degree of specialization or division of knowledge)?

The state will be less productive because the children will know a little about of a lot of the same things, and no one will be an expert in anything.

In comparing the supply of apples over the next growing season with the supply of apples over the next decade, which of the following statements is TRUE?

The supply of apples over the next growing season is less elastic than the supply of apples over the next decade because producers are more reactive to changes in the price over the next decade

In comparing the supply of gold with the supply of computers, which of the following statements is TRUE?

The supply of gold is less elastic than the supply of computers.

The supply of safe cars will rise and the equilibrium price of safe cars will fall.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

There was a fall in supply and a rise in market demand.

Ending hyperinflation in an economy is like an obese person trying to lose 100 pounds. Why?

They are both difficult to do and will require lots of sacrifice.

Nobel Prize-winner and New York Times columnist Paul Krugman has noted that economics is a lot like medicine: Knowledge is limited and many cures are quite painful. What are some other ways that economics and medicine are alike?

They are not perfect sciences. You are never 100% sure of the consequences and outcome of a remedy. Medicine is a practice and economics is also a practice.

Decades ago, Washington, DC, a fairly small city (in geographic area), wanted to raise more revenue by increasing the gas tax. Washington, DC shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states without even really noticing; the suburbs just blend together. When Washington, DC, increased its gasoline tax, how much revenue did it raise? How would your answer change if Washington, DC, Maryland, and Virginia all agreed to raise their gas tax simultaneously?

When Washington, DC, raised its tax alone, it gained very little revenue. If all the states raise their taxes together they would gain a lot of revenue.

In the Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because "A man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

You should devote entire days to studying for each course instead of switching back and forth between subjects during the day.

Over the last 10 years, China and India have both become substantially richer. At the same time, oil prices have risen. The change in oil prices is due to:

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