Micro Final 2

The graph shown demonstrates a tax on buyers. Once the tax has been imposed, the sellers produce ________ units and receive ________ for each one sold.

6; $22

When all players in a game choose the best strategy they can, given the choices of all other players, it is always a:

Nash equilibrium.

In the principal-agent problem, the agent is:

a person who carries out a task on someone else's behalf.

The law of demand describes the:

inverse relationship between price and quantity demanded.

The price elasticity of demand for eggs is -.27 and the price elasticity of demand for soft 27) drinks is -.70. Therefore, the demand for eggs

is less elastic.

A network externality is:

the effect that an additional user of a good or participant in an activity has on the value of that good or activity for others.

The government could offer a subsidy to offset a:

positive externality.

In economic terminology, a buyer or seller who cannot affect the market price is called a:

price taker.

We call costs that fall directly on an economic decision maker:

private costs.

The term equilibrium refers to the point where:

quantity supplied equals quantity demanded.

If producers incorrectly set the price of their product too low a:

shortage will result and consumers will bid the price up.

One way to make consumers take a positive externality into account in their demand decision is to:

subsidize the purchase of the item.

The demand for a specific brand of corn flakes cereal is likely to be:

very price elastic, because there are many close substitutes available.

If a Pigovian tax is not large enough to offset a negative externality, the resulting market quantity:

will be more than the efficient quantity.

A rational person is someone:

with well-defined goals who tries to fulfill those goals as best as he or she can.

External benefits are those that accrue:

without compensation to someone other than the person who caused it.

When a perfectly competitive, well-functioning market is not in equilibrium:

All of these are true.

If a price ceiling of $8 were placed in the market in the graph shown, which area represents deadweight loss?

B + D

Any cost that is imposed without compensation on someone other than the person who caused it is called:

external cost.

A tax on sellers:

shifts the supply curve up by the amount of the tax.

After purchasing a coffee cup from your local gas station for $5.00, you can always refill 7) your cup for $0.50. The marginal cost of your 10th cup of coffee purchased at the gas station is:

$0.50.

According to the graph shown, the equilibrium price is ________ and equilibrium quantity

$10; 20

According to the graph above, a price ceiling in this market would be non-binding if it were set at:

$13.

A market has four individuals, each considering buying a grill for his backyard. Assume that grills come in only one size and model. Abe considers himself a grill-master, and finds a grill a necessity, so he is willing to pay $400 for a grill. Butch is a meat-lover, honing his grilling skills, and is willing to pay $350 for a grill. Collin just met the girl of his dreams, and she loves a good grilled steak, so in his effort to impress her he is willing to pay $320 for a grill. Daniel loves grilled shrimp and thinks it might be cheaper in the long run if he buys a grill instead of eating out every time he wants grilled shrimp, so he is willing to pay $200 for a grill. If the market price of grills is $300, given the scenario described, the total consumer surplus would be:

$170.

This figure displays the choices being made by two coffee shops: Starbucks and Dunkin Donuts. Both companies are trying to decide whether or not to expand in an area. The area can handle only one of them expanding, and whoever expands will cause the other to lose some business. If they both expand, the market will be saturated, and neither company will do well. The payoffs are the additional profits (or losses) they will earn. The outcome of the game in the figure shown predicts that Starbucks will earn profits of:

$2 million.

Larry was accepted at three different graduate schools, and must choose one. Elite U 3) costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is:

$20,000

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll 4) have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:

$35

Which of the following prices could represent Sally's willingness to pay for a pair of 31) shoes if she bought them for $45?

$55.00

You are shopping at the local mall with an $80 gift certificate that expires later today. 6) Only three items catch your attention. The items include a Justin Bieber sheet set, a remote control helicopter, and an "Amazing Ab Belt." You would be willing to give up $60 for the sheets, $70 for the belt, and $80 for the helicopter. Knowing this, you decide to purchase the helicopter. The opportunity cost of the helicopter was:

$70, the value of the ab belt.

If the price of a good increases by 10 percent, its quantity demanded drops by 50 percent. 25) The price elasticity of demand is:

-5.0

According to the graph shown, if the market is in equilibrium, consumer surplus is area:

A + B + C.

Who loses surplus when consumers in a market are forced to pay a Pigouvian tax for a negative externality?

Both producers and consumers lose surplus when negative externalities are internalized.

Suppose that your neighbor smokes in his yard. You can smell his cigarette smoke from inside your house, and you dislike the smell. Which of the following statements is correct?

If it is difficult for you and your neighbor to negotiate with each other, then you may not be able to arrive at an efficient solution to this problem.

The government is deciding where to put a $1 tax-either in a market with elastic supply and demand curves, or a market with inelastic supply and demand curves. If their aim is to raise the most revenue with the smallest deadweight loss, where should the tax be placed?

In the market with inelastic supply and demand curves

The stable (Nash equilibrium) outcome of the game in the figure shown will be:

Nike and Adidas both charge a low price.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of this game?

Player 1 chooses Down and Player 2 chooses Up.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. If Player 2 could make a credible commitment to choose either Up or Down when his or her turn came, then what would Player 2 do?

Player 2 would commit to choosing Down.

The "Made in the USA" campaign was popularized by unions in an effort to influence 14) which determinant of demand?

Preferences

The graph shown demonstrates a tax on sellers. Who bears the greater tax incidence?

The buyers

Suppose there is a tornado that levels a city. As rebuilding begins, how might you 20) analyze this effect in the market for lumber?

The demand for lumber would increase, increasing both the equilibrium price and quantity.

Which of the following is an example of an activity with an external cost?

Speeding on the interstate.

Suppose two companies, Macrosoft and Apricot, and considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). If Macrosoft and Apricot make their decision at the same time, then which of the following statements is correct?

The game has more than one Nash equilibrium.

Last year due to the increased rainfall there was a plentiful supply of blueberries which 17) caused their price to drop. Bakeries regularly produce and sell blueberry pie. Considering the market for blueberry pies, what factor of supply has been affected, and what was the overall effect on the supply?

The price of an input has been affected; supply will increase.

If people took external costs like pollution into consideration, they would on net:

consume less of the goods causing these externalities.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Is it socially optimal for the cigar smoker to smoke?

Yes, because the value to the cigar smoker of smoking is greater than the total value to the other people in the room of clean air.

The graph shown best represents:

a binding price ceiling.

This graph depicts the demand for a normal good. A shift from A to B in the graph shown might be caused by:

a decrease in the price of a complement.

If out of the two cities that send teams to the Super Bowl, the city with the lowest 9) unemployment rate wins 70 percent of the time, there would be:

a positive correlation between Super Bowl wins and low unemployment rates.

When government mandates participation in a program to solve an information asymmetry problem, it is trying to prevent:

adverse selection.

An example of a Pigovian tax would be a tax on:

cigarettes.

When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called a:

commitment problem.

Consider the market for ride-on lawn mowers and the recent increases in the price of oil. 21) The recent increase in the price of oil makes it more expensive to manufacture ride-on lawn mowers. An increase in the price of oil also makes it more expensive to run a ride-on mower. What is likely to happen to equilibrium price and quantity of lawn mowers as a result in the changing price of oil? Supply and demand will both:

decrease, decreasing equilibrium quantity and having an indeterminate effect on price.

A standardized good or service is one:

for which any two units of it have the same features and are interchangeable.

The Coase theorem is the idea that:

in some cases, individuals can reach an efficient equilibrium through private trades, even in the presence of an externality.

The price of pizza falls relative to the price of spaghetti, so people buy more pizza 8) instead of spaghetti. This is an example of responding to:

incentives.

You decide to drive your car on a long road trip of 1,500 miles. The opportunity cost of 5) driving your car:

includes lost wages you could have earned instead of driving.

This table shows the demand and supply schedule of a good. Price of Good QDemand Qsupply $0.00 50 25 $0.50 40 26 $1.00 35 28 $1.50 31 31 $2.00 28 35 $2.50 27 40 According to the table shown, at a price of $2.00 quantity demanded:

is less than quantity supplied and a surplus exists.

Deadweight loss:

is the difference between the total surplus occurring in a market and the maximum total surplus achievable.

If the consumption of good generates an external benefit, then the market equilibrium quantity will be:

less than the socially optimal quantity.

Scarcity reflects our inability to satisfy wants due to:

limited resources.

Correcting a market with an externality through taxation is ________ correcting it through a conventional quota.

more efficient than

Coke and Pepsi probably have a:

more elastic cross-price elasticity of demand than do Coke and bananas.

A baker of chocolate chip cookies is likely to have a ________ price elasticity of supply 28) than does the seller of rare baseball cards due to ________.

more elastic; the availability of inputs

The demand for ice cream is ________ than is the demand for frozen treats because 36) ________.

more price elastic; the scope of the market for ice cream is less broadly defined

The price elasticity of supply is ________ elastic over time because ________.

more; producers have a longer time to adjust their production decisions

The price of house paint, a normal good, has gone up. This change can be shown 15) graphically as a:

movement along the demand curve to the left.

Price elasticity is a measure of how

much consumers or producers respond to a change in market price.

Suppose Frank likes to snack on sugary candy. Frank knows that it's bad for his teeth to eat sugary candy, but he doesn't care. Frank's snacking habits have no impact on anyone other than Frank. In this case, Frank's consumption of sugary candy generates:

neither a positive nor a negative externality.

A dominant strategy is one:

that is the best one to follow, no matter what strategy other players choose.

Because of the lack of buyer's information about a perfectly functioning used car:

the buyer will pay less than what it's worth because of the chance that it will be a lemon.

The classic example used to discuss the problem of adverse selection is:

the imbalance of information that exists between a buyer and seller of a used car.

When someone's willingness to pay is the same as the actual price paid for an item:

the individual's surplus is zero.

At prices above a consumer's reservation price:

the opportunity cost is greater than the benefit from having the good.

Reaching a Nash equilibrium means that:

the players have reached a stable outcome where neither would wish to change his strategy once he finds out what the other player is doing.

Demand for Snickers bars will decrease if:

the price of Milky Way bars (a substitute) decreases.

Adverse selection occurs in the used car market because:

the seller has more information than the buyer.

In the prisoner's dilemma game:

there is a dominant strategy for both players.

Refer to the figure below. If Jess chooses A, then Cory's best response is:

to choose A.

When a perfectly competitive, well-functioning market is in equilibrium:

total surplus is maximized.