MICROECON FINAL

14. Delia's Pizza Place sells extra-large pizzas for $20 each. If Delia hires 10 workers, she can sell 600 pizzas per week. If she hires 11 workers, she can sell 650 pizzas per week. Delia pays each of her workers $400 per week.True or false, & explain why in 1-2 sentences: a. The value of the marginal product (or marginal revenue product) of the 11th worker is $800. b. Delia should not hire any more than 11 workers. c. If the price of a pizza fell to $5 each & she employed 11 workers, Delia would need to lay off at least one worker.

(a) F, it's 50 x $20 = $1000. (b) F, VMPL > wage so she can keep hiring. (c) T, VMPL of the 11th worker would now be 50 x $5 = $250 < wage.

15. Amazon is trying to determine how to price two cameras: the X1, aimed at consumers, & the D10, aimed at professionals. When the price of the X1 is $300, it sells 200 of them in a week. When the price is $350, it sells 100 in a week. When the price of the D10 is $1000, it sells 52 in a week. When the price is $1100, it sells 50 of them in a week.a. Calculate the elasticities of demand of both the X1 & the D10 using the midpoint method. State whether they have elastic, inelastic, or unit elastic demand. b. Which camera should it sell at a higher price in order to maximize its revenue? Which one should it sell at a lower price? Relate your answers to the elasticities of demand.

(a) X1: % change in Q =-66.67%, % change in P = 15.38%. Elasticity = 4.33, elastic. D10: % change in Q = -3.9%, % change in P = 9.5%. Elasticity = 0.4, inelastic. (b) The X1 has elastic demand & should be sold at a lower price to increase revenue, since the decline in the price will be outweighed by the increase in the quantity sold. The D10 has inelastic demand & should be sold at a higher price to increase revenue, since the decline in the quantity will be outweighed by the increase in the price.

12. Which of the following would not shift the demand curve for mp3 players? a. a decrease in the price of mp3 players. b. growing popularity of mp3 players among 12-25 year olds. c. an increase in the price of music downloads on iTunes and Amazon. d. a decrease in the price of cellphones with music players pre-loaded.

A. a decrease in the price of mp3 players.

2. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those policies a. enhance equality. b. enhance efficiency. c. increase the reward for working hard. d. All of the above are correct.

A. enhance equality

8. The demand for potted plants is more elastic than the demand for wallpaper. Suppose the government levies an equivalent tax on potted plants and wallpaper. The deadweight loss would be larger in the market for a. potted plants than in the market for wallpaper because the quantity of potted plants would fall by more than the quantity of wallpaper. b. potted plants than in the market for wallpaper because the quantity of wallpaper would fall by more than the quantity of potted plants. c. wallpaper than in the market for potted plants because the quantity of potted plants would fall by more than the quantity of wallpaper. d. wallpaper than in the market for potted plants because the quantity of wallpaper would fall by more than the quantity of potted plants.

A. potted plants than in the market for wallpaper because the quantity of potted plants would fall by more than the quantity of wallpaper.

4. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should a. sell the ticket because the marginal benefit exceeds the marginal cost. b. sell the ticket because the marginal benefit exceeds the average cost. c. not sell the ticket because the marginal benefit is less than the marginal cost. d. not sell the ticket because the marginal benefit is less than the average cost.

A. sell the ticket because the marginal benefit exceeds the marginal cost.

6. Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then a. the buyers will bear a greater burden of the tax than the sellers. b. the sellers will bear a greater burden of the tax than the buyers. c. the buyers and sellers are likely to share the burden of the tax equally. d. the buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information.

A. the buyers will bear a greater burden of the tax than the sellers.

16. When monopolistically competitive firms advertise, in the long run a. they will still earn zero economic profit. b. they can earn positive economic profit by increasing market share. c. the market price must fall. d. the market price must rise.

A. they will still ear zero economic profit

5. If each country divides its time equally between the production of cheese and bread, then total production is a. 10 units of cheese and 6 units of bread. b. 25 units of cheese and 7.5 units of bread. c. 20 units of cheese and 12 units of bread. d. 12 units of cheese and 8 units of bread.

A.10 units of cheese and 6 units of bread.

13. Economists have proposed which of the following hypotheses to explain the rising wage gap between skilled and unskilled workers? A) Technological change. B) Declines in the amount of international trade. C) There is no rising wage gap. D) Increases in the role of unions in negotiating wages.

A.Technological Change

6. Which of the following combinations of cheese and bread could Spain produce in 24 hours? a. 4 units of cheese and 3 units of bread. b. 6 units of cheese and 1 units of bread. c. 7 units of cheese and 1.5 units of bread. d. 3 units of cheese and 3 units of bread.

B. 6 units of cheese and 1 units of bread.

2. When technology spillover occurs, A) it is the government's responsibility to own firms that are engaged in high-tech research. B) a firm's research yields technological knowledge that can then be used by society as a whole. C) those firms engaged in technology research should be taxed by the government. D) firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product.

B. a firm's research yields technological knowledge that can then be used by society as a whole.

4. Jemma used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is counted as part of the tailoring firm's A) total revenue. B) opportunity costs. C) explicit costs. D) marginal costs.

B. opportunity costs

1. When a country that imported a particular good abandons a free-trade policy and adopts a no-trade policy, A) producer surplus increases and total surplus increases in the market for that good. B) producer surplus increases and total surplus decreases in the market for that good. C) producer surplus decreases and total surplus increases in the market for that good. D) producer surplus decreases and total surplus decreases in the market for that good.

B. producer surplus increases and total surplus decreases in the market for that good.

9. Botox, the commercial name of botulinum toxin, is the most lethal poison known to mankind. In (very) small doses, however, it is used as a medical treatment to cure muscle spasms. In 2002, the FDA approved it as an effective, non-invasive way to prevent wrinkles by paralyzing facial muscles. An economist would expect to find that after 2002, the price of botulinum toxin ____ and the quantity sold ____. a. rose; fell b. rose; rose c. fell; fell d. fell; rose

B. rose, rose

3. Consider Frank's decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on room and board. Frank's cost of going to college is a. $33,800. b. $42,600. c. $49,800. d. $57,000.

B.42,600

5. Which of the following statements is not correct? a. The typical monopolistically competitive firm could reduce its average total cost if it produced more output. b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face. c. Expensive advertising might help consumers if it is a signal that the product is good. d. Brand names acquired at great cost might help consumers by assuring quality.

B.Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.

14. In 2009, the European Union had a surplus of 60,000 tons of butter & almost 200,000 tons of powdered milk. This would have been caused by: A. a price ceiling in the market. B. not enough demand for milk. C. a price floor in the market. D. overproduction of milk by the cows.

C. a price floor in the market.

10. Which of the following would be most likely to cause an outward (rightward) shift of the demand curve for XBox 360 video game consoles? a. a decrease in the price of the Xbox 360 b. an increase in the price of Xbox-exclusive video games c. an increase in the price of the Playstation 3 console d. a decrease in the price of the Wii console

C. an increase in the price of the Playstation 3 console

7. A tax placed on a good a. causes the effective price to sellers to increase. b. affects the welfare of buyers of the good but not the welfare of sellers. c. causes the equilibrium quantity of the good to decrease. d. creates a burden that is usually borne entirely by the sellers of the good.

C. causes the equilibrium quantity of the good to decrease.

5. Which of the following expressions is correct? A) accounting profit = economic profit - implicit costs B) accounting profit = total revenue - implicit costs C) economic profit = accounting profit - implicit costs D) economic profit = total revenue - implicit costs

C. economic profit = accounting profit - implicit costs

1. When externalities exist, buyers and sellers A) neglect the external effects of their actions, but the market equilibrium is still efficient. B) do not neglect the external effects of their actions, and the market equilibrium is efficient. C) neglect the external effects of their actions, and the market equilibrium is not efficient. D) do not neglect the external effects of their actions, and the market equilibrium is not efficient.

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

3. Workers displaced by trade eventually find jobs in A) another country. B) the government sector. C) the industries in which the country has a comparative advantage. D) a different company in the same industry.

C. the industries in which the country has a comparative advantage.

8. Which of the following statements is not correct? A) Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs. B) Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry. C) Monopolistic competition is similar to monopoly because both market structures are characterized by barriers to entry. D) Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers.

C.Monopolistic competition is similar to monopoly because both market structures are characterized by barriers to entry.

3. Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5 per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can we conclude about this monopolist? A) The monopolist is currently maximizing profits, and its total profits are $375. B) The monopolist is currently maximizing profits, and its total profits are $300. C) The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits. D) The monopolist is not currently maximizing profits; it should produce more units and charge a lower price to maximize profits.

C.The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits.

9. The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could a. allow individual shepherds to choose their own flock sizes. b. internalize the externality by subsidizing the production of sheep's wool. c. auction off a limited number of sheep-grazing permits. d. wait until the market corrects the problem.

C.auction off a limited number of sheep-grazing permits.

7. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, A) price may exceed marginal revenue, but in the long run, price equals marginal revenue. B) price may exceed marginal cost, but in the long run, price equals marginal cost. C) price may exceed average total cost, but in the long run, price equals average total cost. D) there are many firms in the market, but in the long run, there are only a few firms in the market.

C.price may exceed average total cost, but in the long run, price equals average total cost.

11. Suppose that in January a profit-maximizing firm has 25 employees. By February, the firm has decreased employment. One can infer that, when 25 employees are hired, the A) firm is losing market share. B) firm is minimizing losses. C) wage exceeds the value of the marginal product of labor. D) value of the marginal product of labor exceeds the wage.

C.wage exceeds the value of the marginal product of labor.

2. The before-trade price of fish in Germany is $6.00 per pound. The world price of fish is $8.00 per pound. Germany is a price-taker in the fish market. If Germany allows trade in fish, then Germany will become an A) importer of fish and the price of fish in Germany will be $6.00. B) importer of fish and the price of fish in Germany will be $8.00. C) exporter of fish and the price of fish in Germany will be $6.00. D) exporter of fish and the price of fish in Germany will be $8.00.

D) exporter of fish and the price of fish in Germany will be $8.00.

12. Which of the following events would bring about a change in the value of the marginal product of labor? A) technological progress that alters the amount a worker can produce B) a change in the marginal product of labor C) a change in the price of the product that the firm sells D) All of the above.

D. ALL

4. A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has average total cost equal to $12. From this information we can infer that A) the firm is currently maximizing its profit. B) the profits of the firm are negative. C) firms are likely to leave this market in the long run. D) All of the above are correct.

D. ALL OF THE ABOVE

17. Which of the following is a characteristic of a natural monopoly? A) Average cost exceeds marginal cost over large regions of output. B) Increasing the number of firms increases each firm's average total cost. C) One firm can supply output at a lower cost than two firms. D) All of the above.

D. all of the above

1. The phenomenon of scarcity stems from the fact that a. most economies' production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restrict production of too many goods and services. d. resources are limited.

D. resources are limited

13. Canned soup is an inferior good if a. the demand for canned soup falls when the price of a substitute for soup rises. b. the demand for canned soup rises when the price of soup falls. c. the demand curve for canned soup slopes upward. d. the demand for canned soup falls when income rises.

D. the demand for canned soup falls when income rises.

6. In the short run, a firm operating in a monopolistically competitive market can earn: A) positive economic profits. B) economic losses. C) zero economic profits. D) Any of the above is possible.

D.ANY OF THE ABOVE

11. In high schools, all teachers are paid the same based on years of service and regardless of specialization. Beginning in the 1970s, a shortage of science and math teachers developed as private industry paid more for math and science skills than schools could offer. At the same time, a decline in the number of school-age children tended to reduce the demand for all other teachers, which led to a surplus. The economist's solution to this problem would be A) merit pay to reward the best teachers. B) recognition that all teachers do comparable work and should be paid the same. C) to raise the wages of all teachers. D) to raise the wages of teachers in fields that are in short supply and lower those of others.

D.to raise the wages of teachers in fields that are in short supply and lower those of others.

8. T/F & explain why in one sentence: Spain can produce 3 units of bread & 3 units of cheese on its own.

False, if Spain produces 3 units of bread it can only produce 2 units of cheese on its own. (or you could make this argument the other way around, saying that if Spain produces 3 units of cheese it can only produce 2.5 units of bread.)

14. If a fungal infestation were to damage the Florida orange crop, while at the same time a study was published extolling the health benefits of orange juice, what would we expect to see happen to the equilibrium price & quantity of orange juice? Draw a supply-demand diagram to illustrate, & explain your answer in one or two sentences.

Supply would shift left, & demand would shift right, raising the price & having an uncertain effect on the equilibrium quantity. You would need to depict this in your diagram.

15. T/F & explain: cows are a private good while elephants are a common resource.

T, & you will need to briefly explain why cows are excludable & rival but elephants, while they are rival, are not excludable.

10. Does the influenza vaccine have any externalities? What kind, and why? Explain in one or two sentences and draw a diagram illustrating the market equilibrium and the socially optimal equilibrium. Name two ways in which the government policies might improve on the market outcome.

Yes, positive externalities in consumption, since receiving the vaccine not only lowers the risk you will get the flu, but it also lowers the risk of spreading it to others. Draw the diagram. Government could mandate vaccines, subsidize them partially, subsidize them fully by providing them for free, provide incentives to receive the vaccine, etc etc.