Microeconomics Final Review

For the Fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat 100 meals, your marginal cost of the 100th meal is:

$0. The non-refundable $600 you paid for your meal plan is a sunk cost; no matter how many meals you eat up to 150, your marginal cost is 0.

What is the amount of tariff imposed on a ton of sugar?

$1,000 The amount of the tariff is the difference between the world price plus the tariff ($2000) and the world price ($1000).

What is the world price of sugar without the tariff?

$1,000/ton In an open economy, the price of a good becomes the world price of that good, which in this case is $1000 per ton.

If the demand curve facing a monopolist shifts, then the monopolist's:

marginal revenue curve and profit-maximizing level of output will change Marginal revenue is derived from demand.

If this is an open economy, the price of a car will be ________.

$10,000/car If the economy is open, the domestic price of cars will become the world price of cars.

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school-aged children. Childcare for their children costs $12,000 per year. Given that Chris doesn't want to stay home with the kids, regardless of what Pat does, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than:

$13,000 per year. The benefit of staying Pat home with the kids is the $12,000 per year saved on childcare plus the value of Pat spending more time with the kids. The cost of Pat staying home with the kids is $25,000 in foregone earnings. Thus, weighing costs and benefits, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than $13,000 per year.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: John's benefit from his first hour cleaning windows is:

$14 In the first hour John spends cleaning windows he cleans 7 windows and earns $2 per window for a total benefit of $14.

What is the price of cars if this were a closed economy?

$14,000/car Domestic supply and domestic demand intersect at a price of $14,000 per car.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours, its total cost each day is:

$176 9 × $14 = $126 in labor costs plus $50 in rent for a total cost of $176.

Refer to the table below. The marginal cost of the 3rd unit of this activity is:

$20 Total cost increases from $40 to $60 when you go from 2 to 3 units, so the marginal cost of the 3rd unit is $20.

Refer to the table below. The average cost of 4 units of this activity is:

$25 Total cost is $100, so dividing by 4 gives $25.

Suppose that Tom bought a bike from Helen for $195. If Helen's reservation price was $185, and Tom's reservation price was $215, the total economic surplus from this transaction was:

$30 Tom valued the bike at $215, and Helen valued the bike at $185, so the total economic surplus from this transaction is $30 (= $215 - $185).

Suppose the table below describes the demand for a good produced by monopolist. The total revenue from selling 6 units is ______, and the marginal revenue of selling the 6th unit is ______.

$30; 0 Total revenue when either 5 or 6 are sold is $30; therefore, the marginal revenue from selling the 6th unit is zero.

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's accounting profit is _______, and Pat's economic profit is _______.

$34,000; -$1,000 Accounting profit equals total revenue minus explicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 = $34,000. Economic profit equals total revenue minus the sum of both explicit and implicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 - $35,000 = -$1,000

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll 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 Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.

You won a free ticket to see the latest Star Trek movie this Friday night (which you can costlessly resell for its face value of $15). Your favorite band is also performing on Friday and is your only alternative activity. Friday is your last chance to see either the movie or the band. Tickets to see your favorite band cost $30, and on any given day, you would be willing to pay as much as $50 for a ticket. Based on this information, what is your opportunity cost of going to see the Star Trek movie on Friday?

$35 The opportunity cost of seeing the movie is the economic surplus you give up by not seeing your favorite band ($50-$30=$20) plus the $15 you could have received by selling your movie ticket.

Refer to the figure below. The equilibrium price is ______, and the equilibrium quantity is ______.

$35; 20 The equilibrium price and quantity are the values that correspond to the intersection of the supply curve and the demand curve.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council requires each firm to reduce emissions by 50 percent, then the total cost to society of this policy will be ______ per day.

$360 Both firms will have to move from process A to process C. As a result, Dirty Inc.'s cost will rise by $270 (from $110 to $380), and Filthy Inc.'s cost will rise by $90, from $400 to $490. So, the total cost to society of this policy will be $360.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. This firm's fixed cost each day is:

$50 The fixed factor of production is the office space, which rents for $50 per day.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: What is John's opportunity cost of cleaning windows for an hour?

$7 Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.

Leo is a welfare recipient who qualifies for two means-tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero. Suppose Leo earns $10. He will lose ______ from each benefit, for a total loss of _____.

$7.50; $15.00 Since Leo loses $0.75 from each program for each dollar he earns, he would lose $7.50 from each program if he earned $10 for a total loss of $15 from the two programs.

Larry was accepted at three different graduate schools, and must choose one. Elite U 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:

$70,000 If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Since going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: A second hour cleaning windows will yield additional earnings of ______.

$8 In the second hour John spends cleaning windows, he cleans 4 additional windows and earns $2 per window for a total benefit of $8.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would have to pay Quick Burger at least ______ per month to NOT operate a drive-through window.

$9,000 Quick Burger's payoff would fall by $9,000 per month (from $24,000 to $15,000) if it did not operate a drive-through window.

The following graph depicts demand. The slope of the demand curve (ignoring the negative sign) is:

0.5. The formula for slope is rise/run, here 1/2 or, 0.5.

Fran runs a doughnut shop in a tiny 3-person town. The table below shows the quantity demand by the three townspeople at various prices. When the price of a doughnut is 25 cents, what is the market demand for doughnuts?

16 doughnuts At a price of 25 cents each, Al wants to buy 9, Betty wants to buy 2, and Carol wants to buy 5, so the market demand is 16.

The figure below shows Ava's demand curve for days in the hospital. The marginal cost of an additional day in the hospital is $200. If Ava had to pay the entire marginal cost of spending a day in the hospital, then she would choose to stay ______ day(s).

2 Given her demand curve, Ava would choose to stay 2 days at a price of $200 per day.

The increase in the price of sugar created by the tariff will lead domestic production to increase by ____ tons per year, compared to when the economy is open without the tariff.

20 The tariff increases the price of each ton from $1000 to $2000, which leads domestic production to increase from 20 tons to 40 tons per year.

Suppose a monopolist faces the demand curve shown below. If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is:

20 units Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.

If this is an open economy, quantity supplied of cars by the domestic producers will be ________.

20,000 If the economy is open, the domestic price of cars will become the world price of cars. At a price of $10,000 per car, the quantity of cars supplied domestically will be 20,000 .

Frank owns an apple farm and plans to spend 4 hours today picking apples. The number of apples he can pick per hour depends on the total number of hours he spends working in either the east orchard or the west orchard in the manner shown in the table below. What is the marginal benefit to Frank of the 2nd hour he spends picking in the east orchard?

24 apples If Frank spends 1 hour in the east orchard he can pick 40 apples. If he spends 2 hours in the east orchard, he can pick 64 (= 32 × 2) apples. Thus, the marginal benefit of the 2nd hour he spends picking in the east orchard is 24 (= 64 - 40).

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit.

4; $18 The monopolist maximizes its profit by choosing the level of output at which marginal revenue equals marginal cost, or 4 units per day. From the demand curve, we can see that at this level of output, the monopolist should charge $18 per unit.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike.

2; $6 Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 bikes and charge $12, and in the afternoon, Island Bikes will rent out 2 bikes and charge $6.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day?

3 The third bike yields a marginal revenue of $4, which is greater than $3, but the fourth bike yields a marginal revenue of -$4, which is less than $3. Thus, Island Bikes will rent 3 bikes and charge $12 per bike.

If 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand?

3. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here -60 / 20 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.

Refer to the table below. Martha's opportunity cost of making of a pie is:

3/4 of a cake. In the time it takes Martha to make a pie, she could have made 3/4 (= 60/80) of a cake.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike.

3; $12 Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 out bikes and charge $12, and in the afternoon, Island Bikes will rent 2 out bikes and charge $6.

Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs he makes each day, as shown in the table below. If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then Chris should make ______ mugs per day.

4 Chris should continue to expand output as long as price is at least as great as marginal cost. The marginal cost of each of the first 4 mugs is less than $7.50, but the marginal cost of the 5th mug is $8. Since $8 is greater than $7.50, Chris will only produce 4 mugs per day. [Note that at 4 mugs per day, Chris's total revenue ($30 = $7.50 × 4) is sufficient to cover his variable cost ($22 = $32 - $10), so she will not shut down.]

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council imposes a tax of $91 per day on each ton of smoke emitted, then total emissions will fall to ______ tons of smoke per day.

4 If the government imposed a tax of $91 on each ton of smoke emitted, then Dirty Inc. would choose process B, and Filthy Inc. would choose process D, so that together they would emit 4 tons.

Refer to the figure below. If Laura and Chris are the only two consumers in this market then at a price of $2.50 per pound, the market demand for hamburger is:

4.5 pounds per week At a price of $2.50 per pound, Laura wants to buy 1.5 pounds per week and Chris wants to buy 3 pounds per week, so market demand is 4.5 pounds per week.

How many cars will this country import in an open economy situation?

40,000 If the economy is open, the domestic price of cars will become the world price of cars. At a price of $10,000 per car, the quantity of cars demanded domestically will be 60 thousand, and the quantity of cars supplied domestically will be 20 thousand, implying that the country will import 40 thousand cars.

If a one percent increase in the price of oranges leads to a five percent increase in the quantity supplied, the price elasticity of supply for oranges is ______.

5 The price elasticity of supply at a point is the percentage change in quantity supplied divided by the percentage change in price.

The following graph depicts demand. The price elasticity of demand at point A is:

5/2. The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (5/4) × (1/0.5) = 5/2.

Refer to the table below. The law of diminishing marginal returns becomes evident after ______ units of output are produced.

66 After 66 units, larger and larger increases in the number of employee hours are needed to increase output by 33 units per day.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. If pollution is unregulated, then a total of ______ tons of smoke will be emitted each day.

8 If there is no requirement to reduce pollution, both firms will choose production process A (where costs are lowest), and each will emit 4 tons of smoke per day.

Compared to an open economy without a tariff, the amount of imported sugar will drop from _____ tons to _____ tons after the tariff is imposed.

80; 40 At the world price of $1,000 per ton, the quantity demanded domestically is 100 tons per year, and the quantity supplied domestically is 20 tons per year, implying that the country imports 80 tons per year. With the tariff, the price of sugar becomes $2,000 per ton. At that price, the quantity demanded domestically is 80 tons per year, and the quantity supplied domestically is 40 tons per year, implying that the country imports 40 tons per year.

A monopolistically competitive firm is one:

A monopolistically competitive firm is one: Monopolistic competition is an industry structure in which a large number of firms produce slightly differentiated products that are all reasonably close substitutes for one another.

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician had two options: (1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to recommend option 2?

A physician who is compensated under a conventional health insurance plan. Since a physician who is compensated under a conventional health insurance plan has no special incentive to hold down costs, the physician is more likely to recommend the more costly option.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product. In perfectly competitive markets, all firms sell the same standardized product. Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the market demand curve does not have to be perfectly elastic.

What might cause a demand curve to shift to the right?

An increase in the price of a substitute. Two goods are substitutes if an increase in the price of one good leads to a rightward shift in the demand for the other.

Which of the following is NOT necessarily true in a market equilibrium?

Both rich and poor have adequate access to the good. Market equilibrium does not address issues of poverty.

Frank owns an apple farm and plans to spend 4 hours today picking apples. The number of apples he can pick per hour depends on the total number of hours he spends working in either the east orchard or the west orchard in the manner shown in the table below. How should Frank divide his time between the east and the west orchard?

He should spend 3 hours in the east orchard and 1 hour in the west orchard. The marginal cost to Frank of spending an additional hour in the east orchard is always 10 apples. His marginal benefit of spending the first hour in the west orchard is 40 apples; his marginal benefit of the 2nd hour is 24 apples (= (32 × 2) - 40); his marginal benefit of the 3rd hour is 11 apples (= (25 × 3) - (32 × 2)); and his marginal benefit of the 4th hour is 5 apples (= (20 × 4) - (25 × 3)). So the marginal benefit of the 1st, 2nd and 3rd hour in the east orchard is greater than its marginal cost. But, the marginal benefit of the 4th hour is less than its marginal cost.

Assume that Joe is willing to produce a hamburger for $1, and Mary is willing to pay $3 for a hamburger. Which of the following is true?

Joe and Mary can make a mutually beneficial exchange. Mary's reservation price is greater than Joe's, so they could each benefit from trade.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

Kate pays $250 per month and Ali pays $350 per month Since the benefit to Ali of listening to her music ($300) is greater than the cost to Kate of hearing Ali's music ($100), Ali will play her music if they live together. Kate's surplus from living together will be the rent she saves by not living alone ($400) minus her share of the rent when living together minus the $100 cost of listening to Ali's music. Ali's surplus from living together will be the rent she saves by not living alone ($400) minus her share of the rent when living together. So, if Kate pays $250 per month and Ali pays $350 per month, then Kate's net surplus from living together will be $400 - $250 - $100 = $50, and Ali's net surplus from living together will be $400 - $350 = $50. That is, under this arrangement they will each be $50 better off than when they live alone.

Refer to the table above. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes.

Martha; Julia Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie).

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: Should John spend a third hour cleaning windows?

No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7. In the third hour John spends cleaning windows he cleans 3 additional windows and earns $2 per window for a total benefit of $6. He could have spent that hour earning $7 at the store, so his opportunity cost is $7. Since $6 is less than $7, he should not clean windows for a third hour. References

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window.

No, because total payoffs are higher when Quick Burger does not operate a drive-through window. When Quick Burger operates a drive-through window, total monthly payoffs are only $35,000, compared to $38,000 when Quick Burger does not operate a drive-through window.

Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing?

Not if Larry is earning more than $500 per month at his current job. If Larry is earning more than $500 per month at his current job, then if he did was Curly was doing, his economic profit would be negative.

Pat can either drive to work, which takes half an hour and uses $1.50 worth of gas, or take the bus, which takes an hour and costs $1.00. How should Pat get to work?

Pat should drive if saving half an hour is worth $0.50 or more. According to the Cost-Benefit Principle, Pat should drive if the marginal benefit of driving (saving half an hour) is greater than its marginal cost ($0.50).

Larry was accepted at three different graduate schools, and must choose one. Elite U 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 maximizes his economic surplus by attending:

State College. To determine what Larry should do, determine the value of each option as if it were his only choice. In this case, the value to Larry from attending Elite U (net of tuition) is $60,000 - $50,000 = $10,000. His value from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Thus, his economic surplus will be the highest if he attends State College.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?

The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window. Although Quick Burger's payoff is higher when it operates a drive-through window, both firms are better off when the Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-through window. Under this arrangement, Quick Burger's monthly payoff is $25,500 and the Sunshine Café's monthly payoff is $12,500.

Refer to the figure below. If the government imposed a price ceiling of $40, what would happen in this market?

The price ceiling would have no effect. At price ceiling of $40 would have no effect on this market since the equilibrium price, $35, is less than $40.

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm's owners. Implicit costs are the opportunity costs of the resources supplied by the firm's owners.

Refer to the figure below. Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result?

They would lower their prices because at $45 there would be excess supply. At price of $45, there would be excess supply, so sellers would have an incentive lower their prices to increase sales.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drive-though window?

Yes, because Quick Burger's payoff is higher when it operates a drive-through. If Quick Burger and The Sunshine Café cannot negotiate with each other, then Quick Burger will choose to operate a drive-through window because Quick Burger's payoff is higher when it operates a drive-though.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment?

Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. The benefit to Ali of listening to her music is $300 per month (the amount you would have to pay her to give up listening to her music). The cost to Kate of listening to Ali's music is $100 per month (the amount Kate would be willing to pay to avoid hearing Ali's music). Since the benefit to Ali of listening to her music is greater than the cost to Kate of hearing her music, it is socially optimal for Ali to play her music if they live together.

Suppose you observe a decrease in the equilibrium price and quantity of corn. Of the options listed below, this is best explained by:

a fall in consumer income assuming corn is a normal good. A decrease in the equilibrium price and quantity of corn suggests a decrease in the demand for corn. If corn is a normal good, and consumer income falls, then demand will fall.

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates:

a negative externality Since Carmen's music imposes a cost on Paul, it generates a negative externality.

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed. The short run is a period of time sufficiently short that at least some of a firm's factors of production are fixed.

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

a positive; a negative Positive externalities yield benefits to others while negative externalities impose costs on others.

Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will:

all go to Duke because, if it didn't, another firm could hire Duke away. Economic rent is bid up to prevent a unique factor from moving to another firm.

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves. A market equilibrium is only efficient if the market supply and demand curves capture all of the relevant costs and benefits associated with production and consumption.

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.

allocative The allocative function of price is to direct resources away from markets that are overcrowded and toward markets that are underserved.

The price of bananas will increase in response to:

an excess demand for bananas. If the quantity of bananas demanded exceeds the quantity supplied, then price will rise.

Refer to the figure below. At a price of $9, there will be:

an excess supply of 5 units. At a price of $9 buyers will want to buy 1 unit, and sellers will want to sell 6 units, a difference of 5 units.

A tariff is a tax imposed on ______ good.

an imported A tariff is a tax imposed on an imported good.

When the government transfers resources to the poor in the form of a good or service, it is called:

an in-kind transfer. Government transfers of goods or services are termed in-kind transfers.

The allocative function of price cannot operate unless there is:

both free entry and free exit. Free entry and free exit are necessary for firms to respond to economic profit and loss.

For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price.

equals; is less than Perfectly competitive firms do not have to lower price to sell an additional unit; monopolists do. As a result, marginal revenue is less than price for a monopolist.

The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cuase externalities, then they:

can always arrive at efficient solutions to the problems caused by externalities The Coase theorem states that if at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.

An individual has an absolute advantage in producing pizzas if that individual:

can produce more pizzas in a given amount of time than anyone else. Absolute advantage means being able to produce more in a given time period.

It is likely that for most people:

coffee and tea are substitutes. Two goods are substitutes if they serve similar functions for people.

If coal mining produces a negative externality because it leads to environmental damage, then the

cost to society of producing an additional ton of coal will be less than the cost to coal mining companies of producing an additional ton of coal. Firms do not consider external costs when making their output decisions, so if a good generates a negative externality, they will produce more than the socially optimal quantity at the market equilibrium.

If two products are substitutes, then the:

cross-price elasticity of demand between them will be positive. If two goods are substitutes, then if the price of one increases, the quantity demanded of the other will increase, implying that the cross-price elasticity of demand between the two goods is positive.

The responsiveness of the quantity demanded of one good to a change in the price of a different good is measured by the:

cross-price elasticity of demand. The cross-price elasticity of demand is the percentage by which the quantity demanded of one good changes in response to a one percent change in the price of another good.

Price discrimination means charging:

different prices to different buyers for essentially the same good or service. Price discrimination is the practice of charging different buyers different prices for essentially the same good or service.

Matt has decided to purchase his textbooks for the semester. His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.Given that driving to campus to buy the concert ticket was rational for Matt, Matt should:

drive to campus to buy the books because the $5 he would save is more than he saved by driving to campus to buy the concert ticket. Because Matt was willing to drive to campus to save $4 last week, we can assume that the cost of driving to campus is no more than $4, so he should be willing to drive to campus to save $5.

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her ______ would be ______. benefit; $12,000

economic surplus; $3,000 Mary's benefit from owning the truck is $15,000 and the cost is $12,000, so her economic surplus is $3,000.

If the price elasticity of demand for a good is greater than one, then the demand for that good is:

elastic. If the percentage change in quantity demanded is greater than the percentage change in price, then the price elasticity of demand will be greater than one, and demand is said to be elastic with respect to price.

The following graph depicts demand. At point A, demand is:

elastic. The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (5/4) × (1/0.5) = 5/2. Since this is greater than one, demand is elastic at point A.

Suppose that when the price of oranges is $3 per pound, the quantity demanded is 4.7 tons per day and the quantity supplied is 3.9 tons. In this case:

excess demand will lead the price of oranges to rise If the quantity that sellers wish to sell is 3.9 tons, and the quantity that buyers wish to buy is 4.7 tons, then there is excess demand, which will lead the price of oranges to rise.

Suppose demand decreases, but there is no change in supply. As the market reaches its new equilibrium:

excess supply will lead the price to fall. When demand decreases, there will excess supply at the original equilibrium price. Thus, sellers will lower their prices.

The marginal benefit of an activity is the:

extra benefit associated with an extra unit of the activity. Marginal benefit is the increase in total benefit that results from carrying out one additional unit of an activity.

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:

firms will earn zero economic profit in the long run. Due to entry and exit in a perfectly competitive market, firms earn zero economic profit in the long run.

Protectionism is the view that:

free trade is harmful and should be restricted. Protectionism is the view that free trade is harmful and should be restricted.

The earned income tax credit (or EITC):

gives low-income workers credits on their federal income taxes. The EITC is a policy under which low-income workers receive credits on their federal income tax.

Suppose that the market price for hot dogs sold by street vendors has just risen from $4.50 to $5.00, and that in response Curly has now begun operating a hot dog cart. We can assume that Curly's reservation price for hot dogs is:

greater than $4.50 but no more than $5.00. Curly did not want to sell hot dogs at $4.50, so his reservation price must be more than $4.50, but since he is willing to sell for $5.00, his reservation price cannot be more than $5.00.

The growth of medical insurance in general and first-dollar coverage specifically has reduced the marginal cost of treatment to the consumer. Therefore, the current level of medical treatment in the United States is:

greater than the efficient level. Given that the consumer pays only a small part of the true cost of the health care, the consumer will consume beyond the point where marginal cost equals marginal benefit.

Shelly purchases a leather purse for $400. One can infer that:

her reservation price was at least $400. Buyers will only purchase an item if its price is less than or equal to their reservation price.

If the local slaughterhouse gives off an unpleasant stench, then the equilibrium quantity of meat will be _____ the quantity that maximizes total economic surplus.

higher than If the production of meat imposes costs on people other than those who buy and sell the meat, then the equilibrium quantity will be higher than the socially optimal quantity.

A price-taker faces a demand curve that is:

horizontal at the market price. A perfectly competitive firm faces a horizontal demand curve at the market price because it need not lower its price to sell more output and it would sell no output if it raised its price above the market price.

According to the textbook, the percentage of gross domestic product devoted to healthcare between the years 1940 and 2013:

increased from 4% to more than 17%. This is as reported in the textbook.

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce. Since firms in perfectly competitive markets have no control over the market price, their most important challenge is deciding how much to produce.

Economics is best defined as the study of:

how people make choices in the face of scarcity and the implications of those choices for society as a whole. Economics is the study of how people make choices under conditions of scarcity and the implications of those choices for society as a whole.

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

increase output until marginal revenue equals marginal cost. Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output at which marginal revenue equals marginal cost.

Numerous studies have shown that breathing second-hand cigarette smoke is harmful to your health. This suggests that a tax on cigarettes will:

increase total economic surplus. Second-hand cigarette smoke is a negative externality. This suggests that a tax on cigarettes will increase total economic surplus.

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At this monopolist's profit-maximizing level of output, it:

incurs an economic loss of $16 per day. The monopolist loses $4 on each of the 4 units sold.

The benefits of specialization can be used to explain why:

individuals and nations benefit from trade. Specialization allows two parties with different opportunity costs to benefit from trade because by specializing they can increase their combined output.

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient. A situation is efficient if no change is possible that will help some people without harming others.

Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ______ and the market equilibrium quantity will be ______.

inefficiently low; inefficiently high In this case, the cost of expanding output will not be fully reflected in the market supply curve for cotton, so the equilibrium quantity of cotton will be inefficiently high and the price of cotton will be inefficiently low.

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:

inelastic. If the percentage change in quantity is less than the percentage change in price, then the price elasticity of demand will be less than one in absolute value, implying that demand is inelastic.

If demand is ______ with respect to price, a price increase will ______ total revenue.

inelastic; increase If an increase in price leads to a relative small percentage drop in quantity demanded (that is, if demand is inelastic), then total revenue will increase.

Suppose the table below describes the demand for a good produced by monopolist. The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because:

it has to charge $1 less for each of the first 3 units of output. When the firm goes from selling 3 to 4 units of output, is has to lower its price from $8 to $7. Thus, while it gains $7 from selling the 4th unit, it loses $3 because it has to charge $1 less for the first 3 units. Thus, marginal revenue is equal to $7 - $3 = $4.

The Cost-Benefit Principle indicates that an action should be taken if, and only if:

its benefits exceed its costs. The Cost-Benefit Principle states that an action should be taken if, and only if, its benefits exceed its costs.

If the marginal cost of pollution abatement is smaller for large firms than it is for small firms, then it is efficient for:

large firms to reduce pollution by more than small firms. It is efficient for firms with the smallest marginal cost of pollution abatement to reduce pollution the most.

The most efficient distribution of pollution abatement is such that the:

marginal cost of abatement is the same across all polluters. The total cost to society of reducing pollution will be the smallest if firms with the smallest marginal cost of pollution abatement reduce pollution the most, so that the marginal cost of pollution abatement is the same across all firms.

According to the law of diminishing returns, when some factors of production are fixed, in order to increase production by a given amount, a firm will eventually need to add successively:

larger and larger quantities of the variable factors of production. The law of diminishing returns notes that it takes larger and larger increases in the variable inputs to increase output by the same amount.

The overconsumption of medical care due to first-dollar health insurance coverage is:

larger the higher the elasticity of demand for medical care. The extent to which first-dollar health insurance leads people to consume more than the socially optimal level of medical care is larger the higher the elasticity of demand for medical care.

In the United States, the emergence of the third-party payment system has:

led health care costs to increase over time. Although part of the increase in health care expenditures is the result of costly new health care technology, a great deal of the increase is due to the emergence of the third-party payment system.

Suppose two demand curves intersect and so have a point in common. At that point, demand shown by the steeper curve will be _______ the flatter curve.

less elastic than At any given price, the steeper demand curve is, the less elastic demand will be.

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

less; more External benefits and external costs are not considered by firms and consumers. Thus, if a good involves an external cost, then private markets will produce too much of the good, and if a good involves an external benefit, then private markets will provide too little of the good.

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

marginal revenue. Marginal revenue is the change in total revenue that results from a one-unit change in output.

The primary objective of most private firms is to:

maximize profit. Most firms exist to earn profit for their owners.

Unlike economic profit, economic rent:

may not be driven to zero by competition. Economic rent is earned by factors of production that are unique. As a result, competition does not drive economic rent to zero.

In many cities in the United States, a single firm provides electricity. Those firms are:

monopolists A monopoly is the only supplier of a unique product with no close substitutes.

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.

more than double A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion.

Relative to a single price monopolist, a price discriminating monopolist generates:

more total surplus. Price discrimination brings the level of output closer to the socially optimal quantity.

If the demand for a good decreases as income decreases, then the good is a(n):

normal good. A normal good is a good for which an increase in income leads to an increase in demand and a decrease in income leads to a decrease in demand.

A cost of an activity that falls on people not engaged in the activity is call a(n):

negative externality An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity.

A program under which the government gives all citizens a substantial lump sum payment that is financed by a tax earned income is termed a(n) ______.

negative income tax. A negative income tax is a system under which the government grants each citizen a cash payment, financed by an additional tax on earned income.

Refer to the table below. According to the table, Martha has the absolute advantage in:

neither pies nor cakes. It takes Martha longer to make both pies and cakes than Julia.

If the price of a good in a closed economy is greater than the world price, then if the country opens its markets to world trade the country will be a ______ of that good.

net importer If the price of a good or service in a closed economy is greater than the world price, and that economy opens itself to trade, the economy will tend to become a net importer of that good or service.

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. One can predict that

new firms will enter the industry. At Q=15, firms are earning an economic profit. Thus, other firms will have an incentive to enter this industry.

If most consumer goods and services are ______, then most income elasticities are ______.

normal; positive The income elasticity of demand for a good is the percentage by which quantity demanded changes in response to a one percent change in income. For normal goods, an increase in income leads to an increase in consumption (and a decrease in income leads to a decrease in consumption), implying that the income elasticity of demand is positive for normal goods.

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others. A situation is efficient if no change is possible that will help some people without harming others.

If a firm functions in an oligopoly, it is:

one of a small number of firms that produce goods that are either close or perfect substitutes. An oligopoly is an industry in which a small number of large firms produce products that are either close or perfect substitutes.

The essential cause of the tragedy of the commons is the fact that:

one person's use of a commonly held resource imposes an external cost on others. The tragedy of the commons arises when individuals overuse commonly held resources because they do not take into consideration the fact that their use of the resource lowers its value to others.

Jody has purchased a non-refundable $75 ticket to attend a Miley Cyrus concert on Friday night. Subsequently, she is asked to go to out dinner at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going out to dinner, the opportunity cost of going out to dinner should include:

only the entertainment value of the concert. The price of the non-refundable ticket is a sunk cost, so the only thing that Jody should include in calculating the opportunity cost of going out to dinner, is the entertainment value of the concert.

The tragedy of the commons refers to the:

overuse of resources that have no price The tragedy of the commons is the tendency for a resource that has no price to be used until its marginal benefit is zero.

If consumers completely cease purchasing a product when its price increases by any amount, then demand is:

perfectly elastic. Demand along a horizontal demand curve is perfectly elastic.

Refer to the table below. Based on their comparative advantage, Martha should specialize in _______ while Julia should specialize in _______.

pies; cakes Martha has the comparative advantage in pies, and Julia has the comparative advantage in cakes. To see this note that Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie).

When calculating price elasticity of demand, if the percentage change in price is negative, then the percentage change in quantity demanded is typically:

positive If the percentage change in price is negative (that is, if price falls), then the percentage change in quantity demanded will be positive, since price and quantity demanded move in opposite directions.

The percentage change in quantity supplied that results from a 1 percent change in price is known as the:

price elasticity of supply Price elasticity of supply is the percentage change in quantity supplied that occurs in response to a 1 percent change in price.

The Cost-Benefit Principle tells us that a firm should continue to expand production as long as:

price of the good is greater than its marginal cost. According to the Cost-Benefit Principle, a firm should produce another unit of output as long as the extra benefit of producing that unit is greater than the extra cost. This is just another way of saying that the firm should increase output whenever price is greater than marginal cost (and it should stop when price is equal to marginal cost).

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output. Because profit-maximizing monopolists produce a level of output at which price is greater than marginal cost, monopolists always produce less than the socially optimal level of output.

Total revenue minus both explicit and implicit costs defines a firm's:

profit. Profit is defined as total revenue from the sale of a firm's product minus all costs (both implicit and explicit) incurred producing it.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours, it earns a daily ______ of ______.

profit; $64 If the firm uses 9 employee hours, its total cost is $176 (= 9 × $14 + $50), and its total revenue is $240 (= 120 × $2). Thus, its profit is $64 (= $240 - $176).

The price elasticity of demand for a good measures the responsiveness of:

quantity demanded to a one percent change in price of that good. The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a 1 percent change in its price.

Refer to the figure below. Suppose the solid line represents the current supply of Star Wars action figures. If the price of the plastic used to make action figures rises, current supply will:

shift to S(A). An increase in input prices will cause supply to shift leftward.

Private markets will lead to a ______ vaccination rate because:

suboptimally low; the external benefit of being vaccinated would not fully be taken into account by decision makers. At least some people will fail to consider the benefits of immunization that are provided to others, so they will judge the private costs of immunization to exceed the private benefits.

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity.

subsidizing; taxing Subsidies are used to increase provision of activities with positive externalities and taxes are used to decrease provision of activities that generate negative externalities.

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:

the actions of independent, self-interested buyers and sellers. Adam Smith's theory of the invisible hand posits that the actions of independent, self-interested buyers and sellers will often (but not always) result in the most efficient allocation of resources.

Economies of scale exist when:

the average cost of production falls as output rises When production is subject to economies of scale, the average cost of production declines as the number of units produced increases.

Suppose that if the price of plane tickets increased, more people would choose to travel by train. If this happened, you would know that:

the cross-price elasticity between plane tickets and train tickets is positive. The cross-price elasticity of demand between substitutes is positive: an increase in the price of one will lead to an increase in demand for the other.

When Joe's Gas raises its price for regular unleaded gasoline, total revenue from regular unleaded gas falls to zero. It must be the case that

the demand for Joe's regular unleaded gasoline is perfectly elastic. If an increase in price leads total revenue to fall to zero, then this suggests that demand for the product was perfectly elastic at the original price (i.e., the demand curve was horizontal at that price).

The economic surplus of an action is:

the difference between the benefit and the cost of taking an action. Economic surplus is defined as the benefit of an action minus its cost.

Economic rent is:

the difference between the payment made to the owner of a factor of production and the owner's reservation price. Economic rent is the part of the payment for a factor of production that exceeds the owner's reservation price.

If pencils and paper are complements for most consumers, then if the price of paper increases, you would expect:

the equilibrium price and quantity of pencils to fall If pencils and paper are complements, and the price of paper increases, then the demand for pencils will fall. As a result, the equilibrium price and quantity of pencils will fall.

The tendency for consumers to purchase more of a good or service as its price falls is captured by:

the law of demand. The negative relationship between price and quantity demanded is implied by the law of demand.

If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then:

the market equilibrium will not be efficient. If the supply and demand curves do not capture all of the costs and benefits of producing another unit of output, then the market equilibrium will not be efficient.

The entire group of buyers and sellers of a particular good or service makes up:

the market. A market for any good consists of all buyers and sellers of that good.

To say that a given welfare program is means-tested implies that:

the more income one earns, the smaller the size of the benefit. A means-tested benefit program is one in which the benefit level declines as the recipient earns additional income.

The opportunity cost of an activity includes the value of:

the next-best alternative that must be foregone. The opportunity cost of an activity is not the total value of all possible activities that you could have pursued, but only the value of the one alternative you give up, which is presumably the next-best one.

If the marginal cost of reducing pollution is positive, then:

the optimal amount of pollution is greater than zero. Pollution should be reduced until the marginal benefit of reducing pollution equals the marginal cost of reducing pollution. If the marginal cost of reducing pollution is positive, then the marginal benefit of reducing pollution should be positive too, implying that the optimal amount of pollution is greater than zero.

In general, when the price of a variable factor of production increases:

the profit-maximizing level of output falls. When the price of a variable factor of production increases, the cost of producing each additional unit of output increases, so the profit-maximizing level of output falls.

When a nation reduces the barriers to international trade:

the total value of all goods and serviced produced by the nation rises While reducing barriers to trade increases total value of all goods and services produced by a nation, it does not guarantee that each individual citizen will be better off.

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

the tragedy of the commons. Students face a marginal price of zero and so take more food than is optimal.

Efficiency is an important goal because when markets are efficient:

there are more resources available to achieve other goals. When markets are efficient, total economic surplus is maximized, implying that there are more resources available to achieve society's other goals.

If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that:

there is a negative externality associated with this good. Buyers and sellers do not consider external costs, so the market will produce more than the socially optimal quantity.

If there is excess demand in a market, then this suggests that:

there is an opportunity for mutually beneficial trades. A market that is out of equilibrium is a market in which some mutually beneficial trades remain.

When a market is in equilibrium:

there is neither excess demand nor excess supply. There is neither excess demand nor excess supply when the market is in equilibrium.

If fewer families choose to purchase medical insurance because of rising health insurance premiums, then:

those who remain insured will tend to have higher-than-average rates of illness Due to adverse selection, those who buy health insurance will tend to be those who are the most likely to require health care.

Refer to the figure below. If the price of a latte increases from $2.00 to $2.50:

total expenditure would decrease. When price is $2.00 total expenditure is $2.00 × 30 = $60, when price is $2.50 total expenditure is $2.50 × 20 = $50. Alternatively, when price is $2.00, we are on the elastic portion of the demand curve, implying that as price increases total expenditure will fall.

A socially optimal public health policy should expand the proportion of the population vaccinated:

until the marginal cost of an additional vaccination equals the marginal benefit of an additional vaccination. A socially optimal public health policy should expand the proportion of the population vaccinated until the marginal cost of an additional vaccination is equal to the marginal cost of an additional vaccination.

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ______ because it generates a ______ economic surplus.

wash clothes; bigger Because both activities have the same cost (Janie's time and her dislike of the task), the activity with the greatest benefit will yield the greatest economic surplus.

If the marginal benefit of additional spending on a public health measure is greater than its marginal cost, then total economic surplus

will increase if the government increases spending on the health measure. The socially optimal expenditure on a public health measure should is the amount for which the marginal benefit to society of the measure is equal to its marginal cost.

The price at which a good or service is traded on international markets is called the ________ price.

world The world price is the price at which a good or service is traded on international markets.

If you have a comparative advantage in a particular task, then:

you give up less to accomplish that task than do others. Comparative advantage means having a lower opportunity cost.

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

your implicit costs are $1,000 per month. Economic profit is the difference between total revenue and the sum of explicit and implicit costs. Here, then, you had revenue of $6000 and your explicit costs were $5200, so your implicit cost must have been $1000 if you earned a profit of -$200.