Midterm Ch. 5, 7, 8, 10

What conditions must be met for private bargaining to be effective in resolving an externality?

Bargaining costs must be low, and property rights must be clear

Barlow and Rusia own a nail salon. A manicure takes Barlow 60 minutes to complete and takes Rusia 45minutes to complete. Completing a pedicure takes Barlow 45 minutes and takes Rusia 30 minutes. Who has acomparative advantage in manicures?

Barlow because he has a lower opportunity cost

Which of the following is the term for a quantity regulation that is implemented by allocating a fixednumber of permits to producers, which can then be traded?

Cap and trade

For a good to be considered normal, the _____ elasticity of demand must be _____.

Income; positive

If the number of available cap and trade permits is decreased, the equilibrium price of the permits _____, andthe equilibrium quantity of emissions _____.

Increases; decreases

If demand is _____, a higher price yields _____ total revenue.

Inelastic; higher

When a manager sets up markets within the company to buy and sell scarce resources, these markets are called

Internal markets

When you assign tasks to employees based on comparative advantage, task assignments go to those with the...

Lowest opportunity cost

A prediction market is a market where:

Payoffs are linked to whether an uncertain event occurs

The type of analysis that describes what is happening and makes predictions based on identified relationshipsis called _____ analysis

Positive

An efficient producer will keep increasing production until:

Price equals marginal cost

If quantity demanded does not respond significantly to a relatively large change in price, demand is:

Price-inelastic

The concept of comparative advantage is based on:

Relative opportunity costs between trading partners

On hot summer days, parking lots at Disneyland are usually full by early morning, even though one mustpay to park there. Parking at such lots is _____ in consumption and _____

Rival; excludable

Which good is MOST likely to have a vertical supply curve?

Sculptures by Michelangelo

Price elasticity of supply measures how responsive:

Sellers are to price changes

All marginal costs, no matter who pays them, are marginal _____ costs.

Social

The outcome that is most efficient for society as a whole — including the interests of buyers, sellers, andbystanders — is the _____ outcome.

Socially optimal

The marginal cost of producing a marble sculpture is $10,000. The sculpture sold for $15,000. How muchproducer surplus did the artist receive?

$5,000

When a market transaction has a beneficial effect on bystanders who were not involved in the transaction,this effect is called:

A positive externality

The person who can produce a product using the fewest inputs has _____ in that product.

An absolute advantage

A cost imposed on bystanders is _____ cost.

An external

Chanda can change the oil in a particular car in 30 minutes. It takes 45 minutes for Deepa to change the oil inthe same type of car. Which of the following statements is TRUE?

Chanda has an absolute advantage over Deepa in changing the oil

The price elasticity of demand for a good with a vertical demand curve is:

Perfectly inelastic

When the absolute value of the price elasticity of demand is zero, demand is:

Perflectly inelastic

Pule purchases four bottles of bathroom cleaner for $3 each. The maximum prices she would have beenwilling to pay for each bottle are $6 for the first bottle, $5 for the second bottle, $4 for the third bottle, and $3for the fourth bottle. The marginal cost of producing the bottles is $2.50. What is Pule's consumer surplus on thefourth bottle of bathroom cleaner?

$0

Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar.The marginal cost of producing the bars is $2.50 each. What is Chin's total consumer surplus from the five barsthat he purchased?

$5

The price of a carton of eggs is $2, and 100 cartons are sold. The consumer surplus is $80, and total surplusequals $150. What is the producer surplus?

$70

The price of milk at the local grocery store is cut by 10%. The quantity of milk demanded increases by 5% inresponse to this price cut. What is the absolute value of the price elasticity of demand for milk?

0.5

Lyft cuts the price of a ride in New York by 20%. Thereafter, the quantity of rides demanded rises by 25%. What is the absolute value of the price elasticity of demand for Lyft rides?

1.25

Lyft cuts the price of a ride in New York City by 10%. Thereafter, the quantity of rides demanded rises by 25%. What is the absolute value of the price elasticity of demand for Lyft rides?

2.5

Which of the following is a positive externality?

After measles vaccinations increase by 20, the number of cases of measles falls by 35%

Pollution may be the best example of a negative externality. A negative externality is:

An activity whose side effects harm bystanders

The proposition that, if bargaining costs are low enough, the private market can achieve an efficientoutcome, regardless of which of the affected parties hold the property rights, is known as the:

Coase theorem

The cross-price elasticity of demand measures how responsive the:

Demand for one good is to change in the price of another good

The efficient rate of emissions occurs when:

MSB = MSC

When Jeremiah watches a movie on Apple TV, his viewing is _____ in consumption because other people_____ able to watch the movie at the same time as Jeremiah does.

Nonrival; are

A particular good is said to be _____, if the income elasticity of demand for the good is positive.

Normal

The university hopes to raise more revenue by increasing student housing fees. This plan will work only if:

The percent rise in price is larger in magnitude than the percent decline in quantity demanded

Price elasticity of demand measures how responsive ______ are to _______ changes.

buyers; price

Which of the following statements is TRUE regarding comparative advantage and absolute advantage?a. People can have a comparative advantage without having an absolute advantage in a task. b. People can have a comparative advantage only if they also have an absolute advantage in a task. c. People can have an absolute advantage only if they also have a comparative advantage in a task. d. People can have no comparative and no absolute advantages in any of the tasks

A

Which of the following is a FALSE statement about assigning work based on comparative advantage? a. Assign the person who is fastest or best at a task to do that task. b. The person who has absolute advantage in the task will sometimes be assigned to do it. c. Workers will be specialists and not generalists. d. The person with the lowest opportunity cost at a task should perform it.

A (false)

_____ tax is designed to encourage people to take responsibility for the negative externalities they cause.

A corrective

Market failure occurs when market forces lead to:

An inefficient outcome

Ang can mow the lawn in two hours. Bill takes three hours to mow the same lawn. What can you concludefrom this information?

Ang has an absolute advantage over Bill in moving the lawn

Abigail rents 10% more online movies when her income increases by 20%. Based on this information, weknow that online movie rentals for Abigail:

Are a normal good

Which of the following is NOT part of the three-step recipe used to analyze externalities?

Assess society's preferences

People gain consumer surplus when they purchase an item:

At a price below the value of the benefit they receive from the item

Mario is willing to sell an extra unit of his product as long as price is:

At least as high as the marginal private cost

A good that is rival and nonexcludable is known as a:

Common resource

The person with the LOWEST opportunity cost of producing a particular good is said to have a(n):

Comparative (18)

Specialization will increase output when it is based on:

Comparative advantage

Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. Themarginal cost of producing the boots is $70. Which of the following is TRUE regarding the economic surplusassociated with her purchase of the boots?

Consumer surplus is $40, and producer surplus is $50

Which statement is FALSE? a. If the income elasticity of demand is positive, a good is normal. b. If the income elasticity of demand is negative, a good is inferior. c. The income elasticity of demand measures the responsiveness of quantity demanded to changes inconsumers' incomes. d. The income elasticity of demand measures the responsiveness of consumers' incomes to changes inquantity demanded.

D

If the market for alpine skis is in competitive equilibrium, and there are no external costs or governmentinterventions, then: a. the sum of consumer surplus and producer surplus is maximized. b. resources are being used efficiently. c. the marginal benefit is equal to the marginal cost. d. all of the above

D (all correct)

Which of the following is NOT a source of market failure? a. side effects of externalities b. irrational decisions c. government regulations that impede market forces d. lack of market power

D (not source of market failure)

The marginal social benefit of flu shots _____ as the quantity of shots given _____.

Decreases; increases

If Ilona wants to live her life based on comparative advantage, then she should

Do for herself the things for which she has low opportunity cost and trade with others for things she has a high opportunity cost

When goods are allocated in a way that creates the largest economic surplus:

Efficient allocation has been achieved

Which of the following statements is TRUE regarding economic efficiency?

Efficient outcomes rarely make everyone happy

Good M has an income elasticity of demand of 0.5. Which of the following items is good M?

Electricity

The marginal external cost is the:

External cost imposed on bystanders by one additional unit of output

If the price of a good is below the competitive equilibrium price, then:

Firms produce less than the efficient quantity

Explain four factors that affect the price elasticity of supply for a product.Indicate the answer choice that best completes the statement or answers the question.

Inventories, available variable inputs, excess capacity, and easy entry and exit from market

The socially optimal outcome is the outcome that:

Is most efficient for society as a whole, including for buyers, sellers, and bystanders

The person who has an absolute advantage in a task...

Is the one who is best at the task

Which of the following headlines is NOT consistent with the principle of comparative advantage?

Island lessens welfare by promoting trade

Mila is a dentist who employs an assistant, John. If Mila worked all day at the front desk, she could answer40 emails. If she worked all day with patients, she could clean the teeth of 40 patients. If John worked all day atthe front desk, he could answer 60 emails. If he worked all day with patients, he could clean the teeth of 20patients. _____ has a(n) _____ advantage in _____.

John; comparative; answering emails

What standard is used to determine the most efficient economic outcome?

Largest economic surplus

If they spend all night writing computer programs, Laurence can write 10 programs, and Carrie Anne canwrite five. If they spend all night making sunglasses, Laurence can make six pairs, and Carrie Anne can makefour. Given this information and supposing Laurence and Carrie Anne have constant opportunity costs, weknow that _____ has an absolute advantage in _____.

Laurence; both programs and sunglasses

Which of the following occurs when private information is a market problem?

Low trust levels lead to a lower quantity than would be efficient

Two ways to calculate economic surplus are _____ and _____.

Marginal benefit minus marginal cost; consumer surplus plus producer surplus

The cost paid by the seller in producing one additional unit of output is known as the _____ cost.

Marginal private

If the price of emergency visits to the dentist rose, we would expect:

Only a slight decline in the number of emergency visits to the dentist

A market with negative externalities will tend to _____ compared to a market producing the socially optimal output.

Overproduce and sell at a lower price

The price elasticity of demand for a good with a horizontal demand curve is:

Perfectly elastic

Analysis that describes what would happen if various actions were taken is _____ analysis.

Positive

The benefit enjoyed by a buyer as a result of purchasing one additional unit of a good is the marginal _____benefit.

Private

Income elasticity of demand measures how responsive the:

Quantity demanded of a good is to changes in income

The price elasticity of demand is computed as the percentage change in the _____ divided by the percentagechange in _____.

Quantity demanded; the price

You are given some data for four different products — dryer sheets, shampoo, soap, and laundry detergent. The absolute value of the price elasticity of demand for dryer sheets is 4. The absolute value of the priceelasticity of demand for shampoo is 0.2. The absolute value of the price elasticity of demand for soap is 0.5. The absolute value of the price elasticity of demand for laundry detergent is 2. Which product has the most elastic demand?

Dryer sheets

Efficient allocation of output requires that:

Each unit of output will go to the person who will get the highest marginal benefit from it

When price equals marginal cost for the last unit sold, a seller will:

Earn producer surplus on all except the last unit sold

Which statement is a positive externality?

Edwin buys a run down house, renovates it, and increases the property values of all the houses in the neighborhood

If you can complete a task at a lower opportunity cost than anyone else, then you

Have a comparative advantage in that task

If you need to make a decision and all the information needed to make a good decision is not available, then you:

Have a knowledge problem

Which statement(s) is/are FALSE about market failures? I. They arise in competitive markets. II. They arise when information is available to all decision makers. III. They arise when external costs are not considered in production decisions by producers

I and II

Which of the following is NOT part of the three-step recipe used to analyze externalities? (Note: the stepsare not necessarily in order.)

Identify costs and benefits in the public sector

Which of the following statements is based on positive analysis?

If the price of car rises, fewer cars will be sold

Marius and Jennifer are going to sell cupcakes and muffins at their third annual fundraiser bake sale. In oneday, Marius can make 40 cupcakes or 20 muffins, and Jennifer can make 15 cupcakes or 15 muffins. Based onthis information, _____ has the absolute advantage in cupcakes, and _____ has the absolute advantage in muffins.

Marius; Marius

Efficient production decisions occur when _____ forces lead firms to produce the output level where ____.

Market; price equals marginal cost

Mary loves avocados and must consume avocados every week, regardless of the price. Which of the following must be true?

Mary has an inelastic demand for avocados

Demand is more elastic when you are shopping in Walmart than when you shop at a small conveniencestore because:

More competing products means greater elasticity

Suppose the price of gasoline rises. As time passes, people adjust to the higher price, and the demand forgasoline becomes:

More elastic

The rational rule for markets is to produce:

More if the unit's marginal benefit exceeds its marginal cost

When people focus their efforts, on the tasks they have a comparative advantage in, what will happen to output?

More of all goods will be produced than if everyone produced everything for themselves

The price of macadamia nuts falls. This conveys all of the following signals EXCEPT

That the price of almonds is rising

A market's deadweight loss is calculated as:

The economic surplus at the efficient quantity minus economic surplus at the actual quantity

Which statement is TRUE?

The income elasticity of demand measures the responsiveness of quantity demanded to changes in consumers' incomes

Suppose that the city of Cleveland has set an emissions tax to reduce the amount of pollution going into the Cuyahoga River. Assume that the optimal tax would be $700 but that government officials have set the tax at$1,200. At the equilibrium with the $1,200 tax:

The marginal social benefit of pollution will be $1,200

Which of the following claims reflects normative analysis?

The minimum wage should be higher so that workers earn a living wage

Total revenue is:

The price of a good times the quantity of the good sold

When price rises, quantity demanded falls. The price elasticity of demand measures:

The responsiveness of a change in quantity demanded to a price change

Which statement best exemplifies a negative externality?

The risks to nonsmokers of second hand smoke

Which factor does NOT determine the price elasticity of demand?

The slope of the supply curve

Which factor is important in determining the price elasticity of supply?

The time the producer has to adjust inputs and outputs

Suppose that the city of Cleveland has set an emissions tax to reduce the amount of pollution going into theCuyahoga River. Assume that the optimal tax would be $2,500 but that city officials have set the tax at $1,000.At the equilibrium with the $1,000 tax:

There will be too much pollution

Economic surplus measures the value of a decision's:

Total benefits minus total costs

Normative analysis is analysis that focuses on:

What should happen or what ought to be, and it involves value judgments

A positive externality is an activity:

Whose side effects benefit bystanders

One problem with assuming that people's willingness to pay is a measure of the marginal benefit they wouldreceive from the product is that:

Willingness to pay reflects ability to pay as well as marginal benefit