ECO FINAL

Alison decides to play the lottery. She has a 0.5 percent probability of winning $1,500 and a 99.5 percent probability of winning zero. The expected value of playing the lottery is A) $7.50. B) $0.50. C) $2,900.5. D) $0

A) $7.50.

A dominant strategy exists if A) a player has a strategy that yields the highest payoff regardless of the other player's choice. B) both players have the highest payoff when they make the same choice. C) both players make the same choice. D) one strategy yields the highest possible payoff.

A) a player has a strategy that yields the highest payoff regardless of the other player's choice.

According to economists, the satisfaction people get from their consumption activities is called A) demand. B) utility. C) a need. D) a want.

B) utility.

The free-rider problem arises when people A) obtain a good for less than the market equilibrium price. B) who do not pay for a good cannot be excluded from consuming it. C) who do not pay for a good cannot consume it. D) who pay for a good cannot consume it.

B) who do not pay for a good cannot be excluded from consuming it.

Go to study guide and answer 60-63

A) Up

The price elasticity of supply at a point is the A) percentage change in quantity supplied divided by the percentage change in price. B) percentage change in price divided by the percentage change in quantity supplied. C) change in quantity supplied divided by the change in price. D) change in price divided by the change in quantity supplied

A) percentage change in quantity supplied divided by the percentage change in price.

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as A) adverse selection. B) statistical discrimination. C) risk aversion. D) moral hazard.

A) adverse selection.

The major prediction of the lemons model is that A) asymmetric information reduces the average quality of goods offered for sale. B) people will generally choose "low-hanging fruit." C) a used car in good condition can be sold for a higher-than-average price. D) used cars offered for sale are generally in better-than-average condition

A) asymmetric information reduces the average quality of goods offered for sale.

Adam Smith's invisible hand only leads to an efficient outcome when A) buyers are fully informed about all relevant aspects of a product and the market in which it is traded. B) buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information. C) buyers have more information about the product being traded than do sellers. D) buyers have less information about the product being traded than do sellers

A) buyers are fully informed about all relevant aspects of a product and the market in which it is traded.

The marginal cost of an activity is the A) change in the total cost of the activity that results from carrying out an additional unit of the activity. B) total cost of the activity divided by the change in the level of the activity. C) total cost of the activity divided by the level of the activity. D) change in the level of the activity divided by the change in the cost of the activity.

A) change in the total cost of the activity that results from carrying out an additional unit of the activity.

If the price elasticity of demand for a good is greater than one, then the demand for that good is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic.

A) elastic.

Curly is offered the following gamble: a 25 percent chance of winning $1,500 and a 75 percent chance of losing $500. This is a(n) A) fair gamble. B) worse-than-fair gamble. C) almost-fair gamble. D) better-than-fair gamble.

A) fair gamble.

A credible promise is A) in the promiser's interest to keep. B) legally enforceable. C) made by an honest person. D) possible to keep.

A) in the promiser's interest to keep

Cartel agreements are difficult to sustain because A) it's a dominant strategy for each cartel member to cheat on the cartel agreement. B) the collective payoff to all the cartel members is lower when they all abide by the cartel agreement. C) cartel members do not face the economic incentives inherent in a prisoner's dilemma. D) it's usually easy to discover if one of the members has cheated

A) it's a dominant strategy for each cartel member to cheat on the cartel agreement.

The rational spending rule is derived from the consumer's desire to A) maximize utility. B) minimize expenditures. C) obtain the lowest possible price. D) maximize the number of goods purchased

A) maximize utility

If a firm operates in an oligopoly, it is A) one of a small number of firms that produce goods that are either close or perfect substitutes. B) the only firm that produces a good with no close substitutes. C) one of a large number of firms that produce goods that are either close or perfect substitutes. D) one of a large number of firms that produce a good with no close substitute.

A) one of a small number of firms that produce goods that are either close or perfect substitutes.

The marginal cost of collecting information A) rises as more information is collected. B) falls as more information is collected. C) is now zero because of the Internet. D) is independent of the amount of information that has already been acquired.

A) rises as more information is collected.

Suppose Mia is going to buy a house and a dishwasher. Assuming the marginal cost of searching for both is the same, one can predict that Mia will A) spend more time searching for the house than the dishwasher. B) spend more time searching for the dishwasher than the house. C) spend equal amounts of time searching for the dishwasher and the house. D) trust the information from her real estate agent but not from the dishwasher salesperson.

A) spend more time searching for the house than the dishwasher.

The price elasticity of demand is a measure of A) the change in quantity demanded of a good that results from a change in its price. B) the change in price of a good that results from a change in its quantity demanded. C) the demand for a good. D) how consumers respond to excess demand.

A) the change in quantity demanded of a good that results from a change in its price.

Frank is considering moving to Denver. There is a 10 percent chance that he will find a job that pays $5,000 more than what he currently earns and a 90 percent chance he will find one that pays $5,000 less. The expected value of moving to Denver is A) −$4,000. B) $4,000. C) −$4,500. D) $500

A) −$4,000.

Alison decides to play the lottery. She has a 5 percent probability of winning $100 and a 95 percent probability of winning zero. The expected value of playing the lottery is A) $100. B) $5. C) $10. D) $0.

B) $5.

Refer to the accompanying figure. The equilibrium price is ______, and the equilibrium quantity is ______. A) $8; 6 B) $6; 4 C) $4; 6 D) $2; 8

B) $6; 4

The price equals marginal cost rule for profit maximization is a specific example of which core principle? A) The Scarcity Principle B) The Cost-Benefit Principle C) The Principle of Comparative Advantage D) The Efficiency Principle

B) The Cost-Benefit Principle

The long run is best defined as A) one year or more. B) a period of time sufficiently long that all factors of production are variable. C) the period of time between annual accounting reports. D) a period of time sufficiently long that at least one factor of production is fixed.

B) a period of time sufficiently long that all factors of production are variable.

A pure monopoly exists when A) many firms produce a good with no close substitutes. B) a single firm produces a good with no close substitutes. C) only a single firm is present in the market. D) a single firm produces a good with many close substitutes.

B) a single firm produces a good with no close substitutes.

In general, individuals and nations should specialize in producing those goods for which they have a(n) A) absolute advantage. B) comparative advantage. C) absolutely comparative advantage. D) absolute advantage and a comparative advantage.

B) comparative advantage.

Natural monopolies are most likely to arise when firms have A) low start-up costs and low marginal costs. B) high start-up costs and low marginal costs. C) low start-up costs and high marginal costs. D) high start-up costs and high marginal costs.

B) high start-up costs and low marginal costs.

The most important challenge facing a firm in a perfectly competitive market is deciding A) whether to maximize its profits. B) how much to produce. C) what price to charge. D) whether to advertise.

B) how much to produce.

The supply curve illustrates that firms A) increase the supply of a good when its price rises. B) increase the quantity supplied of a good when its price rises. C) decrease the quantity supplied of a good when input prices rise. D) decrease the supply of a good when its price rises.

B) increase the quantity supplied of a good when its price rises.

Economies of scale arise from: A) constant returns to scale. B) increasing returns to scale. C) decreasing returns to scale. D) constant marginal returns to scale.

B) increasing returns to scale.

The Incentive Principle states that a person A) is more likely to take an action if its cost increases. B) is more likely to take an action if its benefit increases. C) should take an action if its cost increases. D) should take an action if its benefit increases.

B) is more likely to take an action if its benefit increases.

The additional utility gained from consuming an additional unit of a good is called A) total utility. B) marginal utility. C) costly utility. D) a util.

B) marginal utility.

As the price of a good rises A) firms generally decrease the supply of the good. B) more firms can cover their opportunity cost of producing the good. C) firms generally increase the supply of the good. D) government regulation becomes more justified.

B) more firms can cover their opportunity cost of producing the good

The tendency for marginal utility to decline as consumption increases beyond some point is called A) the law of demand. B) the law of diminishing marginal utility. C) the rational spending rule. D) utility maximization.

B) the law of diminishing marginal utility.

Rationally, search should continue until A) all search options have been explored. B) the marginal benefit of search equals the marginal cost of search. C) the marginal benefit of search is zero. D) the marginal cost of search is zero.

B) the marginal benefit of search equals the marginal cost of search.

The three elements of a game are A) the firm, the consumers, and the profit. B) the players, the strategies, and the payoffs. C) the model, the graph, and the costs. D) the costs, the revenue, and the profit

B) the players, the strategies, and the payoffs.

Suppose Hailey is offered the following gamble: with probability 0.1 she will win $90, with probability 0.4 she will win $50, and with probability 0.5 she will lose $60. The expected value of this gamble is found by solving A) 0.1 × ($90 − $60) + 0.4 × ($50 − $60) B) (0.1 × $90) + (0.4 × $50) C) (0.1 × $90) + (0.4 × $50) − (0.5 × $60) D) ($90 + $50 − $60)/3

C) (0.1 × $90) + (0.4 × $50) − (0.5 × $60)

The entire group of buyers and sellers of a particular good or service makes up A) the demand curve. B) the supply curve. C) a market. D) the equilibrium price and quantity.

C) a market.

A risk-neutral individual will A) accept only better-than-fair gambles. B) see risk as neither good nor bad. C) accept only gambles with an expected value of zero or greater. D) accept only gambles with an expected value of zero

C) accept only gambles with an expected value of zero or greater.

Information about the quality of a product is A) intangible, and therefore not subject to economic principles. B) impossible to objectively assess, and therefore not subject to economic principles. C) both beneficial to have and costly to obtain, and therefore subject to economic principles. D) subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor.

C) both beneficial to have and costly to obtain, and therefore subject to economic principles.

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n) A) pure monopoly. B) oligopoly. C) cartel. D) duopoly.

C) cartel.

The marginal benefit of an activity is the A) same as the total benefit of an activity. B) total benefit of an activity divided by the level of the activity. C) extra benefit associated with an extra unit of the activity. D) total benefit associated with an extra unit of the activity.

C) extra benefit associated with an extra unit of the activity.

If a person takes an action if, and only if, the extra benefits from taking that action are at least as great as the extra costs, then that person is A) not following the Cost-Benefit Principle. B) following the Scarcity Principle. C) following the Cost-Benefit Principle. D) not rational

C) following the Cost-Benefit Principle

Economics is best defined as the study of A) inflation, interest rates, and the stock market. B) supply and demand. C) how people make choices in the face of scarcity and the implications of those choices for society as a whole. D) the financial concerns of businesses and individuals.

C) how people make choices in the face of scarcity and the implications of those choices for society as a whole.

A credible threat is A) possible to carry out. B) legally enforceable. C) in the threatener's interest to carry out. D) not in the threatener's interest to carry out

C) in the threatener's interest to carry out.

A variable factor of production A) is fixed in the long run but variable in the short run. B) plays no role in the law of diminishing marginal returns. C) is variable in both the short run and the long run. D) is variable only in the short run.

C) is variable in both the short run and the long run.

A warranty on a used car is a credible signal of quality because A) many used cars come with warranties. B) sellers who offer warranties are more honest than most people. C) it would cost the seller too much to honor a warranty on a low-quality car. D) it indicates the car is of average quality.

C) it would cost the seller too much to honor a warranty on a low-quality car.

The demand for a good is inelastic with respect to price if the price elasticity of demand is A) equal to one. B) greater than one. C) less than one. D) equal to negative one.

C) less than one.

The percentage change in quantity supplied that results from a 1 percent change in price is known as the A) cross-price elasticity of supply. B) slope of the supply curve. C) price elasticity of supply. D) cross-price elasticity of demand.

C) price elasticity of supply.

"Market power" refers to a firm's ability to A) undercut its competitors' prices. B) force consumers to buy high-priced products. C) raise its price without losing all of its sales. D) influence the price its competitors charge.

C) raise its price without losing all of its sales.

A payoff matrix shows A) the payoff to being a monopolist. B) the demand curve facing a firm when there are only two firms. C) the payoffs for each possible combination of strategies. D) the payoff to being a perfectly competitive firm

C) the payoffs for each possible combination of strategies.

The dilemma in a prisoner's dilemma is that: A) the outcome is random, so players are uncertain about which strategy to play. B) only one player has a dominant strategy, but the other player is uncertain about what to do. C) the players would be better off if they both played a dominated strategy. D) the players may be trapped in a game they don't know how to play

C) the players would be better off if they both played a dominated strategy.

The seller of an existing house claims that it is in great shape, and he is offering a two-year warranty on the house. His statements about the quality of his house are likely to be A) credible even in the absence of a warranty. B) overstated. C) true because offering a warranty is a costly-to-fake signal. D) untrue because otherwise he would not offer the warranty.

C) true because offering a warranty is a costly-to-fake signal.

If the price elasticity of demand for a good equals one, then the demand for that good is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic.

C) unit elastic.

The Scarcity Principle states that A) people don't have enough money to buy what they want. B) society will eventually run out of resources. C) with limited resources, having more of one thing means having less of another. D) some countries have fewer resources than others.

C) with limited resources, having more of one thing means having less of another.

If you have a comparative advantage in a particular task, then A) you complete it faster than other people. B) you give up more to accomplish that task than do others. C) you give up less to accomplish that task than do others. D) you have specialized in that task, while others have not.

C) you give up less to accomplish that task than do others(lower opportunity cost)

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. For Vinnie, the expected value of searching for another vacation rental is A) $200. B) $50. C) $45. D) $5

D) $5

The short run is best defined as A) one year or less. B) a period of time sufficiently short that all factors of production are variable. C) the period of time between quarterly accounting reports. D) a period of time sufficiently short that at least one factor of production is fixed.

D) a period of time sufficiently short that at least one factor of production is fixed.

A risk-averse individual will A) never accept any gamble. B) accept a fair gamble. C) only choose certain events. D) accept only better-than-fair gambles.

D) accept only better-than-fair gambles.

If two products are substitutes, then the A) income elasticity of demand for both will be high. B) price elasticity of demand for both will be positive. C) cross-price elasticity of demand between them will be negative. D) cross-price elasticity of demand between them will be positive.

D) cross-price elasticity of demand between them will be positive.

If a gamble has an expected value of zero, then it is termed a(n) A) better-than-fair gamble. B) unfair gamble. C) zero gamble. D) fair gamble

D) fair gamble

The marginal benefit of additional information A) rises as more information is collected. B) is independent of the amount of information that has already been acquired. C) tends to be lower for expensive items than inexpensive items. D) falls as more information is collected.

D) falls as more information is collected.

A decision tree is used when modeling A) any type of game. B) simultaneous decisions. C) a prisoner's dilemma. D) games in which timing matters

D) games in which timing matters

In markets with incomplete information, middlemen tend to ________total economic surplus by ______. A) reduce; raising prices B) reduce; giving misleading information C) increase; raising prices D) increase; matching sellers with buyers who have high reservation prices

D) increase; matching sellers with buyers who have high reservation prices

The law of demand indicates that as the cost of an activity A) falls, less of the activity will occur. B) rises, more of the activity will occur. C) rises, the level of the activity may or may not increase depending on the individual. D) rises, less of the activity will occur.

D) rises, less of the activity will occur.

In sequential games, the player who moves first A) always has a first-mover advantage. B) has a first-mover advantage only when he or she is able to make a credible threat or promise to choose a dominated strategy. C) has a first-mover advantage only when the second mover fails to choose the dominant strategy. D) sometimes has an advantage and sometimes has a disadvantage

D) sometimes has an advantage and sometimes has a disadvantage

The optimal amount of information to acquire before making a purchase is A) zero. B) as much as possible. C) the amount such that the total cost of acquiring information equals the total benefit. D) the amount such that the marginal cost of acquiring information equals the marginal benefit.

D) the amount such that the marginal cost of acquiring information equals the marginal benefit.

Marginal cost is calculated as A) total revenue minus total costs. B) the change in output divided by the change in total costs. C) the percentage change in total costs divided by the percentage change in output. D) the change in total cost divided by the change in output.

D) the change in total cost divided by the change in output.

The sum of the possible outcomes of a gamble multiplied by their respective probabilities is known as A) a fair gamble. B) the variance of the gamble. C) a better-than-fair gamble. D) the expected value of the gamble

D) the expected value of the gamble

When a market is in equilibrium A) there is either excess demand or excess supply. B) both excess demand and excess supply are positive. C) both excess demand and excess supply are positive and equal to each other. D) there is neither excess demand nor excess supply.

D) there is neither excess demand nor excess supply.