Econ test 1

"Market power" refers to a firm's ability to:

raise its price without losing all of its sales.

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

Subsidies are most likely to:

reduce total economic surplus.

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

rise; fall

This text believes that the emphasis on _______________, found in many other economics texts, is misplaced.

scarcity

In a free market, if the price of a good is above the equilibrium price, then;

sellers, dissatisfied with growing inventories, will lower their prices.

Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand?

separate buyers based on their willingness to pay.

The situation described in the book as "smart for one, dumb for all" occurs when:

individuals act rationally, but there are still unexploited opportunities for society as a whole.

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

inefficient.

The buyer's reservation price for a particular good or service is the:

largest price the buyer would be willing to pay for it.

A market equilibrium:

leaves no unexploited opportunities for individuals.

According to the textbook, government price controls fail because:

legislation cannot alter basic economic incentives.

An outcome is socially optimal if it:

maximizes total economic surplus.

Unlike economic profit, economic rent:

may not be driven to zero by competition.

Efficiency is an important social goal because:

movements toward economic efficiency make the total economic pie larger.

A monopoly that results from economies of scale is called a(n):

natural monopoly.

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

normal good.

If the market demand curve does not capture all of the benefits to society of buying an additional unit of good, then:

the market equilibrium will not be efficient.

In a perfectly competitive market, if supply and demand fully reflect all of the costs and benefits associated with production and consumption, then total economic surplus is maximized when:

the market is in equilibrium.

A seller?s reservation price is generally equal to:

the seller?s opportunity cost of producing an additional unit.

An example of an implicit cost is:

the value of a spare bedroom turned into a home office.

Those most likely to benefit from an increase in the minimum wage are

those workers who get a higher wage due to the minimum wage and who are still able to keep their jobs.

A perfectly competitive firm is observed to make zero economic profit. This implies that its:

total revenue is equal to the sum of all its explicit and implicit costs.

Refer to the figure below. Moving from demand curve D1 to demand curve D2 illustrates a(n):

increase in demand.

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 explicit costs are ______, and Pat's implicit costs are ______.

$16,000; $35,000

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

$35; 20

The last time the minimum wage alone was sufficient to keep a family of three above the poverty line was

1985.

The Ten Core Economic Principles for this class are listed on page one of the text. An alterantive list of Seven Core Princples (from the Frank and Bernanke book used in many of our custom text's chapters) is listed on page

9

Which of the following is likely to occur after several years of relevant rent control?

A decrease in available housing

Who is considered the father of economics?

Adam Smith

A single-priced, profit-maximizing monopolist:

Always charges a price above the marginal cost of production.

Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $10,000 per car. If Saab produces 500,000 cars per year and Volvo produces 200,000 cars per year, calculate the average production cost for each company.

Average production cost for Saab: $12,000 .Average production cost for Volvo: $ 15,000 .On the basis of these costs, which company's market share do you think will grow in relative terms? Saab

Why, according to your readings, do the butcher, the brewer, and the baker provide society with meat, beer, and bread?

Because of their regard to their own interests.

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

Both rich and poor have adequate access to the good.

What will happen to the equilibrium price and quantity of beef if consumer income increases? (Assume that beef is a normal good.).

Both will increase.

Which of the following statements best expresses why economic efficiency should be society's first goal?

Efficiency maximizes total economic surplus and thereby allows other goals to be more easily achieved.

Suppose the current issue of the New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and quantity of chickens sold in the United States?

Equilibrium quantity will increase, but the effect on equilibrium price is unknown.

Which of the following is NOT a characteristic of rent controls?

Greater availability of apartments.

What are the core economic principles that will be emphasized in this class?

Mutual Benefits Economic Reasoning Consider the Alternatives Diminishing Returns/Increasing Opportunity Cost Comparative Advantage The Role of Information Incentives & Self Interest Market Efficiency Market Failures Government Failures

An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will this claim affect the supply (not the quantity supplied) of binoculars in Tucson stores?

Supply will not change. The demand for binoculars is likely to increase, leading to an increase in price and quantity supplied (but no change in supply).

Assume the supply of land is fixed. How will an increase in the birth rate affect the equilibrium price of land?

The equilibrium price of land will increase because demand for land shifts to the right .

If a monopolist could perfectly price-discriminate:

The marginal revenue curve and the demand curve would coincide.

The Invisible Hand refers to

The price mechanism

What are the three economic questions?

What? How? For whom?

A pure monopoly exists when:

a single firm produces a good with no close substitutes.

State whether the following statements are true or false.

a. In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping.False b. Perfectly competitive firms have no control over the price they charge for their product. True c. For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.True

How would each of the following affect the U.S. market supply curve for corn?

a. More fuel-efficient tractors are developed.The supply curve for corn would: shift to the right . b. The price of farm equipment falls. The supply curve for corn would: shift to the right . c. The government requires farmers to pay higher wages to farm workers. The supply curve for corn would: shift to the left . d. A tornado sweeps through Iowa.The supply curve for corn would: shift to the left

Indicate how you think each of the following would shift demand in the indicated market:

a. The incomes of buyers in the market for dining out decreases.The demand curve shifts to the left . b. Buyers in the market for pizza read a study linking pepperoni consumption to clogged arteries.The demand curve shifts to the left . c. Buyers in the market for CDs learn of an increase in the price of downloadable MP3s (a substitute for CDs).The demand curve shifts to the right . d. Buyers in the market for CDs learn of an increase in the price of CDs. The demand curve remains unchanged .

Arguing that many senior citizens have difficulty paying their electric bills, regulators have ordered an electric utility company to charge seniors half the rate charged to other customers for each kilowatt-hour of power they use. The normal rates closely mirror the cost of providing power.

a. What effect will this have on the seniors' decisions about whether to leave their porch lights on all night? It will make them more likely to leave their porch lights on all night. b. What effect will the new regulation have on total economic surplus? Total economic surplus will fall because the price charged to seniors will be below the cost of providing power, leading seniors to consume electricity wastefully .

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves.

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

Two goods are complements if:

an increase in the price of one good leads to a decrease in demand for the other.

In the long run, rent control has ________ impact because, over time, supply and demand become ________ elastic.

an increasing; more

Start-up costs:

are the one-time costs incurred when beginning the production of a new product.

If the equilibrium rent is ________ the controlled level, then rent control laws are ________.

below; irrelevant

When two people agree to a price in a negotiation, we can assume that:

both parties will benefit.

Equilibrium price and quantity are determined by:

both supply and demand.

To understand how the price of a good is determined in a free market, one must account for the interests of:

buyers and sellers.

Price discrimination means charging:

different prices to different buyers for essentially the same good or service.

The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:

doesn't always lead to an efficient outcome.

A firm earns a normal profit when its:

economic profit is zero.

In a market with barriers to entry:

economic profit will not fall to zero in the long run.

Accounting profit minus implicit costs equals:

economic profit.

Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit an industry.

economic profit; economic loss

According to the textbook, the most important and enduring source of market power is:

economies of scale.

The argument that the minimum wage does not significantly increase unemployment is based on

elasticity.

A perfectly price discriminating monopolist charges each buyer:

exactly his or her reservation price.

Adam Smith argues that a certain human propensity helps us leverage mutually beneficial opportunities. This propensity is the propensity to "truck, barter, and __________."

exchange

A firm?s average fixed cost is equal to the firm?s:

fixed cost divided by its level of output.

A price setter is a firm that:

has some degree of control over its price.

State whether the following statements are true or false.

he economic maxim "There's no cash on the table" means that there are never any unexploited economic opportunities. False b. Firms in competitive environments make no accounting profit when the market is in long-run equilibrium. False c. Firms that can introduce cost-saving innovations can make an economic profit in the short run. True

A monopolistically competitive firm is one:

of many firms that sell products that are close but not perfect substitutes.

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.

Free entry and exit of firms is a characteristic of:

perfectly competitive industries.

Rent control is an example of a _________.

price ceiling.

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

produce less than the socially optimal level of output.

Economies of scale exist when:

the average cost of production falls as output rises.

"All else constant, consumers will purchase more of a good as the price falls." This statement reflects the behavior underlying:

the demand curve.

When a market is not in equilibrium:

the economic motives of sellers and buyers will move the market to its equilibrium.

The argument that employers would actually not lose money if the minimum wage were raised is based on

the idea that workers would be more productive if they felt they were adequately compensated.