Econ Test 2 From w/ Explanations

15. Buyers will bear none of the burden of an excise tax if supply is perfectly _____. 1. Elastic. 2. inelastic.

1. Elastic. When a good is elastic, price is barely affected while quantity transacted is significantly decreased. So the seller bears all of the burden.

24. Which of the following is a characteristic of a perfectly competitive market? 1. Firms are price takers in the market. 2. Firms face significant barriers to entering the market. 3. There are few firms selling the good in the market. 4. The goods sold in the market are differentiated.

1. Firms are price takers in the market. This is by definition.

8. A good that is _____ and _____ in consumption is a public good. 1. rival; excludable 2. nonrival; excludable 3. rival; nonexcludable 4. nonrival; nonexcludable

4. nonrival; nonexcludable

43. A good that is _____ and _____ in consumption is a public good. 1. rival; excludable 2. nonrival; excludable 3. rival; nonexcludable 4. nonrival; nonexcludable.

4. nonrival; nonexcludable. This is by definition.

18. Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's economic profit from running his store for a year is 1. -$25,000. 2. $25,000. 3. $50,000. 4. $75,000. 5. $125,000. 6. $150,000. 7. $300,000.

1. -$25,000. Econ Prof = Account Prof - Implicit Costs

42. In the case of a good that generates negative production externalities, the equilibrium quantity transacted in the market is _____ the socially optimal quantity. 1. Greater than 2. equal to 3. less than

1. Greater than. If the good generates negative externalities, society will want the optimal quantity to be lower than the quantity transacted, therefore the QT will be greater than the socially optimal quantity

28. Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing ice cream is $3.30, average variable cost is $2.50, and price is $3.40. Over time, everything else held constant, the number of sellers of ice cream will 1. Increase. 2. decrease. 3. remain unchanged.

1. Increase.

29. Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing ice cream is $3.30, average variable cost is $2.50, and price is $3.40. Over time, everything else held constant, the quantity of ice cream transacted will 1. Increase. 2. decrease. 3. remain unchanged.

1. Increase.

20. When average total cost is less than marginal cost at a particular level of output, average total cost must be 1. Increasing. 2. decreasing. 3. remaining constant.

1. Increasing. ATC<MC, MC=P, so P>ATC (Recall Profit = (P-ATC)Q)

22. When average total cost is less than marginal cost at a particular level of output, average total cost must be 1. Increasing. 2. decreasing. 3. remaining constant.

1. Increasing. According to the ATC-MC graph, ATC increases when MC intersects its minimum point.

12. Answer true or false to the following statement. The difference between the price buyers pay for a good and the price sellers receive from selling it is the amount of the tax. 1. True. 2. False.

1. True.

7. A corn dog is an example of 1. a private good. 2. a public good. 3. an artificially scarce good. 4. a common resource.

1. a private good

31. Mario is a profit-maximizing wholesale meatball distributor who sells his meatballs to all of the finest restaurants in town. Because nobody can make meatballs like Mario, he is the only distributor in town that sells meatballs to restaurants. As a result, the price of one of Mario's meatballs will be _____ the marginal revenue from producing it. 1. greater than 2. the same as 3. less than

1. greater than

6. In the case of a good that generates negative production externalities, the equilibrium quantity transacted in the market is _____ the socially optimal quantity. 1. greater than 2. equal to 3. less than

1. greater than

17. Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's implicit cost of running his store for a year is 1. $75,000. 2. $100,000 3. $150,000. 4. $175,000. 5. $225,000. 6. $250,000. 7. $325,000.

2. $100,000. Implicit costs implies lost benefits

14. Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the price the buyers pay for the good after the tax is levied will be _____ higher than the price they paid prior to the tax. 1. $0.90 2. $2.50 3. $3.00 4. $7.50 5. $9.00 6. $10.00

2. $2.50

38. Which of the following conditions must hold if a firm is to engage in price discrimination? 1. The transaction costs of one consumer selling the product to another consumer must be low. 2. A firm must be a price maker in its market 3. Different consumers must have similar preferences for the product. 4. A firm must be a monopolist in its market.

2. A firm must be a price maker in its market. This is by definition.

33. Answer true or false to the following statement. If a non-price discriminating monopolist is maximizing its profits, we know that it has equated its marginal cost with the market price. 1. True. 2. False

2. False. Market Price would be greater than Marginal Cost

11. Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, economic surplus in the market for t-shirts will _____ today. 1. increase 2. decrease 3. remain unchanged 4. be ambiguous

2. decrease

30. Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing ice cream is $3.30, average variable cost is $2.50, and price is $3.40. Over time, everything else held constant, profits in this market will 1. Increase. 2. decrease. 3. remain unchanged.

2. decrease.

32. Suppose, at a given point in time, Wanda's Wig Warehouse, a non-price discriminating monopolist, is producing at a level of output where marginal revenue is greater than marginal cost. Everything else held constant, Wanda could increase her firm's profits by _____ the quantity of wigs she produces and _____ the price she charges for them. 1. increasing; increasing 2. increasing; decreasing 3. decreasing; increasing 4. decreasing; decreasing 5. not changing; not changing

2. increasing; decreasing

21. If the price a firm charges for a good is less than its average total cost of producing it, then the firm is earning an economic profit _____ zero. 1. greater than 2. less than. 3. equal to

2. less than. P<ATC (Recall Profit = (P-ATC)Q)

41. The flu vaccine has a _____ externality associated with its _____. 1. positive; production 2. positive; consumption 3. negative; production 4. negative; consumption

2. positive; consumption. Consuming the flu shot would prevent disease implicitly, or externally.

34. Suppose, at a moment in time, the price at which a monopolist is selling its output is $21 and the marginal revenue from the last unit sold is $13. Suppose further that the marginal cost of producing the last unit of output sold is $14. Everything else held constant, which of the following actions should the non-price discriminating, profit-maximizing monopolist take? 1. Increase output and increase price. 2. Increase output and decrease price. 3. Decrease output and increase price 4. Decrease output and decrease price.

3. Decrease output and increase price. Price is $21, Marginal Revenue is $13, Marginal Cost $14. In any firm, you want MR=MC, therefore you want to increase MR and/or decrease MC. According to the MR-MC graph, you would decrease QT and increase Price

39. Consider the following offer: an all-you-can-eat buffet charges $12 per person, but allows children under 10 years of age to dine for free. This pricing scheme is an example of _____-degree price discrimination. 1. first 2. second 3. Third

3. Third. This is by definition

44. A pay-per-view movie is an example of 1. A private good. 2. a public good. 3. an artificially scarce good 4. a common resource.

3. an artificially scarce good. A pay-per-view movie is a nonrivalrous and excludable good. Consumption can only be prevented by the ability to pay.

23. Perhaps Petra's Plantain Plantation produces plantains in a perfectly competitive market. Suppose further that at her current level of production, Petra has marginal costs equal to $2.50 per kilo. If the market price of plantains is $2.75 per kilo, it can be concluded with certainty that Petra's profits are 1. Positive. 2. negative. 3. increasing. 4. decreasing.

3. increasing. ATC is not provided and so it cannot be concluded if it is positive or negative. However, because price is greater than marginal cost, profits increase.

26. Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, Rachel is earning an economic profit _____ zero. 1. greater than 2. equal to 3. less than.

3. less than. In a perfectly competitive market, P=MR, MR=$8, so P=$8. Profit = (P-ATC)Q. ATC=$10. So Profit is negative.

27. Suppose Michelle's Mitten Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing mittens is $16, average variable cost is $15, and marginal cost is $17. Michelle should 1. Shut down immediately. 2. continue to produce in the short run since she is minimizing her losses. 3. maintain her current level of production since she is earning a positive economic profit. 4. increase production since it will increase her economic profit. 5. decrease production since it will increase her economic profit.

3. maintain her current level of production since she is earning a positive economic profit. In a perfectly competitive market, P=MR=$17. ATC=$16. Since P>ATC, this is a Case 1 circumstance and she should maintain her behavior

3. Consider the following offer: an all-you-can-eat buffet charges $12 per person, but allows children under 10 years of age to dine for free. This pricing scheme is an example of _____-degree price discrimination. 1. first 2. second 3. third

3. third

25. Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, the price of ratatouille is 1. Greater than $10. 2. $10. 3. greater than $8, but less than $10. 4. $8. 5. $7. 6. less than $7.

4. $8. In a perfectly competitive market, P=MR and MR=$8. Thus, P=$8.

13. Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the sellers will bear _____ percent of the burden of the tax. 1. 0 2. 25 3. 30 4. 75 5. 90 6. 100

4. 75

36. Suppose Sophie's Salmon Shack is a non-price discriminating monopolist and is producing its profit-maximizing level of output. Suppose further that at her current level of output, Sophie's average total cost of a kilo of salmon is $19, her average variable cost is $17, and her marginal revenue is $18. Sophie's economic profit is _____ in the short run, everything else held constant. 1. negative 2. zero 3. positive 4. Ambiguous

4. Ambiguous. We know ATC to be $19, however we don't know profit unless we're given the price of the good. (Recall: (P-ATC)Q)

1. What happens to producer and consumer surplus when a non-price discriminating monopolist increases output above its profit-maximizing level? 1. Both producer and consumer surplus increase. 2. Both producer and consumer surplus decrease. 3. Producer surplus increases and consumer surplus decreases. 4. Producer surplus decreases and consumer surplus increases.

4. Producer surplus decreases and consumer surplus increases.

37. What happens to producer and consumer surplus when a non-price discriminating monopolist increases output above its profit-maximizing level? 1. Both producer and consumer surplus increase. 2. Both producer and consumer surplus decrease. 3. Producer surplus increases and consumer surplus decreases. 4. Producer surplus decreases and consumer surplus increases

4. Producer surplus decreases and consumer surplus increases. According to the MR-MC graph, if QT increased, MR decreases and MC cost increases. This affects the seller so that the seller loses more, while the buyer loses less.

19. Suppose a profit-maximizing firm is earning positive accounting profits at its current level of output. Everything else held constant, the firm's economic profits are 1. Positive. 2. negative. 3. normal. 4. ambiguous.

4. ambiguous. We don't know the implicit costs therefore we cannot determine the economic profit.

10. Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, producer surplus in the market for t-shirts will _____ today. 1. increase 2. decrease 3. remain unchanged 4. be ambiguous

4. be ambiguous

9. Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, consumer surplus in the market for t-shirts will _____ today. 1. increase 2. decrease 3. remain unchanged 4. be ambiguous

4. be ambiguous

35. Suppose Sophie's Salmon Shack is a non-price discriminating monopolist and is producing its profit-maximizing level of output. Suppose further that at her current level of output, Sophie's average total cost of a kilo of salmon is $19, her average variable cost is $17, and her marginal revenue is $18. It can be concluded with certainty that the price of the last kilo of salmon Sophie sold was _____, everything else held constant. 1. greater than $19 2. greater than or equal to $19 3. $19 4. greater than $18 5. greater than or equal to $18 6. $18

4. greater than $18. When producing Q*, MR=MC, and in this case, we want P>MR, or P>MC. ATC and AVC are unnecessary.

4. "Buy two, get one free" is an example of _____-degree price discrimination. For this pricing scheme to be successful for the firm, the customers who buy only one unit of the good must be relatively more price _____ in their demand than the customers who buy two units. 1. first; elastic 2. first; inelastic 3. second; elastic 4. second; inelastic 5. third; elastic 6. third; inelastic

4. second; inelastic

40. "Buy two, get one free" is an example of _____-degree price discrimination. For this pricing scheme to be successful for the firm, the customers who buy only one unit of the good must be relatively more price _____ in their demand than the customers who buy two units. 1. first; elastic 2. first; inelastic 3. second; elastic 4. second; inelastic 5. third; elastic 6. third; inelastic

4. second; inelastic. This is by definition. Though people who buy a single item don't care for the savings with the bulk-purchase and so are considered price inelastic.

16. Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's explicit cost of running his store for a year is 1. $75,000. 2. $100,000. 3. $150,000. 4. $175,000. 5. $225,000. 6. $250,000. 7. $325,000.

5. $225,000. Explicit costs implies actual costs.