ECON UNIT #2

Markets can't work when there is:

Something of value without a price Something of value without property rights Goverment can step in to improve things for society

5. Consider the following scenario: if Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Farmer Brown's total-cost curve is A increasing at an increasing rate. B increasing at a decreasing rate. C increasing at a constant rate. D decreasing.

A increasing at an increasing rate.

Monopoly

A market in which there are many buyers but only one seller.

10. Who among the following individuals most likely experiences the largest nonmonetary reward as a supplier of labor? Assume all of the four individuals have the same level of education and work the same number of hours per week. A Oakley, who prefers not to socialize and works at home by himself B Danuta, whose job provides little intellectual and personal satisfaction C Zima, whose preference is to avoid dangerous work but works as an FBI agent D Larry, who works the night shift but would prefer to work during the day and sleep at night

A Oakley, who prefers not to socialize and works at home by himself

Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm raises its price, what happens to total revenue and total costs?)

A monopolist always produces a quantity at which demand is elastic. If the firm produced a quantity for which demand was inelastic and the firm raised its price, quantity would fall by a smaller percentage than the rise in price, so revenue would increase. Because costs would decrease at a lower quantity, the firm would have higher revenue and lower costs, so profit would be higher. Thus the firm should keep raising its price until profits are maximized, which must happen on an elastic portion of the demand curve.

Joan grows pumpkins. If Joan plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 500 pumpkins. If she plants 2 bags, she gets 800 pumpkins. If she plants 3 bags, she gets 900 pumpkins. A bag of seeds costs $100, and seeds are her only cost. Joan's total-cost curve is A. increasing at an increasing rate. B. increasing at a decreasing rate. C. increasing at a constant rate. D. decreasing.

A. increasing at an increasing rate.

___8. If a monopolist has zero marginal costs, it will produce A. the output at which total revenue is maximized. B. in the range in which marginal revenue is still increasing. C. at the point at which marginal revenue is at a maximum. D. in the range in which marginal revenue is negative.

A. the output at which total revenue is maximized.

6. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit A 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. B 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. C 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. D 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air.

B 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Suppose that you want to build a community garden for your neighborhood, which has 500 residents. The cost of the garden is $2,000, and each person values the garden at $3. After a month, you have only received 75 donations at $3 each. The result is that A. the local government should build the garden, but you should not. B. you should still build the garden, but the local government should not. C. neither you nor the local government should build the garden. D. either you or the local government should build the garden.

C. neither you nor the local government should build the garden.

7. Consider the following scenario. In the small town of Eureka Springs, Arkansas, there is a local hardware store called Eddy's Hardware. There are only two types of workers who apply for jobs at Eddy's Hardware: cowgirls and farm girls. Local politicians have received numerous complaints that Eddy's Hardware is practicing wage discrimination against farm girls. Eddy's Hardware denies the complaint and says the store is only trying to maximize profit. Which of the following statements would strengthen the discrimination complaint against Eddy's Hardware? A On average farm girls have less experience working at the hardware store than cowgirls. B Cowgirls call in sick to work more often than farm girls. C Cowgirls' experience using hardware generally exceeds farm girls' experience using it. D Farm girls are more likely than cowgirls to work the day shift rather than the night shift.

B Cowgirls call in sick to work more often than farm girls.

9. Which of the following pairs of goods includes a good that is excludable and rival in consumption as well as a good that is not excludable and not rival in consumption? A Tablet computer, membership at a gym that always has plenty of open equipment and classes B Tablet computer, national defense C Congested nontoll road, national defense D Online music subscription, streetlight

B Tablet computer, national defense

3. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? A The railroad will continue to operate but will pay the farmer $1,500 in damages. B The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. C The farmer will incur $1,500 in damages to his crops. D The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

B The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.

8. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should A continue the flight. B continue flying until the lease expires and then drop the run. C drop the flight immediately. D drop the flight now but renew the lease if conditions improve.

B continue flying until the lease expires and then drop the run.

2. Refer to the table below: Labor (Number of workers) 0 1 2 3 4 5 Output (Units) 0 100 180 240 280 300 Fixed Cost (Dollars) 30 30 30 30 30 30 Variable Cost (Dollars) 0 15 30 45 60 75 For the firm whose production function and costs are specified in the table, its total-cost curve is A increasing at a decreasing rate. B increasing at an increasing rate. C constant. D unknown because there is no relationship between a firm's production function and its total-cost curve.

B increasing at an increasing rate.

___3. Which of the following is not a characteristic of pollution permits? A. Prices are set by supply and demand. B. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. C. Real-world markets for pollution permits include sulfur dioxide and carbon. D. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive.

B. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.

___10. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller rather than fertilizer on half her land. As a result, she loses half of her productive farmland. If the property of diminishing returns applies to all factors of production, she should expect to see A. an increase in the marginal productivity of her remaining land and an increase in the marginal productivity of her labor. B. an increase in the marginal productivity of her remaining land and a decrease in the marginal productivity of her labor. C. a decrease in the marginal productivity of her remaining land and an increase in the marginal productivity of her labor. D. a decrease in the marginal productivity of her remaining land and a decrease in the marginal productivity of her labor.

B. an increase in the marginal productivity of her remaining land and a decrease in the marginal productivity of her labor.

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to A. stop her messy habits or else move out. B. pay you at least $60 but less than $80 to live with the clutter. C. continue to be messy and force you to move out. D. demand payment of at least $60 but no more than $80 to clean up after herself.

B. pay you at least $60 but less than $80 to live with the clutter.

4. If Stella's Fashion Jewelry sells its product in a competitive market, then A Stella's Fashion Jewelry total cost must be a constant multiple of its quantity of output. B the price of that product depends on the quantity of the product that Stella's Fashion Jewelry produces and sells because the firm's demand curve is downward sloping. C Stella's Fashion Jewelry total revenue must be proportional to its quantity of output. D Stella's Fashion Jewelry total revenue must be equal to its average revenue.

C Stella's Fashion Jewelry total revenue must be proportional to its quantity of output.

6. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will A fall in the short run. All firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. B fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. C fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. D not fall in the short run because firms will exit to maintain the price.

C fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium.

9. Celia's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $15. The marginal productivity of the last worker that Celia hired was 3 tires per hour. What is the maximum hourly wage that Celia was willing to pay the last worker hired? A $90. B $15. C $45. D $5.

C $45.

1. When a country allows trade and becomes an exporter of silk, which of the following is not a consequence? A The price paid by domestic consumers of silk increases. B The price received by domestic producers of silk increases. C The price paid by domestic consumers of silk decreases. D The gains of domestic producers of silk exceed the losses of domestic consumers of silk.

C The price paid by domestic consumers of silk decreases.

1. The privately-owned school system in Fort Yaman has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Because the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct? A A tax increase to pay for education could potentially make the community better off. B The free-rider problem causes the private market to undersupply education to the community. C The private market is the best way to supply education. D The government can potentially help the market reach a socially optimal level of education.

C The private market is the best way to supply education.

4. On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. On these days, electricity is A excludable, but nonrival in consumption. B not excludable, but rival in consumption. C excludable and rival in consumption. D not excludable and nonrival in consumption.

C excludable and rival in consumption.

7. Which of the following statements is true? A When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. B Average revenue is the same as price for monopoly firms but not competitive firms. C Average revenue is the same as price for competitive firms but not monopoly firms. D When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price.

D When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price.

___2. The before-trade price of fish in Denmark is $10.00 per pound. The world price of fish is $6.00 per pound. Denmark is a price-taker in the fish market. If Denmark begins to allow trade in fish, its consumers of fish will become A. better off, its producers of fish will become better off, and on balance the citizens of Denmark will become better off. B. worse off, its producers of fish will become better off, and on balance the citizens of Denmark will become worse off. C. better off, its producers of fish will become better off, and on balance the citizens of Denmark will become worse off. D. better off, its producers of fish will become worse off, and on balance the citizens of Denmark will become better off.

D. better off, its producers of fish will become worse off, and on balance the citizens of Denmark will become better off.

Markets lead to the most efficient allocation of resources.... EXCEPT when there are

Market failures

Externalites

When someones actions affect the well being of a bystand and there is no compensation NEGATIVE EXTERNALITIES Loud party Cigarette smoke Talking during lecture Factory smoke( Environmental Economics, Climate Change, Cars)

Nonmonetary incentives

Work-life balance Ability to expand skills Positive work environment Finding meaning in work

competive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

10. The Solo Cup company is located in the small town of Champaign, Illinois. There are only two kinds of people in Champaign: blue and red. The mayor of Champaign has received numerous complaints that Solo Cup is practicing wage discrimination against blue people. Solo Cup denies the complaint, saying the factory is just maximizing its profits. Which of the following statements would strengthen the discrimination complaint against Solo Cup? a. Red people call in sick to work more often than blue people. b. Blue people are more likely than red people to work the day shift rather than the night shift. c. Red people are generally more educated than blue people. d. On average, blue people have less experience working in the factory than red people.

a. Red people call in sick to work more often than blue people.

4. Francisco has decided to start his own business giving dancing lessons. To purchase equipment for the business, Francisco withdrew $2,000 from his savings account, which was earning 2% interest, and borrowed an additional $4,000 from the bank at an interest rate of 5%. What is Francisco's annual opportunity cost of the financial capital that has been invested in the business? a. $40. b. $240. c. $170. d. $200.

b. $240.

2. Refer to figure 1. The market for plastic in Happyland is at the social optimum. A new government is elected, and one of its first policies is to eliminate existing regulations, including a corrective tax on plastics. This elimination moves the market for plastics from the social optimum to the market equilibrium. How much will the government lose in tax revenue? a. $2,250. b. $750. c. $3,000. d. $3,450.

c. $3,000.

5. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 4 units of output are produced is $50, and the marginal cost of the fifth unit of output is $80. What is the average total cost when five units are produced? a. $60. b. $250. c. $56. d. $70.

c. $56.

9. Over the past several years, the earnings gap between high-skilled and low-skilled workers has widened because: i) International trade has altered the relative demand for skilled and unskilled labor. ii) Changes in technology have altered the relative demand for skilled and unskilled labor. iii) The return to education for men has decreased, whereas the return to education for women has increased. Which of the following options is correct? a. (i) only. b. (iii) only. c. (i) and (ii). d. (i), (ii) and (iii).

c. (i) and (ii).

7. Aliens from outer space abduct a large number of Slovenian farmers to teach the aliens to cultivate crops on their distant planet. Under the assumption that land and labor are complements in a farming production function, what changes would we expect to see in the wages earned by farmers in Slovenia and the rents earned by landowners in Slovenia following the abduction? a. Both wages and rents would increase. b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase.

c. Wages would increase, and rents would decrease.

8. Refer to figure 2. Suppose the firm sells its output for $14 per unit, and it pays each of its workers $33 per day. When the number of workers increases from 4 to 5, ... a. the marginal revenue is $42 per unit of output, and the marginal cost is $33 per unit of output. b. the value of the marginal product of labor is $99, and the marginal cost per unit of output is $33. c. the value of the marginal product of labor is $42, and the marginal cost per unit of output is $11. d. the firm's profit decreases.

c. the value of the marginal product of labor is $42, and the marginal cost per unit of output is $11.

Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is a. $29. b. $35. c. $40. d. $46.

d. $46.

Subsidy

is the opposite of a tax, a tax would shift the demand curve "in" a subsidy would shift it out "out". "Instead of making people pay for staying out late, rather pay them to stay in."

Private Markets

markets in which transactions are worked out directly between two parties

Marginal Revenue (MR)

the change in total revenue from selling one more unit of a product

marginal cost

the cost of producing one more unit of a good