Exam 2

According to the Laffer curve, which of the following is true? a. When marginal tax rates are high, a reduction in tax rates may increase tax revenue. b. An increase in tax rates will always cause tax revenues to increase. c. When marginal taxes are low, an increase in tax rates will probably cause tax revenues to decline. d. When marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase.

correct a

An increase in the number of students graduating with a major in engineering would result in a. an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed. b. an increase in the demand for engineers that would increase the wage of engineers and increase the number employed. c. a decrease in the demand for engineers that would decrease the wage of engineers and decrease the number employed. d. a decrease in the supply of engineers that would increase the wage of engineers and decrease the number employed.

correct a

From the standpoint of economic efficiency, markets tend to provide a. less of a public good than would be efficient. b. more of a public good than would be efficient. c. exactly the amount of a public good that is efficient. d. none of the above.

correct a

If a firm increases its output and finds that its average total cost decreases as a result, this implies that a. average total cost exceeds marginal cost. b. average fixed cost is increasing. c. the cost of producing an additional unit of output is more than the average total cost. d. marginal cost exceeds average total cost.

correct a

If consumption of education creates an external benefit, which of the following would increase efficiency relative to the outcome determined by private decisions? a. Produce more education. b. Less education must be produced at the same price. c. Less education must be produced, and the price should be lower. d. Less education must be produced, and the price should be higher. e. The same amount of education must be produced, and the price should be lower.

correct a

In the long run, why might a firm experience rising per-unit costs? a. Diseconomies of scale. b. The law of supply. c. The law of diminishing marginal returns. d. Economies of scale.

correct a

Suppose the market equilibrium price of corn is $5 per bushel, and the government sets a price ceiling of $4 per bushel. What is the most likely result of this action? a. There will be a shortage of corn. b. There will be a surplus of corn. c. There will be an increase in the quantity of corn supplied as the result of the price ceiling. d. There will be a decrease in the quantity of corn demanded as the result of the price ceiling

correct a

When government imposes price controls in a market, which of the following is a likely result? a. Non-price factors become more important in the rationing of the good. b. Efficiency in the market is enhanced. c. Shortages and surpluses are eliminated. d. Buyers and sellers both become better off.

correct a

Which of the following is a likely result when a shortage of a good exists due to a price ceiling? a. Non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good. b. The amount supplied will be greater than the amount demanded. c. The quality of the good will generally improve. d. The demand for the product will increase and, thereby, eliminate the shortage.

correct a

A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91. The administration is considering a tuition increase to help balance the budget. The revenue-maximizing decision is to a. leave tuition as is-an increase would not help balance the budget. b. increase tuition, which would generate more revenue. c. decrease tuition, which should boost enrollment enough to balance the budget. d. decrease tuition, which would bring in more revenue.

correct b

Assuming that bus travel is an inferior good, an increase in consumer income, other things being equal, will cause a. a downward movement along the demand curve for bus travel. b. a leftward shift in the demand curve for bus travel. c. a rightward shift in the demand curve for bus travel. d. an upward movement along the demand curve for bus travel.

correct b

When a government subsidy is granted to the buyers of a product, how can sellers end up capturing some of the benefit? a. Buyers will reduce their demand for the product. b. The market price of the product will rise in response to the subsidy. c. The market price of the product will fall in response to the subsidy. d. The market price of the product will not change in response to the subsidy.

correct b

Which of the following is a likely result when the free-rider problem exists? a. The good will not be produced. b. The market will devote too few resources to the production of the good. c. The cost of the good will always be more than the benefit of the good. d. Entrepreneurs will eventually find a way to make free-riders pay their share.

correct b

Which of the following is an implication of the law of diminishing returns? a. In the long run, average total cost will eventually decline as output is expanded. b. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost. c. A doubling of all inputs will lead to more than a doubling of output. d. Total output will decline as more workers are hired.

correct b

Why do markets fail when externalities are present? a. Markets fail only if externalities are negative; positive externalities are not market failures. b. Because some of the costs and benefits of producing a good are not reflected in the market price. c. Markets fail only if the positive externalities are less than the negative externalities. d. Because profits are not maximized. e. Because all of the costs and benefits of producing a good are reflected in the market price.

correct b

in which of the following cases will the total spending on a good decrease? a. Demand is of unit elasticity, and price decreases. b. Demand is elastic, and price increases. c. Demand is inelastic, and price increases. d. Demand is elastic, and price decreases.

correct b

If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ____, indicating the demand is ____. a. 2; inelastic b. 0.5; elastic c. 2; elastic d. 0.5; inelastic

correct c

What will a tax imposed on the sellers of a good do? a. Raise the price paid by buyers and raise the equilibrium quantity. b. Raise the net price received by sellers and lower the equilibrium quantity. c. Raise the price paid by buyers and lower the equilibrium quantity. d. Raise the net price received by sellers and raise the equilibrium quantity.

correct c

Which of the following describes a situation in which demand must be inelastic? a. Total revenue does not change when the price of shoes rises. b. The price of shoes rises by 10 cents, and quantity of shoes demanded falls by 50. c. The price of shoes rises by 10 cents, and total revenue rises. d. Total revenue decreases when the price of shoes rises. e. A 20 percent increase in the price of shoes leads to a 20 percent decrease in the quantity of shoes demanded.

correct c

Which of the following is true when production of a good generates external benefits? a. The demand curve for the good will overstate the true social benefits from consumption of the good. b. The supply curve for the good will understate the true social cost of producing the good. c. The demand curve for the good will understate the true social benefits from consumption of the good. d. The supply curve for the good will overstate the true social cost of producing the good.

correct c

Why does the short-run average total cost (ATC) curve of a firm tend to be U-shaped? a. Diminishing returns will be present when output is small, while high AFC will push per-unit cost to high levels when output is large. b. Diseconomies of scale will be present at both small and large output rates. c. At small output rates, average fixed cost (AFC) will be high, while at large output rates, marginal cost (MC) will be high. d. Larger firms always have lower per-unit costs than smaller firms.

correct c

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would a. result in a price that is higher than the efficient price for both goods. b. result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost. c. result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost. d. result in a price that is lower than the efficient price for both goods.

correct d

If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which a. the demand is price elastic b. the demand is unitary elastic c. there are many good substitutes available for the good d. the demand is price inelastic

correct d

When an economist says a firm is earning zero economic profit, this implies that the firm a. will be forced out of business in the near future unless market conditions change. b. has an accounting profit of zero. c. is earning a zero rate of return on its assets. d. is earning as high a rate of return now as could be earned in other industries.

correct d

Which of the following is true if education creates external benefits? a. The government should impose a depletion tax. b. Actual market outcomes provide a higher price than the efficient price of education. c. Actual market outcomes provide more than the efficient quantity of education. d. Actual market outcomes provide less than the efficient quantity of education.

correct d