Introduction to Micro Economics: Final Exam

Adam has a monthly income of $20 that can be spent on books (B) and pencils (P). The price of a book is $5 and the price of a pencil is $0.50. The equation for Adam's daily budget constraint can be written as: A. 5(B) + 0.50(P) ≤ 20. B. 0.50(B) + 5(P) ≤ 20. C. 20(B) + 0.50(P) ≤ 5. D. 0.50(B) + 20(P) ≤ 5.

A. 5(B) + 0.50(P) ≤ 20.

A principle suggesting that people with more income or wealth should pay more taxes is the _____ principle. A. ability-to-pay B. proportional tax C. lump-sum tax D. benefits received

A. ability-to-pay

An example of an import quota is a: A. limit on the total number of Honda automobiles imported from Japan. B. regulation specifying that each imported Honda automobile must meet certain emission exhaust guidelines. C. tax of 10% of the value of each Honda automobile imported from Japan. D. subsidy from the Japanese government of $500 for each Honda automobile imported into the United States.

A. limit on the total number of Honda automobiles imported from Japan.

A monopoly: A. produces a product with no close substitutes. B. is composed of a single buyer and several sellers. C. is composed of a large number of small firms. D. is composed of a small number of large firms.

A. produces a product with no close substitutes.

A tax of $10 on an income of $100, $25 on an income of $200, and $60 on an income of $300 is: A. progressive. B. proportional. C.regressive. D. flat.

A. progressive.

A well-known example of an international cartel is: A. Japan. B. OPEC. C. Exxon. D. General Motors.

B. OPEC.

A monopolist generally _____ than does a perfectly competitive industry with the same market demand. A. produces a larger quantity B. charges a higher price C. charges a lower price D. earns less profit in the long run

B. charges a higher price

A Pigouvian subsidy is: A.designed to discourage activities generating externalities. B. designed to encourage activities generating external benefits. C. appropriate when the marginal social cost curve is above the marginal cost of D. production curve. appropriate when the marginal social cost curve and the marginal social benefit curve intersect at an inefficient level.

B. designed to encourage activities generating external benefits.

A tariff is MOST likely to _____ prices and _____ domestic consumption of the good or service being protected. A. decrease; increase B. increase; decrease C. have no effect on; not change D. decrease; decrease

B. increase; decrease

An individual gets 5 units of utility from one slice of pizza and 9 units of utility from two slices of pizza. The principle of diminishing marginal utility implies that the total utility from three slices of pizza will be _____ units of utility. A. exactly 12 B. less than 13 C. less than 9 D. more than 14

B. less than 13

According to the profit-maximizing principle of marginal analysis, if the marginal benefit is _____ the marginal cost, _____. A. more than; an activity should be reduced B. less than; an activity should be reduced C. equal to; an activity should be reduced D. more than; net benefit is maximized

B. less than; an activity should be reduced

A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that these negotiations do NOT happen is that: A. most individuals are unfamiliar with the Coase theorem. B. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive. C. agreements arising from such negotiations could not be enforced since the Constitution guarantees all individuals freedom of access to all public roads. D. lawyers would find a way to prohibit such negotiations unless they were actively involved, thus making transaction costs prohibitive.

B. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive

A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of the water for which they are not compensated. In this case: A. too little of society's resources is being used to produce copper. B. too much of society's resources is being used to produce copper. C. the optimal amount of society's resources is being used to produce copper. D. there is an external benefit to society from copper production.

B. too much of society's resources is being used to produce copper.

A Japanese steel firm sells steel in the United States and in Japan. Since the United States buys steel from a number of sources, the U.S. demand for Japanese steel is more price-elastic than is the Japanese demand for Japanese steel. If the Japanese steel firm wishes to maximize its profits, it should: A. charge the same price in both countries (after adjusting for transportation costs). B. charge a higher price in the United States and a lower price in Japan; otherwise, it would be accused of unfair trade practices. C. charge a lower price in the United States and a higher price in Japan. D. figure out which market is more profitable and sell only in that market.

C. charge a lower price in the United States and a higher price in Japan.

Activities that generate external costs will likely be carried out at levels that _____ those that would be efficient. A. are equal to B. are less than C. exceed D. compete with

C. exceed

A natural monopoly is one that: A. monopolizes a natural resource such as a mineral spring. B. is based on control of something occurring in nature (such as diamonds). C. has increasing returns to scale over the entire relevant range of output. D. typically has low fixed costs, making it easy and "natural" for it to shut out competitors.

C. has increasing returns to scale over the entire relevant range of output.

Amtrak is a publicly owned company that provides rail service. This means that Amtrak's prices tend to be _____ than if it were a private company, and the quality of service tends to be _____ than if it were a private company. A. higher; worse B. higher; better C. lower; worse D. lower; better

C. lower; worse

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers: A. have more real income. B. purchase fewer substitute goods. C. purchase more of the now less expensive good. D. purchase more complementary goods.

C. purchase more of the now less expensive good.

A monopoly will have a Herfindahl-Hirschman index equal to: A. 1 B. 100 C. 1,000 D. 10,000

D. 10,000

An external benefit is a: A. negative externality. B. benefit that accrues to domestic firms as a result of the actions of foreign (external) firms. C. benefit that accrues to foreign (external) firms as a result of the actions of domestic firms. D. benefit that individuals or firms confer on others without receiving compensation.

D. benefit that individuals or firms confer on others without receiving compensation.

An increase in a consumer's income will NOT: A. shift the budget line away from the origin. B. increase the horizontal intercept. C. increase the vertical intercept. D. change the slope of the budget line.

D. change the slope of the budget line.

A perfectly competitive firm will earn a profit in the short run when it produces the profit-maximizing quantity of output and the price is: A. greater than marginal cost. B. less than marginal cost. C. less than average variable cost. D. greater than average total cost.

D. greater than average total cost.