Parsons Exam #2

Decreasing costs in an industry are:

rare and temporary.

As firms enter a market, supply increases and the price declines, which:

reduces profits.

Explicit costs _____, while implicit costs do not.

require an outlay of money

If the United States tried to use strategic trade protectionism to raise revenues for airplane manufacturers, countries that import U.S.-produced planes world:

retaliate and place tariffs or quotas on other U.S.-produced goods.

According to the elimination principle, firms making an above-normal profit in a competitive market:

will not be able to do so for long, as new firms will enter the market.

In the textbook, it is estimated that sugar quotas cost the U.S. economy about:

$1.32b a year

Between 1918 and 1920, _____ population died of flu.

2.5 percent to 5 percent of the world's

As real GDP per capita increases, the incidence of child labor tends to:

decrease

Which is an industry in which industry costs decrease with greater output?

decreasing cost industry

The _____ is the price and quantity that maximize the sum of producer surplus, consumer surplus, and everyone else's surplus.

efficient equilibrium

Economist Joseph Schumpeter's concept of creative destruction refers to:

entrepreneurial innovation. Only by constantly innovating can firms avoid the elimination of profits.

A(n) _____ is a cost borne by parties other than the consumer or the producer in a market.

external cost

Which of these might cause the Invisible Hand Properties discussed in the textbook to fail to come about?

externalities

Which would cause the Invisible Hand Properties to fail?

externalities

An external benefit is sometimes called a:

positive externality.

For the competitive process to work, it is important that:

prices accurately signal costs and benefits.

A(n) _____ is a cost borne by the consumer or the producer.

private cost

Friedrich Hayek said that properties like the minimization of the total costs of production were:

products of human action but not of human design.

Without the pressure of the competitive process in an industry earning above-normal profits:

profits will not be eliminated.

_____ states that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Coase theorem

Chimamanda's landscaping business is currently making a loss. What can she expect to happen in the industry?

Firms will exit the industry.

If these two firms are in different countries and there is no free trade between the countries, which is true?

If the price of this good in each of these two countries is different, the total costs of production will not be minimized.

Which has to occur in order for the competitive process to work? Entrepreneurs must pursue the social interest instead of their self-interest. Prices must accurately signal costs and benefits. Many firms must be monopolies or oligopolies. Goods must have significant external costs and benefits.

Prices must accurately signal costs and benefits.

Margaret works in an industry in which many firms are entering. What can she expect to happen to profits as price declines?

Profits will decline.

Salih works in the steel industry. He notices that many suppliers are entering the market. What can he expect to happen to profit as price declines?

Profits will decline.

Rebecca works in the steel industry, which has seen many firms exit. What will she see happen to prices as supply decreases and price increases?

Profits will increase.

_____ is the economic policy of restraining trade though quotas, tariffs, or other regulations that burden foreign producers but not domestic producers.

Protectionism

Suppose R's market activity generates $50 worth of benefits for R, but imposes a $75 cost on S, who is external to the market. If S has a clearly defined right to demand that R discontinue the activity and transaction costs are sufficiently low, what will be the result of private bargaining?

R will unsuccessfully offer to pay S for the right to continue the activity.

Jordan's company is currently making below-normal profits. What can he expect to happen in the industry?

Supply will decrease and prices will rise.

If a firm is earning zero economic profits, then which is NOT true? The firm's accounting profits are also zero. The firm is covering all of its costs. The price is equal to the firm's average cost. The firm is paying capital and labor enough to compensate them for their ordinary opportunity costs.

The firm's accounting profits are also zero.

Which statement is true of great ideas? They do not become commonplace. They are not adopted by others. They diffuse through the economy. They are always profitable.

They diffuse through the economy.

What will happen in an industry earning above-normal profits without the pressure of the competitive process?

Too few resources will move to that industry

Which is a basic question that every profit maximizing-firm must ask?

What price to set?

Industry clusters often arise when an industry is:

a decreasing-cost industry.

If property rights are clearly defined and transaction costs reduced, then:

a market for externalities might develop.

An import quota is:

a numerical limit on imports.

The least costly way to divide up the production of goods among all of the firms in an industry is to divide it up such that:

all of the firms have the same marginal cost.

Elimination of sugar tariffs would benefit all of the following individuals EXCEPT: No one would benefit from the elimination of sugar tariffs. a Brazilian sugar farmer. an American consumer of foods made with sugar. an American sugar producer.

an American sugar producer.

Great ideas:

become commonplace. diffuse through the economy

When the government imposes a limit on how much output firms can produce, this is known as:

command and control

Which is an industry in which industry costs do not change with greater output?

constant cost industry

Social surplus is _____

consumer surplus plus producer surplus plus everyone else's surplus

Externalities are _____ that fall on bystanders.

costs or benefits

The simple rule that firms should enter an industry when P > AC and exit an industry when P < AC would be exactly correct if:

firms could instantly and without cost enter and exit industries.

The total costs of production in an industry can be reduced without changing total output as long as:

firms have different marginal costs.

Protectionism is the economic policy of restraining trade though quotas, tariffs, or other regulations that heavily burden _____ producers.

foreign

To reduce the total costs of production in an industry, production should be shifted:

from firms with high marginal costs to firms with low marginal costs

A key industry:

generates spillovers.

A Pigouvian tax is levied on:

goods with external costs.

Imports beyond a trade quota are:

heavily taxed or forbidden.

Which is part of the calculation of economic profit, but not part of the calculation of accounting profit?

implicit costs

A trade quota restricts the quantity of goods that can be:

imported

A tariff is a tax on:

imports

Which is an industry in which industry costs increase with greater output?

increasing cost industry

The idea of a decreasing-cost industry is important for explaining:

industry clusters.

Most young children who work for a significant number of hours each day are:

involved in agricultural and other non-export industries.

Strategic trade protectionism is different from the other arguments in favor of trade restrictions discussed in the textbook because it:

is an argument in favor of limiting exports, not imports.

If Americans stop importing goods that are made using child labor

it is very likely that these children will be worse, not better, off.

When zero profits occur in the market:

it must be the case that P = AC.

When a firm earns zero economic profits:

labor and capital are being paid what they could earn in another industry.

When profit-seeking entrepreneurs decide to enter, exit, or remain in a competitive market:

labor and capital move across industries into their highest-value uses

The _____ is the time after all exit or entry has occurred.

long run

Which is a market that meets the following three conditions? i. The product being sold is similar across different firms. ii. There are many buyers and sellers. iii. Each buyer and seller represents a small portion of the total market.

lumber

Consider two industries: Industry A's profits are high, and industry B's profits are low. Profit-maximizing entrepreneurs are likely to:

move capital from industry B to industry A.

In the short run _____.

new firms do not enter the market

The long run is the period when:

new investment can occur.

The textbook presents some arguments in favor of restricting trade. With respect to the United States, these arguments are usually:

of limited applicability. Not many of the arguments presented applied very well to the United States.

One factor that allows Saudi Arabia to successfully use strategic trade protectionism to increase oil revenues is that:

oil is the only significant export of Saudi Arabia.

When does the competitive process work to minimize total costs of production and achieve the right balance of industries?

only in certain circumstances The invisible hand works in competitive markets.

Every year Sally vaccinates her dog against rabies. Who receives the external benefits of Sally's decision to vaccinate her dog?

other dogs at the dog park that Sally and her dog visit

Consider two industries: Industry A's profits are high, and industry B's profits are low. If the costs of producing output in these two industries is the same, when capital moves from industry B to industry A:

output with high value is gained in industry A, and output with low value is given up in industry B.

Kirsten opened a charming book store in a shopping plaza. Business in other shops in the plaza has increased because of the customers Kristen's bookshop has attracted. Given the external benefits her bookshop generates, if Kristen is selling the market equilibrium quantity of books:

she is selling too few books.

Kirsten opened a charming book store in a shopping plaza. Business in other shops in the plaza has increased because of the customers Kristen's bookshop has attracted. Given the external benefits her bookshop generates, if Kristen is selling her books at the market equilibrium price for books:

she would eliminate a deadweight loss in the market for her books if she sold books at the efficient equilibrium price and quantity.

What is the time before exit or entry can occur?

short run

If a firm's price falls below its average cost, in the absence of sunk costs and uncertainty, the firm will want to:

shut down in the short run if the revenues from producing don't cover the firm's variable costs

A firm may not want to shut down immediately if its profits become negative because:

shutting down does not immediately eliminate all costs.

The Coase theorem

states that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.

A ____ sets the quantity of pollution.

system of tradable pollution permits

A _____ is a tax on imports.

tariff

Which IS an example of protectionism? a. restricting or taxing imports b. tariffs c. domestic workers earning a higher wage than their foreign counterparts d. income tax.

tariffs

Protectionism tends to create a society:

that pits one interest group against another.

If an industry is competitive:

the actions of an individual buyer or an individual seller will not affect the market.

A private cost is a cost borne by:

the consumer or producer

If a firm is earning zero profit:

the firm is covering all of its costs.

What price will a profit-maximizing firm charge if the price elasticity of demand for the firm's product is perfectly elastic?

the market price

Assume the market demand curve is horizontal. The price a profit-maximizing firm in this market will charge is:

the market price.

If a firm is earning zero profit:

the price is equal to the firm's average cost.

When a tariff is levied on a good, two things happen: the quantity of the good produced domestically increases and:

the quantity of the good consumed domestically decreases.

When a tariff is levied on a good, two things happen: the quantity of the good consumed domestically decreases and:

the quantity of the good produced domestically increases.

It is easier for OPEC nations to use strategic trade protectionism to increase oil revenues than it is for the United States to use strategic trade protectionism to increase revenues from computer sales because:

there are fewer substitutes for OPEC-produced oil than there are for U.S.-produced computers. So when OPEC restricts output, the price rises, and so does revenue. If the United States restricted the output of computers, buyers would buy computers from a different nation instead.

If an industry is competitive:

there are many potential sellers.

The United States would have difficulty using strategic trade protectionism to increase revenues because:

there are many substitutes for most U.S.-produced goods.

Firms in a competitive industry will all end up with the same marginal cost because:

they face the same price

When Americans buy goods produced in Mexico:

they pay for it in dollars, which ultimately will be used to buy something from the United States.

The Organization of Petroleum Exporting Countries (OPEC) limits the amount of oil it exports:

to raise prices and revenues from the sale of oil. The demand for oil is likely to be inelastic.

What name is given to the costs necessary to reach an agreement?

transaction costs

The billions of dollars spent in Japan and the European Union to subsidize producers specializing in HDTV:

was probably a mistake.

Command-and-control is the optimal approach to a problem:

when the problem is well understood and success requires rigid compliance.

Suppose your neighbor is in a band, and his band practices late into the night in his apartment. You have a right to peace and quiet, and the music keeps you up all night. Private bargaining between you and your neighbor will be MOST successful at solving this externality problem if:

you offer to pay your neighbor not to have band practices at night so you can sleep.

Assume the price elasticity of demand for a firm's product is perfectly elastic. How many units will the firm sell if it charges a price above the market price for its product?

zero units