ECO 101 Final Part 1 Practice Questions
How does a consumer's budget set differ from his budget constraint?
a. A budget set refers to all of the possible bundles of goods and services a consumer can purchase, while a budget constraint is limited to the bundles he can purchase using all of his income b. A budget set is simply the collection of the many budget constraints a consumer faces at different points in time. c. A budget constraint refers to all of the possible bundles of goods and services a consumer can purchase, while a budget set is limited to the bundles he can purchase using all of his income d. There is no difference at alllong dash—the terms "set" and "constraint" are interchangeable
What is meant by comparative statics? Explain with an example
a. A change in an outcome, such as consumption, that results from a change in a factor, such as the price b. Changes in net benefits when a person switches from one alternative, such as consumption, to another, such as no consumption. c. Equilibria across multiple markets, such as labor markets, financial markets, and service markets. d. The effect of the best feasible choice, such as consumption, on its marginal cost.
Which of the following common features do monopolistically competitive markets and monopolies share?
a. Barriers restrict new firms from entering b. Firms face downward-sloping demand curves c. Consumers with market power set prices. d. Producers with no market power set their own prices.
How is a monopolistically competitive market similar to a perfectly competitive market?
a. Both have differentiated products with close substitutes b. There are no restrictions on the entry of new firms c. Both have homogeneous products with no close substitutes d. Producers with market power set their own prices
What approach would be the least effective way to deal with the overfishing problem?
a. Charge a tax per fish caught. b. Enact a law limiting the number of fish that can be caught per person c. Limit who is allowed to fish in the lake d. Restock the lake more often with fish
How is a Nash equilibrium different from a dominant strategy equilibrium?
a. For a given game, there can only be one dominant strategy equilibrium but multiple Nash equilibriums b. For a given game, there can only be one Nash equilibrium but multiple dominant strategy equilibriums c. Nash equilibriums are mathematical, while dominant strategy equilibriums are quantitative d. Dominant strategy equilibriums are mathematical, while Nash equilibriums are quantitative
What is the problem with the argument that infant industries need to be protected from foreign competition?
a. Foreign companies may do a better job of providing the good or service b. Since the stock of deadweight losses builds up over time, the total lost surplus will never be made up c. Because the world price will continue to drop, the domestic industry will never catch up in any case d. Changing a comparative advantage is nearly impossible and so the domestic industry will not likely survive anyway e. Starting a company in isolation may deprive it of "technological spillovers" that its competitors, all located near one another, may enjoy.
People who need life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why can't producers of life-saving drugs charge any price that they wish to?
a. If the producers of life-saving drugs raise the price, the price effect always dominates and total revenue falls b. Monopolists that sell life-saving drugs face a horizontal supply curve c. A monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves d. The government will force monopolies to lower drug prices if they charge too much
How has the pattern of trade changed in the United States since 1960?
a. Imports have grown faster than exports, and the United States has remained a net exporter. b. Exports have grown faster than imports, and the United States has become a net importer c. Exports and imports have grown at the same rate, and the United States has remained a net exporter d. Imports have grown faster than exports, and the United States has become a net importer e. Exports have grown faster than imports, and the United States has remained a net exporter
What is backward induction?
a. It involves choosing one particular action for a situation b. The methodology supporting an extensive-form representation of a game c. The theory that represents extensive-form games when the Nash equilibrium specifies the order of play d. The procedure of solving an extensive-form game by first considering the last mover's decision.
Which of the following is true regarding the concept of causation?
a. It states that if event A causes event B, then event B must also cause event A. b. It states that if event A causes event B, then event B cannot have a causal effect on event A. c. For any two events that occur, economists state that the first must have caused the second, since it came first. d. It describes how one event can bring about change in another.
How does microeconomics differ from macroeconomics?
a. Macroeconomics is the study of how individuals and firms make choices, while microeconomics is the study of all state and local government policies b. Microeconomics is the study of how individuals and firms make choices, while macroeconomics is the study of all state and local government policies. c. Macroeconomics is the study of how individuals, households, firms, and governments make choices, while microeconomics is the study of the economy as a whole. d. Microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole.
In the market for backpacksbackpacks, suppose Green's price elasticity of demand is 0.30.3, Smith's price elasticity is 1.31.3, and the price elasticity of all the other consumers is greater than 0.30.3 but less than 1.31.3. Could the market price elasticity be less than 0.30.3 or greater than 1.31.3?
a. No, it must lie between 0.30.3 and 1.31.3. b. Yes, it can be a multiple or fraction of the average of the elasticities of individual consumers
Are all efficient outcomes also equitable? Explain.
a. No, the only efficient outcome that is equitable is the one that results in an equal distribution of goods across society. b. There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgments are made. c. No, only those efficient outcomes that produce a rich-to-poor income ratio less than 5.0 are equitable. d. Yes, if an outcome is efficient, then by definition, it maximizes social surplus and consequently must be equitable.
Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry's HHI is 6,850. Is this information sufficient to conclude that the aluminum market is less competitive than the market for refrigerators?
a. Not necessarily. It could indicate increased competition because firms could be more profitable b. Yes, because there are more firms in the refrigerator market. c. No, because close substitutes exist in the refrigerator market. d. Not necessarily. Although the HHI indicates a smaller number of firms, those firms may compete intensely
What role do prices play in the snow shovel market?
a. Prices would signal when price gouging was taking place so authorities could step in to prevent it b. In such a natural disaster, prices would not efficiently guide the invisable hand. c. It would incentivize distributors to ship more snow shovels into the area to meet the increased demand d. In an emergency, prices must remain fixed; therefore, prices do not play a role in this case
Priceline is a Web site that sells flights and hotel bookings based on the price that a consumer states that he or she is willing to pay. So consumers who want to book a flight or a hotel room need to tell Priceline the price that they are willing to pay, and the seller lets Priceline know whether it is willing to accept that price. Which of the following outcomes is likely using this form of pricing?
a. Producer surplus will fall, since some price offers by consumers will be below the price that Priceline would have charged, causing consumer surplus to rise b. Producer surplus will rise, since some price offers by consumers will be higher than the price that Priceline would have charged, causing consumer surplus to shrink c. Consumer and producer surplus will fall, since without a set price for the good neither side will achieve their ideal price level d. Consumer and producer surplus will rise, since consumers will only offer prices they are willing and able to pay, while firms will only accept offers that are beneficial to them
Identify the key assumption(s) made about a Nash equilibrium. (Check all that apply.)
a. Some players are smarter than others b. All players understand the game and the payoffs associated with each strategy c. All players understand that other players understand the game d. Some players will occassionally behave illogically
To restrict a firm's monopoly power, why can't antitrust authorities just set a floor or a ceiling in the market?
a. The government does not have the power to dictate what a firm can charge; it can only stop mergers. b. It is difficult to set a fair price, so regulators do not get involved in the pricing decisions of any monopolists. c. Floors or ceilings lead to inefficiency and deadweight loss, which can be avoided if the monopoly sets its own price. d. It is difficult to set a fair price, and even if regulators did, the firm would then have no incentive to innovate.
Why might game theory not always be an accurate predictor of real-world situations?
a. We do not always know the exact payoffs, since payoffs involve attitudes and feelings as well as monetary gains b. Game theory assumes all players have a dominant strategy, which is not always the case c. Players are not usually as cunning, wise, or experienced as game theory would predict d. Models and payoff matrices demonstrate that game theory is always an accurate predictor of the real world
What is not an example of a real life zero sum game?
a. free market transaction b. thermonuclear war c. heads-or-tails d. rock-paper-scissors
How do economic profits and losses allocate resources in an economy?
a. When an industry's goods (or services) become more highly valued by society, positive economic profits emerge for firms in the industry, attracting new firms and their resources to that industry b. Businesses always seek to improve their profits and in so doing, they move resources into the production of goods and services that society values the highest c. When an industry's goods (or services) become less highly valued by society, firms in the industry suffer losses and thus become motivated to put their resources to more profitable uses elsewhere. d. all the above
Suppose you have a flashlight that takes three batteries to power it. If you buy the batteries one at a time, for which purchase will diminishing benefits set in?
a. When you buy the first battery b. when you buy the second battery c. when you buy the third battery d. when you buy the fourth battery
Georgina, an economics student, notices that the price of oiloil has been increasingincreasing steadily. She also observes that the total consumption of oiloil has actually increasedincreased. Georgina concludes that this is an exception to the Law of Demand. Do you agree?
a. Yes, the Law of Demand is often broken, just like most other laws in society. b. Yes, the Law of Demand only holds when "all else is constant." Since such constancy seldom holds in the real world, the Law of Demand likewise seldom holds. c. No, she is mistakenly assuming a stationary demand curve when most likely she is observing changes in the equilibrium caused by an increasingan increasing quantity supplied and shifting demand. d. No, the Law of Demand always holds; however, the government's failure to enforce it makes it appear superficial.
Suppose there are three activities in which you could participate: 1. The opportunity cost of the first activity is missing 3 hours of work. 2. The opportunity cost of the second activity is missing a concert that you have tickets to. 3. The opportunity cost of the third activity is missing the afternoon nap that you take every day. Given this information, for which of these activities would you be able to compare opportunity costs?
a. You can only compare activities 1 and 2, since they can both be easily stated in terms of dollars forgone b. You can compare all the activities after you translate all the missed activities into dollar amounts c. You can only compare activities 1 and 3, since they both relate to an amount of time that is lost d. You cannot compare any of these opportunity costs, since they each are measured in different units
When comparing the graph of your ATC curve for a natural monopoly with that of a firm in perfect competition, we see that ____________.
a. a natural monopoly has a downward-sloping ATC curve, while a firm in perfect competition has a U-shaped curve. b. a natural monopoly has a U-shaped ATC curve, while a firm in perfect competition has a downward-sloping curve c. a natural monopoly has an upward-sloping ATC curve, while a firm in perfect competition has a U-shaped curve d. the ATC curves are identical
In a perfectly competitive market, sellers _________ and buyers _________.
a. are able to charge more than the market price; are able to pay less than the market price. b. are able to charge more than the market price; cannot pay less than the market price. c. cannot charge more than the market price; are able to pay less than the market price. d. cannot charge more than the market price; cannot pay less than the market price.
The last firm to enter earns ___________.
a. average economic profits. b. positive economic profits. c. the greatest economic profits. d. zero economic profits.
Economists mostly use optimization in differences, as opposed to optimization in levels, because ____________
a. calculating cost-benefit ratios is complicated b. examining the net benefits of alternatives is counterintuitive c. contrasting the total benefit of alternatives is simple d. comparing different features of alternatives is intuitive
Externalities are called market failures because they ___________.
a. cause markets to overproduce when there is inflation b. cause markets to produce suboptimal social outcomes c. raise prices in an unfair manner for the poor d. raise prices for everyone
Empiricism is a principle in economics that _________.
a. collects data using the scientific method b. gathers data using surveys c. uses data to test economic models d. aggregates data to create graphs
When a firm exercises its monopoly power, the cost to society is the ____________.
a. deadweight loss b. lost consumer surplus c. firm's economic profit d. increased producer surplus
An individual or a firm can internalize an externality by ___________.
a. doubling the size of the externality b. ignoring the externality c. disputing that an externality exists d. paying the cost of the externality
The concept of diminishing marginal benefits means that __________
a. each additional unit consumed is worth less to you than the previous one. b. the more of a good that you consume, the lower is your overall benefit from that good. c. as you consume more of a good, your willingness to pay for that good increases faster than the benefit you receive. d. each additional unit consumed is worth more to you than the previous one, but the additional benefit grows at a diminishing rate.
If demand shifts to the left (decreases), the last firm that entered ____________.
a. earns negative economic profits and thus undertakes cost-cutting measures to return to profitability. b. earns negative economic profits and so exits the market c. earns positive economic profits, leading to new firms entering the market. d. is indifferent between producing or exiting the market and so the outcome is indeterminate
Which of the following would not be considered one of the possible opportunity costs of a recent high school graduate starting college right awaystarting college right away.
a. getting a full - time job b. using your college fund to buy a new car c. spending a year backpacking across Europe d. none of these would be considered an opportunity cost e. all of these is a possible opportunity cost
Which of the following is not an example of causation?
a. graduating college will lead to being smarter b. washing your car will lead to raining that day c. smoking cigarettes will lead to lung cancer d. all of the above are examples of causation
Which of the following is the best example of causation (versus correlation)?
a. ice cream sales and the number of drownings b. women's skirts get shorter and the stock market goes up c. the groundhog sees its shadow and winter lasts longer d. oil prices go up and gasoline prices go up
In the model of an oligopoly with identical (homogeneous) products, the price is likely to be ___________
a. less than minimum average cost b. greater than marginal revenue c. equal to marginal cost d. equal to variable costs
In a perfectly competitive market, if one seller chooses to charge a price for its good that is slightly higher than the market price, then it will _________
a. lose all or almost all of its customers b. see a small decrease in its number of customers c. see no change in its number of customers d. all of the above are equally likely
When determining which firms enter the market first, we look at ____________.
a. marginal costs b. fixed costs c. average total cost d. average variable cost
Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where ___________.
a. marginal revenue equals marginal cost b. price equals marginal cost c. marginal cost equals zero d. price equals marginal revenue.
Free riding occurs because _________.
a. people usually think about what is in the public interest before pursuing what is in the private interest. b. people sometimes pursue their own private interests and don't contribute voluntarily to the public interest. c. in a democratic society you cannot force anyone to do something that they are against doing. d. there is perfect information in the market so everyone knows how much value each person puts on an item or activity
Which of the following is not a characteristic of monopoly?
a. price-maker b. market power c. a single seller d. produces identical goods
health insurance
a. private goods b. common pool resources c. club goods d. public goods
library's collection of e-books
a. private goods b. common pool resources c. club goods d. public goods
mosquito program
a. private goods b. common pool resources c. club goods d. public goods
radio spectrum
a. private goods b. common pool resources c. club goods d. public goods
video on youtube
a. private goods b. common pool resources c. club goods d. public goods
All firms in a perfectly competitive market are said to be __________.
a. profitable in the long run. b. price leaders. c. price takers d. price neutral
The Law of Supply states that, in most cases, the quantity supplied of a good ___________ when the price of the good rises. This means we would expect a typical supply curve to be___________.
a. rises; downward-sloping b. rises; upward-sloping c. falls; downward-sloping d. falls; upward-sloping
A production possibilities curve (PPC) ___________.
a. shows the relationship between the maximum production of one good for a given level of production of another good b. shows the combinations of inputs that can create a specific level of output c. shows the trade-off between price and quantity of produced goods or services d. determines the levels of imports and exports within a country
In a monopolistically competitive market, a firm earning negative economic profit in the short run will ____________
a. shut down only if price is less than average variable cost b. shut down to avoid losses c. produce only if price is greater than marginal cost d. produce when revenue is positive
A zero-sum game is when ___________.
a. the Nash equilibrium is dominant b. the outcome of a payoff matrix is uncertain c. the dominant strategy is a payoff d. the sum of the payoffs is zero
The concept of opportunity cost is a measure of _________.
a. the benefit that you receive from doing any activity. b. the dollar amount you must pay to do any activity c. all the possible alternative uses of a resource d. the value of the best alternative use of a resource
Optimization is the process that describes __________.
a. the budgeting process for households b. how to obtain relevant data c. how to maximize wealth d. the production of resources e. the choices that governments make
Which of the following is not an item studied under macroeconomics?
a. the inflation rate b. the unemployment rate c. economic output d. firm profits
A consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because ___________.
a. the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off. b. an inequality between these ratios implies that she has insufficient income to achieve maximum satisfaction. c. her preferences become distorted and therefore invalid when the marginal benefits per dollar are unequal. d. any shift in consumption toward either good will violate her budget constraint.
Optimization in levels examines ___________, while optimization in differences analyzes ____________.
a. total benefits of alternatives; net benefits of alternatives. b. total net benefits of feasible alternatives; total net benefits of infeasible alternatives. c. marginal benefits of alternatives; the change in marginal benefits. d. total net benefits of alternatives; the change in net benefits. e. total benefits of alternatives; total costs of alternatives.
A Nash equilibrium is ___________.
a. when players choose strategies that are best responses to the strategy of others b. when players pick their actions at the same time c. one best response to every possible strategy of the other player(s) d. when prisoners confess because of unfair sentencing guidelines, which lead to heterogeneous dominant strategies
When can backward induction be used to arrive at the equilibrium for a game? In the case of,
a. zero sum games b. extensive form games c. complex games d. strategic form games
Is a player's best response in a game the same as his dominant strategy?
a. Yes, if a player's best responses depend on the strategy choices of other players, then a player's best response will be the same as his dominant strategy. b. Yes, if a player has a dominant strategy, then it is his best response, and every best response is always a dominant strategy c. No, the key concept of game theory is finding a best response in each game, so that each best response leads to a Nash equilibrium d. Not necessarily. If a player has a dominant strategy, then it is his best response; however, every best response is not always a dominant strategy
In a competitive market, a supply curve shows all the price and quantity combinations at which firms will produce. Does a monopoly face a similar supply curve?
a. Yes, since monopolies and competitive firms base production on a given market price that they cannot control b. No, a monopoly has a horizontal supply curve that is located where marginal revenue equals marginal cost. c. No, a monopoly has a vertical supply curve that is located where marginal revenue equals marginal cost d. No, a monopoly is a price-maker and its production decisions are determined by its downward-sloping demand curve