ECO Final
Pollution permit policies achieve an ______ outcome because _____.
efficient; firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits. Selling pollution permits promotes efficiency because firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits, so that the reductions in pollution will be accomplished by firms that can do so the most cheaply.
Perfect competition is socially efficient and monopoly is not because under perfect competition price is ______ while under monopoly price is ______.
equal to MC; greater than MC At a monopolist's profit-maximizing level of output, price is greater than marginal cost. Thus, the marginal benefit to society of the last unit produced is greater than its marginal cost, implying that the monopolist is producing less than the socially optimal level of output. In contrast, at a perfectly competitive firm's profit-maximizing level of output, price is equal to marginal cost.
equilibrium is at $6-4 At $9 D-1, S-6 At a price of $9, the market will experience ______________ in the amount of __________ units.
excess supply, 5 units At a price of $9 demanders will want to purchase 1 unit and suppliers will want to supply 6 units, a difference of 5 units.
Suppose that the demand for electricity has been found to be price inelastic. The most likely explanation for this finding is that:
few substitutes for electricity exist. Goods with few substitutes have lower price elasticity because buyers cannot readily shift to another product if the price of the good rises.
Suppose males place less importance on the social approval of their job and more on the income they receive. The gender wage gap would therefore be ______ than if this difference did not exist because of ______.
larger; compensating wage differentials To the extent that females value social approval more, they will be willing to accept jobs with lower pay, so all else equal, the wage gap between males and females will be larger.
A swing at a popular, unfenced public park is:
nonexcludable. Since the park is unfenced, people cannot be excluded from using the swing, so the swing is nonexcludable. The swing is not, however, nonrival because if one person uses the swing, then others cannot enjoy the swing at the same time.
Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. EXTREME-L EXTREME-R X Y Z 0 25 50 75 100 To an economic naturalist, this model helps explain why political candidates:
move toward more centrist positions during campaign season. During a campaign candidates will attempt to get votes from voters who are in the middle of the political spectrum.
Pat's total utility after eating 99 Reese's Peanut Butter Cups was greater than his total utility after eating 100 Reese's Peanut Butter Cups. Therefore, Pat's marginal utility from the 100th peanut butter cup was:
negative. Since Pat's total utility was lower after he ate the 100th Peanut Butter Cup, it must have been true that the marginal utility of the 100th peanut butter cup was negative.
Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. Economists would consider the environmental damage that results from the production of cotton to be a(n):
relevant cost of production. Environmental damage is a cost of production, even if the firm does not have to pay this cost.
Morgan lives in San Francisco and likes to dine out. Morgan has noticed that prices at restaurants near popular tourist destinations in the city tend to be higher than at restaurants of the same quality in other neighborhoods. One reason for this is that:
search costs are higher for people who are unfamiliar with the area. The cost of acquiring information will be higher for tourists who are not familiar with their surroundings.
For the Fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat 100 meals, your marginal cost of the 100th meal is:
$0. The non-refundable $600 you paid for your meal plan is a sunk cost; no matter how many meals you eat up to 150, your marginal cost is 0.
Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.
$13 When Q = 100, total cost = 300 + 10 × 100 = 1,300. Average total cost is total cost divided by Q, here 1,300/100 = 13.
The table below shows a pizzeria's fixed cost and variable cost at different levels of output. Pizza's sell for $20 each. #-FC-VC 0-500-0 25-500-150 50-500-250 75-500-450 100-500-850 125-500-1650 When the pizzeria makes 125 pizzas per day, its total revenue is:
$2,500 Total revenue equals price × quantity, which in this case is $2,500 = $20 × 125.
Consider a town with three residents. The residents' demand curves for various acres of a public park are shown below. A B C 12 12 - 12 10 9 - 9 - 8 7 - 7 - 6 - 5 - 5 - 4 - 3 - 3 - 2 - 1 - 2 - 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 The public's willingness to pay for the 2nd acre of parkland is ______.
$26. The public's willingness to pay for the 2nd acre is $5 + $12 + $9 = $26.
Alison decides to play the lottery. She has a 5% probability of winning $100 and a 95% probability of winning zero. The expected value of playing the lottery is:
$5. The expected value of this gamble is: (0.05 × $100) + (0.95 × $0) = $5.
Refer to the figure below. What is the equilibrium price of bananas in this market? intercept is at $5-5
$5/pound At a price of $5 per pound, the quantity demanded equals the quantity supplied, so this is the equilibrium price.
Suppose Sarah owns a small company that makes wedding cakes. The table below shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. 0-100 1-180 2-220 3-300 4-400 5-520 6-660 When Sarah produces 2 cakes per day, her average variable cost is ______.
$60 When Sarah produces 2 wedding cakes per day, her total cost is $220, and her fixed cost is $100 (her total cost when output is zero), so her variable cost is $120. Thus, her average variable cost is $60 (AVC = VC/Q = $120/2).
A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. # GOATS $ 2-Y OLD $INCOME 1 80 30 2 75 25 3 70 20 4 65 15 5 55 5 If the villagers purchase the socially optimal number of goats and bonds, then total village income will be ______.
$70 The villagers should purchase 3 goats and 2 bonds. The income from the goats will be 3 × $20 = $60, and the income from 2 bonds will be 2 × $5 = $10, for a total village income of $70.
The marginal utility of the 5th apple is: 1-20 2-35 3-45 4-50 5-45
-5 Since total utility decreases from 50 to 45 when the 5th apple is consumed, the marginal utility of the 5th apple is -5.
Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. BJF CNH ELF At this monopolist's profit-maximizing level of output, its total revenue equals the area:
0FJB MC = MR at F units of output, and from the demand curve we can see that at that level of output, the monopolist will charge a price of B. Total revenue equals price times quantity.
Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below. PROCESS A-10 B-8 C-6 D-4 E-2 COST -A $750 $800 $1000 $1400 $2000 COST-FC $500 $750 $1200 $2200 $4000 Suppose the firms are both currently using process A. If the government imposes a tax of $110 per ton of smoke emitted, a total of ______ tons of smoke will be emitted each day, and the total cost to society of this policy will be ______ per day.
16; $250 With a tax of $110 per ton, Acme will adopt process C and FirmCo will stay with process A. The cost to Acme of moving from process A to C is $250.
The figure below shows Ava's demand curve for days in the hospital. The marginal cost of an additional day in the hospital is $200. PRICE 400 - 300 - 200 ----------------+---------------------- S 100 - 0 1 2 3 4 D QUANTITY If Ava had to pay the entire marginal cost of spending a day in the hospital, then she would choose to stay ______ day(s).
2 Given her demand curve, Ava would choose to stay 2 days at a price of $200 per day.
The figure below shows a single consumer's demand for ice cream at the student union. PRICE 4 - 3 - 2 - 1 - D 0 1 2 3 4 5 6 7 8 QUANTITY Fran is one of the students whose demand curve for ice cream is shown above. When price is $4.00, Fran demands ______ scoops a week, and when price is $2.00, Fran demand ______ scoops.
2; 6 The answer can be gleaned from reading the graph.
Paper Pushers Inc. hires workers in a competitive labor market. Apart from labor, the company has no other variable inputs. The company's hourly output varies with the number of workers hired, as shown in the table below. 0-0 1-40 2-75 3-105 4-125 5-140 6-150 7-155 If each page sells for $2 and the market wage is $15 per hour, then this firm will hire ______ workers per hour.
6 If each page sells for $2, then the VMP of the sixth worker is $20 per hour (= 10 × $2), and the VMP of the seventh worker is $10 per hour (= 5 × $2). So if the market wage is $15 per hour, then the firm will hire 6 workers.
Suppose the market consists of 3 individuals: Citizen A, Citizen B and Citizen C. A B C 10 9 10- 8 7 8 - 6 - 5 - 6 - 4 - 3 - 4 - 2 - 1 - 2 - 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 If the good shown on the graphs is a private good, then at a price of $4, market demand is ______ units.
60 The quantity demanded by Citizen A is 20, by Citizen B is 10, and by Citizen C is 30, so the total quantity demanded is 60.
Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below. PROCESS A-10 B-8 C-6 D-4 E-2 COST -A $750 $800 $1000 $1400 $2000 COST-FC $500 $750 $1200 $2200 $4000 If pollution is unregulated, the two firms will produce using process ______, and a total of ______ tons of smoke will be emitted each day.
A; 20 In the absence of regulation, each firm would choose process A, which is the cheapest, and each would emit 10 tons of smoke each day, for a total of 20 tons.
Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q. Generic Industries: TC = 500 + 3Q. Which of the following statements is true?
Acme and Generic have the same marginal cost. Both firms will experience a $3 increase in total cost for each one-unit increase in Q.
It is spring, and several graduates of State U are seeking employment. State U graduates have evenly distributed GPAs, from 2.0 to 4.0, with an average GPA of 3.0. The largest employer in town, Acme Dynamite, is interviewing candidates, hoping to hire a few hard workers. While Acme does not require students to submit a transcript with their applications, the hiring officer believes that high GPAs signal a willingness to work hard. Suppose that all State U students have the same academic ability when they enter college and do not learn anything in college that will be useful to them while working at Acme. Students only differ only in their willingness to work hard and study for their classes. In this case:
Acme will use a student's GPA as a signal of the student's willingness to work hard. Having a high GPA is a credible signal of a student's willingness to work hard because those who are not willing to work hard will have a harder time getting a high GPA
Which of the following is an example of a positional arms control agreement?
Campaign spending limits Because elections are determined by relative votes, there is an incentive for candidates to spend ever-increasing amounts of money on campaigns. Spending limits can keep that tendency in check.
The table below shows the relationship between the number of times you get your car washed each month and your total monthly benefit from car washes. Each car wash costs $15. 0-0 1-20 2-36 3-48 4-56 5-60 What is the marginal cost of the 5th car wash each month?
Each car wash costs $15, so the marginal cost of a car wash is always $15.
Which of the following would not be studied in macroeconomics?
How a sharp increase in gasoline prices is likely to affect SUV sales. Macroeconomics is the study of the performance of national economies and the policies that governments use to try to improve that performance. SUV sales are directly related to individuals' choices about what to consume, and so are a microeconomic topic.
Refer to the figure below. If the price rises from $10 to $14, what will happen to the price elasticity of supply? PRICE 14 C 12 10 B 8 6 A 4 2 0 100 200 300 400 500 600 QUANTITY
It decreases. The price elasticity of supply computed as (P/Q) × (1/slope). Note that as price rises from $10 to $14, P/Q falls, and since slope is constant along a linear supply curve, this implies that the price elasticity of supply falls as price rises from $10 to $14.
Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for:
Moe to eliminate his snoring. It would cost Moe $50 per month to stop the snoring. It would cost Curly $150 a month to put up with the snoring. Renting a separate apartment would cost Curly $100 more than splitting an $800 per month rent bill.
Which of the following is NOT an example of the hurdle method of price discrimination?
Permanently reducing all prices by 10%. Everyday low prices are available to all shoppers; the other discounts require overcoming a hurdle.
You have two options for how to spend the afternoon. You can either go see a movie with your roommate or work as a tutor for the Math Department. From experience, you know that going to see a movie gives you $20 worth of enjoyment, and with your student discount, a movie ticket only costs $12. If you spend the afternoon working as a math tutor, you will get paid $45. On a typical day, you wouldn't be willing to spend the afternoon working as a math tutor for less than $35. What is your opportunity cost of seeing a movie this afternoon?
The opportunity cost of seeing the movie is the $12 you pay for a ticket, plus the foregone $10 in economic surplus you would have received from working as a tutor.
Suppose that Chris had been charging $1.00 per pound for potatoes. When Chris lowered the price to $0.90 per pound, his total revenue fell. When Chris raised the price to $1.10, total revenue also fell. Which of the following could explain this?
The price elasticity of demand for potatoes is 1 at a price of $1.00 per pound. Total revenue is highest when demand is unit elastic (that is, when the price elasticity of demand is equal to one).
Suppose that the equilibrium price of French fries rises while the equilibrium quantity falls. The most consistent explanation for these observations is:
a decrease in supply of french fries with no change in demand A decrease in supply will cause price to rise and quantity to fall.
Which of the following best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand curve would shift to the right, leading to:
a higher equilibrium price in the short run and entry into the market in the long run. The demand shift increases price and leading to positive economic profit. In the long run, this economic profit will prompt new firms to enter the market.
price X-X X-W X-Z X-Y QUANTITY Refer to the figure above. Assume the market is originally at point W. Movement to point Z is a combination of:
an increase in supply and an increase in demand. Movement from W to Z is a rightward shift in both demand and supply.
Pure public goods:
are frequently provided by the government, and are sometimes provided by private firms. Not all public goods should be provided by the government, and not all goods and services provided by the government are public goods. Nonetheless, public goods are often (but not always) provided by the government.
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. OPEC M CHEAT ABIDE E CHEAT X ABIDE In the Nash equilibrium of this game:
both Mexico and OPEC cheat on the agreement. Mexico's dominant strategy is to cheat. If Mexico cheats, OPEC is better off cheating.
Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. AMY Y 25-T, 225-A 300-T, 200-A TRACY X 75-T,150-A AMY Z 125-T, 125-A If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, then Amy would commit to the ______ branch and Tracy would choose the ______ branch.
bottom; top If Amy commits to choosing the top branch, then Tracy will choose the bottom branch and Amy will get 150, but if Amy commits to choosing the bottom branch, the Tracy will choose the top branch and Amy will get 200. So, Amy it's in Amy's interest to commit to the bottom branch, and Tracy will respond by choosing the top branch.
If resources are misallocated in a perfectly competitive market, then in the long run profit opportunities will:
bring about a more efficient allocation of resources. In a perfectly competitive market, misallocations of resources are often remedied through the self-interested actions of buyers and sellers.
If the cross-price elasticity of demand between two goods is -1.2, then the two goods are:
complements. The cross-price elasticity of demand between complements is negative: an increase in the price of one will lead to a decrease in demand for the other.
One reason for the ________ slope of the demand curve is that as prices fall ________.
downward; fewer people find that the price equals their reservation price. We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price. As prices fall, the price becomes lower than people's reservation price.
If the owners of a business are receiving total revenues just sufficient to cover all of their explicit and implicit costs, then they are:
earning a normal profit. If owners of a business are receiving total revenues just sufficient to cover all their explicit and implicit costs, then they are earning zero economic profit, or a normal profit.
One thousand adults live in Milltown. Every day, they all leave work at 4:30 p.m., arrive home at exactly 5:00 p.m., and go to bed at 9:00 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. To get a donation, they must call Milltown's residents after they get home from work but before they go to bed. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. To an economic naturalist, this scenario would explain why:
fundraising calls typically occur shortly after people arrive home from work. Economic naturalists use economic theory to explain everyday observations. The familiar calls shortly after people arrive home from work can be explained by firms clustering in their efforts to find people at home at the end of the day.
Suppose that there is not enough parking at an urban university. Sometimes students come to campus, spend a few minutes searching for a parking spot, and then decide that going to class isn't worth the effort of continuing to search for a parking spot, so they go home. Assume that all professors give midterm exams on the same day. You would expect the optimal amount of time spent searching for a parking spot on that day to _____ because ______.
increase; the marginal benefit of search is higher The benefit of finding a spot will be higher on that day because students have to go to class to take their midterm, so students would engage in more search.
Relative to a monopolist charging a single price to all consumers, price discrimination ______ total economic surplus.
increases All else equal, a monopolist that price discriminates will produce closer to the socially optimal level of output than will a monopolist that charges a single price to all consumers.
Paper Pushers Inc. hires workers in a competitive labor market. Apart from labor, the company has no other variable inputs. The company's hourly output varies with the number of workers hired, as shown in the table below. 0-0 1-40 2-75 3-105 4-125 5-140 6-150 7-155 The VMP of the sixth worker is ______ than the VMP of the fourth worker because ______.
less; of the law of diminishing returns. Because of the law of diminishing returns, the marginal product of labor is decreasing. For example the marginal product of the sixth worker is 10 pages per hour, and the marginal product of the fourth worker is 20 pages per hour. Since all pages sell for the same price, this implies that the value of the marginal product of labor will be lower for the sixth worker than for the fourth worker.
A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. # GOATS $ 2-Y OLD $INCOME 1 80 30 2 75 25 3 70 20 4 65 15 5 55 5 When the each villager decides how to invest based on his or her narrow self-interest, total village income will be ______ when the village collectively decides how to invest.
lower than If the villagers decide how to invest based on their own narrow self-interest, they will not account for the fact that sending a goat out onto the commons entails an external cost because it lowers the price at which other villagers can sell their goats. This problem does not arise when the village collectively decides how to invest.
A perfectly competitive firm's supply curve is the portion of its ______ cost curve that lies above its ______ cost curve.
marginal; average variable A perfectly competitive firm's will always choose the level of output such that the marginal cost is equal to price. If price is below the minimum of the average variable cost curve, however, it will shut down. Thus, a perfectly competitive firm's short run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.
Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it's clear that this firm:
should not shut down if its total variable cost is less than $750. A firm will only shut down if its total revenue is less than its total variable cost. If this firm produces 500 units of output and the price of each unit is $1.50, then we know this firm's total revenue is $750. Thus, this firm should not shut down if its total variable cost is less than $750.
In the market for coffee, for many consumers:
tea is a substitute. A substitute is a good for which demand will increase if the price of a related good increases. When the price of coffee increases, demand for tea increases.
Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that:
the external cost of using diesel fuel is greater than 10 cents. With conventionally-sloped demand and supply curves, a vertical shift upward in cost of x cents will lead to a new equilibrium price that is less than x cents, so an observed price increase of 10 cents must have been caused by a vertical shift greater than 10 cents.
If the elasticity of labor demand is greater than one, then imposing a minimum wage above the equilibrium wage will cause:
the firms' total wage bill to fall. If the demand for labor is elastic, then a 1 percent increase in the wage rate will result in a more than 1 percent decrease in employment, so firms' total wage bill will fall.
Suppose that the price of doughnuts decreases and that doughnut-holes are a by-product of producing doughnuts. One would expect:
the supply of doughnut holes to decrease. A reduction in the price of doughnuts will lead to fewer doughnuts supplied. Since doughnut holes are produced at the same time as doughnuts, there will be fewer doughnut holes supplied at every price.
Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. In deciding what kind of car to buy, individuals:
will have a strong incentive buy large cars because large cars are safer than small cars. Everyone faces an individual incentive to increase car size to improve his or her odds in the event of a collision.
Suppose Sarah owns a small company that makes wedding cakes. The table below shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. 0-100 1-180 2-220 3-300 4-400 5-520 6-660 If Sarah's fixed costs double, then in the short run, her profit-maximizing level of output:
will not change. Since a change in fixed cost will have no effect on the cost of producing an additional unit of output, Sarah's profit-maximizing level of output will not change.
