ECO101- Final Exam

When a profit-maximizing firm is earning profits, those profits can be identified by

(P - ATC) × Q.

Which of these activities will most likely impose an external cost?

A secretary smokes a cigarette in a crowded break room.

Which of these activities will most likely result in an external benefit?

An elderly woman plants a flower garden on the vacant lot next to her house.

Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports.

False

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

False

If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good.

False

Which of the following statements is correct?

Government should tax goods with negative externalities and subsidize goods with positive externalities.

Which of the following statements about markets is most accurate?

Markets are usually a good way to organize economic activity.

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50.

New firms will likely enter this market to capture some of the economic profits.

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

The firm will immediately stop production to minimize its losses.

Which of the following is not a necessary condition for the Coase theorem?

The government intervenes to internalize the externality

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

True

Markets sometimes fail to allocate resources efficiently.

True

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

True

Which of the following statements about trade is false?

With trade, one country wins and one country loses.

The difference between a corrective tax and a tradable pollution permit is that

a corrective tax sets the price of pollution and a permit sets the quantity of pollution.

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

a corrective tax.

Trade

allows specialization, which reduces costs.

Patterns of trade among nations are primarily determined by

comparative advantage.

When the nation of Mooseland first permitted trade with other nations, domestic producers of sugar experienced a decrease in producer surplus of $5 million and total surplus in Mooseland's sugar market increased by $2 million. We can conclude that

consumer surplus in Mooseland increased by $7 million.

Suppose Iceland goes from being an isolated country to being an importer of coats. As a result,

consumer surplus increases for consumers of coats in Iceland.

A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those policies

enhance equality

Which of the following is not a characteristic of a competitive market?

entry is limited

When the government redistributes income from the wealthy to the poor,

equality is improved, but efficiency is not.

Market failure can be caused by

externalities and market power.

In a market economy, who makes the decisions that guide most economic activity?

firms and households

A long-run supply curve is flatter than a short-run supply curve because

firms can enter and exit a market more easily in the long run than in the short run.

Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the number of domestic jobs. An economist would argue that

foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding.

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

give sellers the incentive to account for the external effects of their actions.

As a general rule, when accountants calculate profit they account for explicit costs but usually ignore

implicit costs

Suppose the world price of a television is $300. Before Paraguay allowed trade in televisions, the price of a television there was $350. Once Paraguay began allowing trade in televisions with other countries, Paraguay began

importing televisions and the price of a television in Paraguay decreased to $300.

If firms are competitive and profit maximizing, the price of a good equals the

marginal cost of production.

In a market economy, government intervention

may improve market outcomes in the presence of externalities.

A cost imposed on someone who is neither the consumer nor the producer is called a

negative externality.

For a firm in a competitive market, an increase in the quantity produced by the firm will result in

no change in the product's market price.

Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles,

other countries have a comparative advantage over Vietnam and Vietnam will import textiles

Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML does not choose the

price at which it sells its butter.

One should be especially wary of the national-security argument for restricting trade when that argument is made by

representatives of industry.

When the nation of Worldova allows trade and becomes an exporter of silk,

residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova rises.

A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x,

social cost = private cost = private value < social value.

Markets are often inefficient when negative externalities are present because

social costs exceed private costs at the private market solution.

​Which of the following industries has a marginal cost that is close to zero?

software

A paper plant produces water pollution during the production process. If the government forces the plant to internalize the negative externality, then the

supply curve for paper would shift to the left.

If education produces positive externalities, we would expect

the government to subsidize education.

The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost.

In an economy in which decisions are guided by prices and individual self-interest, there is

the potential to achieve efficiency in production.

The marginal benefit Susie gets from purchasing a third pair of gloves is

the total benefit she gets from purchasing three pairs of gloves minus the total benefit she gets from purchasing two pairs of gloves.

The opportunity cost of going to college is

the value of the best opportunity a student gives up to attend college.

A common argument in favor of restricting international trade in good x is based on the premise that

trade restrictions can be useful when one country bargains with its trading partners.

Trade enhances the economic well-being of a nation in the sense that

trade results in an increase in total surplus.

In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the losers.

true

​If we know that Canada exports maple syrup, we can conclude that maple syrup consumers in Canada are worse off than they would be in the absence of trade.

true

Suppose Brazil has an absolute advantage over other countries in producing almonds, but other countries have a comparative advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil

will import almonds

In the long run, each firm in a competitive industry earns

zero economic profits