ECON 102 WOOTEN FINAL EXAM
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
What do economists mean by scarcity?
Economists mean that unlimited wants exceed limited resources.
How do property rights affect externalities and market failure?
Externalities and market failure will result from the difficulty of enforcing property rights.
Microeconomics is most likely to include the study of
Firm interaction
In England during the Middle Ages, each village had an area of pasture, known as a commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used optimally?
Grazing created a negative externality, resulting in the commons being overused.
Which type of tax raises the most revenue for the federal government?
Individual Income
Briefly explain whether you agree with the following statement: "A lower price in a market always increases economic efficiency in that market."
I disagree, because economic efficiency declines if price falls below the market equilibrium.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P isprice, Q isoutput, and ATC is average total cost.
Which type of tax raises the most revenue for state and local governments?
Sales tax
Suppose that a large oil field is discovered in Michigan. By imposing a tax on the oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in Michigan?
The quantity of labor supplied in Michigan will decrease if the income effect is larger than the substitution effect.
Briefly explain whether you agree with the following statement: "If consumer surplusLOADING... in a market increases, producer surplusLOADING... must decrease."
The statement is incorrect. Consumer surplus (and producer surplus) could increase by decreasing deadweight loss.
A student makes the following argument: "When a market is in equilibrium, there is no consumer surplusLOADING.... We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.
The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.
Why are firms willing to accept losses in the short run but not in the long run?
There are fixed costs in the short run but not in the long run.
What is the circular-flow diagram and what does it illustrate?
The circular-flow diagram shows how households and firms are linked through product and factor markets.
Suppose an analyst estimates the cost to businesses from family leave laws.
This is an example of positive analysis
What do most economists find to be the most persuasive argument in favor of protectionism?
Trade barriers protect infant industries that initially have relatively high costs. Your answer is correct. B.
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
What is a price taker? A price taker is
a firm that is unable to affect the market price
A black market is
a market in which buying and selling occur at prices that violate government price regulations.
price elasticity of supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
Consider the consumption of electricity. What type of good is electricity? Electricity is
a quasi public good
Producer surplus is equal to the area
above the supply curve and below the price for the units produced and sold.
An example of technological change is
all of the above
What must be true for the Coase TheoremLOADING... to hold? For the Coase Theorem to hold,
all parties to an agreement must have full information about the costs and benefits of the externality
Imagine that the curves shown in the accompanying figure represent two demand curves for traditional wings (basket of six) at Buffalo Wild Wings. Further assume that wings are a normal good. The movement from point A to B on D1 is caused by
an increase in the price of baskets of traditional wings A rise in veg a fall in buyer incomes
In addition, Gao and colleagues have estimated the income elasticity of demand for beer to be −0.09. If so, then beer is
an inferior good
As a result of the positive change in technology, the new equilibrium price will be lower, and the new equilibrium quantity will be higher. Suppose instead that the demand curve shifts to the right. Then, relative to the initial market equilibrium, A. the new equilibrium price would be lower and the new equilibrium quantity would be higher. B. the new equilibrium price would be higher and the new equilibrium quantity would be lower. C. the new equilibrium price would be lower and the new equilibrium quantity would be lower. D. the new equilibrium price would be higher and the new equilibrium quantity would be higher.
answer
What is the difference in the short run and the long run? In the short run,
at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
On a shopping trip, Sofia decided to buy a light blue coat that had a price tag of $79.95. When she brought the coat to the store's sales clerk, Sofia was told that the coat was on sale, and she would pay 20 percent less than the price on the tag. After the discount was applied, Sofia paid $63.96, $15.99 less than the original price. The value of Sofia's consumer surplus from this purchase is
at least $15.99 since this is the difference between the price Sofia is willing to pay for the coat and the actual price she pays, but she could have be willing to pay more than $79.95 for the coat.
in the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
Your company incurs a cost for machinery, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of machinery
becomes a variable cost.
If QD = 0 = 2,500−20P, then P=
125
Every society faces trade-offs because we live in a world of scarcity. Suppose a student-athlete has the opportunity to earn $200,000 next year playing for a minor league baseball team, $100,000 next year playing for a European professional football team, or $0 returning to college for another year The opportunity cost of the student-athlete returning to college next year is $
2000000
What is the definition of monopoly?
A monopoly is a firm that is the only seller of a product in a given industry.
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus decreases , and as the price of a good falls, consumer surplus increases .
How does producer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, producer surplus increases , and as the price of a good falls, producer surplus decreases .
Sean Astin, who played Sam in the Lord of the Rings movies, wrote the following about an earlier film he had appeared in: "Now I was in a movie I didn't respect, making obscene amounts of money (five times what a teacher makes, and teachers do infinitely more important work) ..." Source: Sean Astin, with Joe Layden, There and Back Again: An Actor's Tale, New York: St. Martin's, 2004, p. 35. Are salaries determined by the importance of the work being done? If not, what are they determined by? Salaries are determined
by the marginal revenue product of the last worker hired and the supply of labor.
MPL formula
change in quantity/change in labor
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____.
consumer; producer; maximum; equilibrium
According to the goal of economic efficiency, governments tend to favor taxes that
create a small excess burden relative to revenue raised
Assume the world market for oil is competitive and that the marginal cost of producing (extracting and bringing to market) another barrel of oil is $82.00 and the marginal benefit is $80.00. If one more barrel of oil is produced and consumed, how will economic surplus change? Economic surplus will
decrease by 2
After World War II in 1945, the United States experienced a "baby boom" as birthrates rose and remained high through the early 1960s. In 2011, the first members of the baby boom generation became older than 65. What effect will this have on the market for doctors? As the first baby boomers become older than 65, the
demand curve for doctors will shift to the right
Writing on the Baseball Prospectus Web site, Dan Fox argued, "What a player is really worth depends in great deal on the teams that are interested in signing him." Source: Dan Fox, "Schrodinger's Bat," baseballprospectus.com, May 17, 2007. Do you agree? Shouldn't a baseball player with a particular level of ability be worth the same to every team? Briefly explain. What a baseball player is worth
depends on his marginal product and the price his output sells for, the latter of which is different for each team.
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale
A price ceiling
does not increase the amount of the product that consumers buy because it creates a shortage.
One reason some oppose free trade and the reduction of trade barriers is protectionism. What does old-fashioned protectionism seek to protect? Protectionism traditionally seeks to use trade barriers to protect
domestic wages
Which of the following correctly explains the effect of a variable on the labor demand curve?
f human capital increases, then the labor demand curve will shift to the right.
Economies of scale
factors that cause a producer's average cost per unit to fall as output rises
n another example, suppose market research shows that a particular brand of truck is a normal good and a luxury. If so, then the income elasticity of demand for this truck is
greater than 1
compensating differentials
higher wages that compensate workers for unpleasant aspects of a job
The production possibilities frontier will shift outward
if resources are used to produce capital goods
According to economists, an efficient tax is one that
imposes a small deadweight loss relative to the tax revenue it raises.
Black markets may arise
in reaction to binding price ceilings
In the circular-flow diagram showing how a market system works,
income flows to households through factor markets
Suppose the price of a substitute to LCD televisions rises. What effect will this have on the market equilibrium for LCD TVs? The equilibrium price of LCD TVs will
increase and the equilibrium quantity will increase
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if
it earns profits in the long run
A firm is likely to be a price taker when
it represents a small fraction of the total market
A firm might experience economies of scale because
large firms may be able to purchase inputs at lower costs than smaller competitors
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then
market competition would increase, decreasing market prices.
How might transaction costs affect private solutions to externality problems? Transaction costs
may make private solutions to reduce negative externalities no longer feasible.
Compare the demand for sugar with demand for clothes. The demand for sugar is likely
more inelastic because sugar tends to represent a smaller fraction of a consumer's budget.
Raising taxes on high-earning families will cause the U.S. tax system to become
more progressive because those with higher incomes will pay a larger percentage of their incomes in tax.
Which of the following is not scarce according to the economic definition?
none of the above
Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargainingLOADING...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution reduction? If the electric utility and the people suffering the effects of the utility's pollution can bargain, then making the utility legally liable for the damages from its pollution will
not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.
In economics, the term capital refers to
physical capital, such as machinery, that is used to produce other goods
According to the ability−to−pay principle, governments favor taxes that
place a greater share of the tax burden on those who have greater ability to pay.
instead, suppose pepper and salt were substitutes. If so, then the cross-price elasticity of demand between pepper and salt would be
positive
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
How might society solve problems associated with externalities and market failureLOADING...? If an externality is present, resulting in market failure, then
private solutions may reduce or correct market failure.
How do externalitiesLOADING... in the production of electricity result in market failureLOADING...? Because of externalities, the market for electricity will
provide too much electricity.
Consider a Lacoste shirt. Is the consumption of Lacoste shirts rival and excludableLOADING...? The consumption of Lacoste shirts is
rival and non excludable
In 1999, at a meeting of the World Trade Organization in Seattle, Washington, a large number of people protested attempts to reduce trade barriers. What is a reason why some would want to prevent trade barriers from being reduced? Some want to prevent trade barriers from being reduced because they
seek to protect domestic jobs
A production possibilities frontier:
shows the maximum attainable combinations of two goods that may be produced with available resources.
Suppose Sony makes PlayStation 3 using capital. In what way is capital a derived demand? Capital for Sony to make PlayStation 3 is a derived demand because
t depends on consumer demand for PlayStation 3.
marginal revenue product of labor
the change in a firm's revenue as a result of hiring one more worker
Suppose a common resource—wood in a public forest—is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being overused? To prevent overuse of the common resource,
the community could establish norms where social pressure limits deforestation
Which of the following is an example of a transaction costLOADING... associated with negotiating the reduction of a negative externality? An example of a transaction cost is
the cost associated with drawing up a binding contract to reduce a negative externality
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
Producer surplus is
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Tax incidence is
the division of the burden of a tax between buyers and sellers
A marginal tax rate is
the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income.
Why are major league baseball players on average paid substantially more than college professors? Explain. Major league baseball players are paid more than college professors because
the marginal revenue product of major league baseball players is high relative to college professors.
When a competitive market is in equilibrium, what is the economically efficient level of output?
the output level where marginal cost is equal to marginal benefit
Which of the following is a primary determinant of the price elasticity of supply...? The price elasticity of supply is affected by
the passage of time
The formula for the price elasticity of supply is
the percentage change in quantity supplied divided by the percentage change in price.
How do externalities... affect markets? If a positive externality in consumption is present in a market, then
the private benefit from consumption will be different than the social benefit from consumption.
What is technology? Technology is
the processes a firm uses to turn inputs into outputs of goods and services.
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
What is the production function? The production function is the relationship between
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
What are the three most important variables that cause the market supply curve for labor to shift? The supply curve for labor shifts with changes in
the population, demographics, and opportunities in other labor markets.
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
Consider the market for Blackberry cell phones. Assume the market is perfectly competitive and at a market-clearing equilibrium. What area represents consumer surplus? What area represents producer surplus? Consumer surplus is equal to the area
under the demand curve and above the price for the units consumed.
In the diagram to the right, when demand decreases, a surplus develops at the original price. Equilibrium price will fall and equilibrium quantity will fall as a new equilibrium is established.
when supply increases, a surplus develops at the original price. Equilibrium price will fall and equilibrium quantity will rise as a new equilibrium is established
Suppose that last semester your semester GPA was 4.00 and your resulting cumulative GPA was 2.89. Next, suppose that this semester your semester GPA will be 3.30. If so, then your cumulative GPA
will increase because your "marginal" GPA will be above your cumulative GPA.
We can show economic inefficiency:
with points inside the production possibilities frontier
We can show economic efficiency:
with points on the production possibilities frontier.
Suppose workers have the option of working in a dangerous factory or a safe factory. Both jobs require the same productive characteristics, such as education and training. According to compensating differentialsLOADING..., would a law mandating an improvement in safety for the dangerous factory make workers in that factory better off? Given compensating differentials, the safety law
would not necessarily make workers in the dangerous factory better off because it would lower their wages.
When economists speak of a surplus, they mean a situation in which A. the market price is above the equilibrium price. B. the quantity supplied exceeds quantity demanded. C. firms have unsold goods piling up. D. all of the above. Your answer is correct. E. A and B only.
D