Econ 2 final
Suppose Stan owns a piece of property with a large lake. Initially, Stan and his family were the only people who swam in the lake. Then Stan started selling tickets to people who wanted to go swimming in the lake. When Stan died, he left the lake and the land it was on to the state, stipulating that the lake be left open to the public for swimming. Due to the lake's remote location, it was never crowded. When Stan started selling tickets to the public, the lake became a ______ good. commons club private public
B Nonrival and excludable because you are now forcing people to pay
A patch of edible mushrooms growing wild in a national forest is a ______ good. pure public commons public private
B Rival and nonexcludable
A firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost is ______. decreasing increasing low high
C
A payoff matrix shows: the payoff to being a monopolist. the demand curve facing a firm when there are only two firms. the payoffs for each possible combination of strategies. the payoff to being a perfectly competitive firm.
C
If a natural monopoly increases the quantity of output it produces, then: its profit will increase. its average cost will increase. its average cost will decrease. it will have to increase its price.
C
The government can raise tax revenue and increase total economic surplus by taxing: luxury goods that are primarily consumed by wealthy individuals. goods whose supply and demand curves are highly elastic. goods that generate negative externalities. goods that generate positive externalities.
C
The quantity that sellers wish to sell tends to ________ as price increases, and so the supply curve is ________ sloping. increase; downward decrease; downward increase; upward decrease; upward
C
When someone buys a movie on DVD, the DVD is a ______ good. commons public private club
C
Which of the following items is an example of a good that is nonrival but excludable? Broadcast television National defense Corn Pay-per-view movies
D
Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will: always lead an economy to ruin. often lead to the most efficient allocation of resources. always lead to the most efficient allocation of resources. often lead to increasing inequality.
B
Even though conspicuous consumption can serve as a credible signal of ability, it can lead to socially inefficient outcomes because: conspicuous consumption is not highly correlated with earnings. conspicuous consumption can lead to positional arms races. earnings and ability are very poorly correlated. conspicuous consumption has been demonstrated to be poorly correlated with ability.
B
Game theory is not useful in understanding perfect competition because in a perfectly competitive market: the payoffs to firms' choices are unknown. no single firm can influence the market price, so firms' decisions are not interdependent. there are too many firms to be able to model their behavior accurately using game theory. each firm only cares about its own profit, so there is no interdependence.
B
Generally, _______ motivates firms to enter an industry, while ________ motivates firms to exit an industry. (Economic profit; accounting loss, Economic profit; economic loss, accounting profit; economic loss, accounting profit; accounting loss)
B
In the Nash equilibrium of a prisoner's dilemma: there is no cash left on the table. both players have equal payoffs. total economic surplus is maximized. players are not pursuing their best response strategies. there is unrealized opportunity for both to gain.
E
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 + 10 Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______. $3 $3.10 $10.30 $1.03 $13 $10 $0.30
E (ATC = TC/Q)
When a group of people must decide whether to buy a shared public good or service, the free-rider problem frequently occurs because: (a) People have an incentive to understate how much the public good is really worth to them if they have to pay taxes to finance it. (b) Each individual's needed contribution is an insignificant amount of the total required. (c) People have an incentive to overstate how much the public good is worth to them if they don't have to pay taxes to finance it. (d) People hope that others will value the public good enough to pay for it entirely. (e) Only one of the above statements is not a reason for the existence of the free-rider problem.
e
A natural monopoly that attempts to charge the socially desirable price will invariably suffer an economic loss because average cost is higher than marginal cost. marginal cost is equal to zero. average cost is lower than marginal cost. average cost and marginal cost are equal.
A
Aaron's neighbor Cliff keeps his front yard well-manicured and plants beautiful flowers which Aaron enjoys. If local law prevents Cliff from fencing his yard, the beauty of Cliff's front yard is: both nonrival and nonexcludable. a private good. nonexcludable. nonrival.
A
Adam Smith's invisible hand only leads to an efficient outcome when buyers are fully informed about all relevant aspects of a product and the market in which it is traded. buyers have more information about the product being traded than do sellers. buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information. buyers have less information about the product being traded than do sellers.
A
The adaptive rationality standard: - assumes that people's goals are themselves a choice variable and that people's choices about which goals to pursue are made efficiently. - argues that people are only able behave rationally if they are aware of how their actions affect others. -assumes that people act in their own self-interest because cooperating with others is irrational. -takes people's goals as given and assumes that people are efficient at pursuing whatever goals they happen to hold at the moment of action.
A
Some people have argued that the government should provide free medical care to everyone. Under this system: the price of medical care will ration resources efficiently. prices will not ration medical care so some other rationing method will be used. prices will not ration medical care so there will be no scarcity. the price of medical care will allocate resources efficiently.
B
Under a head tax, the amount of tax paid is: the same for all taxpayers who use the public good. the same for all taxpayers. proportional to each taxpayer's income. a linearly increasing function of the taxpayer's income.
B
Your state department of transportation is considering installing toll booths with gates on a quiet section of highway. If this is done, a good that is currently a: nonrival good will become a rival good. nonexcludable good will become an excludable good. rival good will become an excludable good. public good will become a private good.
B
If the firms in a perfectly competitive market are earning an economic profit, then, in the long run, the market ________ curve will shift to the ________. demand; right demand; left supply; right supply; left
C
The buyer's reservation price for a particular good or service is the: smallest price the buyer would be willing to pay for it. same as the market price. largest price the buyer would be willing to pay for it. price the buyer must pay to ensure he or she gets it.
C
If the consumption of good generates an external benefit, then the market equilibrium quantity will be: greater than the socially optimal quantity. socially optimal. equal to zero. Less than the socially optimal quantity.
D
Information about the quality of a product is -subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor. -impossible to objectively assess, and therefore not subject to economic principles. -intangible, and therefore not subject to economic principles. -both beneficial to have and costly to obtain, and therefore subject to economic principles.
D
One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that: - firms will compete on the basis of better service rather than lower prices - a long-run equilibrium cannot be achieved. - firms will have to spend money on advertising - each firm faces perfectly elastic demand - positive economic profit is only possible in the short run
D
One way sellers can credibly signal that they have a high-quality product is to: sell very little of their product in order to create scarcity. simply tell buyers more about their product. lower their marginal cost of production. spend a lot of money on advertising.
D
When people use anchoring and adjustment to estimate something, the adjustment they make when they receive new information is typically: in the wrong direction. on average accurate. too large too small
D
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 + 10 Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your fixed cost ______ and your total cost ______. stays the same; stays the same decreases; stays the same decreases; increases increases; decreases stays the same; increases stays the same; decreases
E
If coal mining produces a negative externality because it leads to environmental damage, then, at the market equilibrium, the: quantity of coal produced will be greater than the socially optimal quantity. supply curve will lie to the left of the regulated supply curve. quantity of coal produced will be less than the socially optimal quantity. price of coal will be higher than the socially optimal price.
A
In the case of either a positive or negative externality, a good's market price will: not fully reflect a good's social marginal cost or social marginal benefit. not equate the quantity supplied by sellers with the quantity demanded by buyers. be too low. be too high.
A
Suppose Bobby just watched a documentary about the massive decline in house prices during the Great Recession. According to the availability heuristic, this is likely to make Bobby: worry that the price of his own house might fall. believe that house prices will be more stable in the future. think the movie is biased towards the status quo. believe that he is wealthier than other people.
A
Suppose Stephen's first novel makes the New York Times bestseller list. Regression to the mean implies that his second novel: won't be as popular as his first novel. will be even more popular than his first novel. will be a complete flop. will have a similar plot to his first model.
A
When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______. total revenue always rises; total revenue could rise, fall, or remain unchanged total revenue does not change; total revenue rises marginal revenue stays the same; marginal revenue rises total revenue rises; total revenue falls
A
traditional economic models, which of the following do(es) NOT describe homo economicus: (there could be one or more correct answers - select all that apply) impulsive. narrowly self-interested. well-informed. cognitively sophisticated.
A
According to the adaptive rationality standard, people might choose to have unselfish (altruistic) preferences because: people sometimes make irrational choices. doing so could be in their own best interest. they do not know how to make efficient choices. they have no other choice. people sometimes have unusual tastes and preferences.
B
If a tax imposed in a market generates deadweight in that market, then the tax: will necessarily lower economic surplus. could still increase economic surplus, depending on how the tax revenue is spent. will generate very little tax revenue. will never be approved by voters.
B
If the demand for cookies falls when the price of ice cream increases, then we know that cookies and ice cream are: substitutes complements normal goods inferior goods
B
In markets with incomplete information, middlemen tend to ______ total economic surplus by ______. increase; raising prices increase; matching sellers with buyers who have high reservation prices reduce; raising prices reduce; giving misleading information
B
Natural monopolies are most likely to arise when firms have: low start-up costs and low marginal costs. high start-up costs and low marginal costs. low start-up costs and high marginal costs. high start-up costs and high marginal costs.
B
Pure public goods: should always be provided by private firms. are frequently provided by the government, and are sometimes provided by private firms. should always be provided by government. are, by definition, goods and services provided by the government.
B
he major prediction of the lemons model is that: a used car in good condition can be sold for a higher-than-average price. asymmetric information reduces the average quality of goods offered for sale. used cars offered for sale are generally in better-than-average condition. people will generally choose "low-hanging fruit".
B
If coal mining produces a negative externality because it leads to environmental damage, then, at the market equilibrium, the: -price of coal will be higher than the socially optimal price. -supply curve will lie to the left of the regulated supply curve. -quantity of coal produced will be greater than the socially optimal quantity. -quantity of coal produced will be less than the socially optimal quantity.
C
Kendra is having difficulty deciding between two cars, A and B. As shown in the accompanying diagram, A has more cargo room than B, but lower gas mileage. Ideally Kendra would like a car both with a lot of cargo room and good gas mileage. If Kendra behaves like most decision-makers, then the addition of option C would: decrease her likelihood of buying a car have no impact on her choice of A and B. increase her likelihood of picking A increase her likelihood of picking B
C
What is the socially desirable price for a natural monopoly to charge? The price at which average cost equals average revenue. The price at which the marginal benefit to the consumer is less than the marginal cost of production. The price at which the marginal benefit to the consumer equals the marginal cost of production. The price at which the marginal benefit to the consumer is greater than the marginal cost of production.
C
If low-income households spend a larger share of their income on food than do high-income households, then a tax on food is: a proportional tax. a way to redistribute from the wealthy to the poor. a progressive tax. a regressive tax.
D
In a repeated prisoner's dilemma, players: can sustain cooperation by employing a tit-for-tat strategy. can sustain cooperation by playing their dominant strategy. always play their dominant strategy. never learn to play their dominant strategies.
A
A crowded beach without an entrance fee is a ______ good. private pure public commons You Answered public
C
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 + 10 Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your average fixed cost ______ and your marginal cost ______. decreases; increases increases; decreases decreases; stays the same stays the same; increases
C
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 + 10 Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your average fixed cost ______ and your marginal cost ______. decreases; increases stays the same; increases decreases; stays the same increases; decreases
C
Suppose Anna just received a parking ticket. According to the availability heuristic, this will tend to make Anna: less likely to pay future parking tickets. dislike parking tickets. think people frequently receive parking tickets. more likely to break parking rules in the future. think people should not receive parking tickets.
C
Rules of thumb that reduce computation costs are known as: decision trees cost-benefit calculations optimality constraints judgmental and decision heuristics
D
Joe earns $10,000 in income and pays $1,000 in taxes while Jack earns $30,000 and pays $4,000 in taxes. The structure of this tax is: regressive. proportional. a head tax. progressive.
D (A progressive tax - Tax that takes a larger percentage of income from high income groups than from low income groups) (A Proportional tax - A tax that takes the same percentage of income from all income groups)
Under what circumstances can a price ceiling increase total surplus? Would the quantity of output change? Explain. Your Answer: Two main reasons: - if sellers have monopoly power. In this case, a price ceiling below the monopoly price could increase the quantity sold, bringing us closer to the optimal quantity. - if there are negative externalities. In this case, a binding price ceiling will decrease the quantity sold. But since the good was being over-produced, this could get us closer to the socially optimal level.
Write on cheat sheet
Judy is planning to sell an antique grandfather clock that she values at $200. If she sells the clock on Craigslist, it will be bought by someone who values it at $450. If she uses an antique dealer to sell the clock, it will be bought by someone who values it at $850. The antique dealer will charge Judy $100 to sell the clock, which just covers the antique dealer's opportunity cost of selling the clock. Relative to selling the clock on Craigslist, selling the clock through an antique dealer will lead: to no change in total economic surplus. total economic surplus to increase by $300. total economic surplus to decrease by $100. total economic surplus to increase by $400.
b
When both supply and demand increase, the equilibrium price will [ Select ] and the equilibrium quantity will [ Select ] .
either inc or dec and increase
A swing at a popular, unfenced public park is: nonexcludable. nonrival. a club good. a pure public good.
A
Josh pays $6,000 in taxes and earns $60,000. Maggie pays $4,000 in taxes. If the tax system is progressive, then Maggie earns: more than $60,000. more than $40,000 but less than $60,000. less than $40,000. $40,000.
B
