ECON FINAL

15). Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. Picture At this monopolist's profit-maximizing level of output, deadweight loss equals ______. $1,000 $2,000 $4,000 $6,000

$1,000 Deadweight loss is ½ × $40 × 50 = $1,000.

25). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture The cost (in thousands of dollars) of the filter to Erie Textiles is ______, and the net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is _______. $400; $310 $310; $200 $200; $75 $200; $235

$200; $235 With the filter, Erie's benefits are $200 lower, the fishermen's benefits are $130 higher, and the bird watchers' benefits are $105 higher.

42). f a boxing fight is shown on pay-per-view television every Saturday at 4pm, the demand curve for each fight is given below. Picture If the regulated pay-per-view charge to watch a fight were $5 per household, then what would be the loss in total economic surplus relative to when the there is no charge to watch the fight? $25 million $50 million $225 million $625 million

$25 million The loss in total economic surplus would be 1/2 ($5 ×10M) = $25M.

23). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture When Erie Textiles operates without a filter, the total gain (in thousands of dollars) to all three parties is ______. $985 $325 $510 $475

$475 Erie's benefits are $400, the fishermen's are $50 and the bird watchers' are $25.

24). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture When Erie Textiles operates with a filter, the total gain (in thousands of dollars) by all three parties is ______. $985 $600 $510 $475

$510 Erie's benefits are $200, the fishermen's are $180 and the bird watchers' are $130.

48). There are 20 residents in the village of Towneburg. The size of the village's annual fireworks display depends upon the number of shells that are fired off. Each resident's demand for fireworks is shown below. The total cost of the fireworks display is $1,000 plus $10 per shell. Picture Collectively, the residents of Towneburg would be willing to pay ______ for the 10th shell, and the marginal cost of the 10th shell is ______. $30; $100 $600; $1100 $30; $10 $600; $10

$600; $10 The collective willingness to pay for the 10th shell is $600 = $30 × 20, and the marginal cost of each shell is $10, regardless of how many shells have been fired off.

41). f a boxing fight is shown on pay-per-view television every Saturday at 4pm, the demand curve for each fight is given below. Picture If viewing a fight were free to anyone who tuned in, total economic surplus would be ______. $25 million $50 million $225 million $625 million

$625 million Economic surplus is given by the area of the triangle under the demand curve up the to equilibrium quantity. If viewing a fight were free, there would be 50 million viewing households, so economic surplus would be 1/2 ($25 × 50M) = $625M.

11). Suppose a monopolist faces the demand curve shown below. Picture If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is: 50 units. 40 units. 20 units. 30 units.

20 Units Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.

43). If a boxing fight is shown on pay-per-view television every Saturday at 4pm, the demand curve for each fight is given below. Picture If the regulated pay-per-view charge to watch a fight were $15 per household, then ______ households would watch the fight, and the loss is total economic surplus would be ______ relative to when there is no charge to watch the fight. 10 million; $25 million 20 million; $225 million 20 million; $25 million 10 million; $225 million

20 million; $225 million At a price of $15, 20 million households would watch the fight. Relative to when the fight is show free of charge, the loss in total economic surplus would be 1/2 ($15 × 30M) = $225M.

13). Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. Picture The profit-maximizing price for this monopolist to charge is: A. B. C. E.

B MC = MR at F units of output. From the demand curve, we can see that this corresponds to a price of B.

In many cities in the United States, a single firm provides electricity. Those firms are:

monopolists

14). Suppose the figure below shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. Picture At the monopolist's profit-maximizing level of output, deadweight loss equals the area: C0N ALN JLN JKN

JLN The monopolist's profit-maximizing level of output is F and the socially optimal level of output is H. Deadweight loss is the area to the right of F below the demand curve and above the marginal cost curve.

Which of the following items is an example of a good that is nonrival but excludable? Pay-per-view movies. Corn. National defense. Broadcast television.

Pay-per-view movies. More than one person can enjoy a per-per-view movie at one time, but people who don't pay for it can be excluded from enjoying it.

A good or service that is rival but nonexcludable is called a ______, and a good or service that is nonrival but excludable is called a ______. public good; private good commons good; public good commons good; collective good public good; collective good

commons good; collective good A commons good is a good or service that is nonexcludable but rival. A collective good is a good or service that is nonrival but excludable.

28). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter? No, because it makes $200 less in profit with the filter. Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. No, because use of a filter would result in smaller total economic surplus. Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter. The increase in the fishermen's and bird watchers' benefits is $310 minus $75 = $235; they must pay Erie more than $200, so there is room for a mutually beneficial transaction.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment? Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. No, because the benefit to Ali of listening to her music is less than the cost to Kate. Yes, because the benefit to Ali of listening to her music is less than the cost to Kate. No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. The benefit to Ali of listening to her music is $300 per month (the amount you would have to pay her to give up listening to her music). The cost to Kate of listening to Ali's music is $100 per month (the amount Kate would be willing to pay to avoid hearing Ali's music). Since the benefit to Ali of listening to her music is greater than the cost to Kate of hearing her music, it is socially optimal for Ali to play her music if they live together.

The existence of a negative externality will result in: a less than optimal level of production. a greater than optimal level of production. prices that are artificially high. elimination of deadweight loss.

a greater than optimal level of production. A supplier will not consider external costs, and so will produce more than is socially optimal.

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality. a positive; a negative a negative; a positive a positive, no no; a negative

a positive; a negative Positive externalities yield benefits to others while negative externalities impose costs on others.

A pure monopoly exists when: many firms produce a good with no close substitutes. a single firm produces a good with no close substitutes. only a single firm is present in the market. a single firm produces a good with many close substitutes.

a single firm produces a good with no close substitutes.

The problems of externalities and poorly formed property rights are: minor in modern economies. among several rationales for the existence of government. better solved by private rather than government action. the only two legitimate reasons for creating government.

among several rationales for the existence of government. Governments can help regulate activities that generate externalities, and they can help enforce property rights.

The development of pay-per-view technology: converted a collective good into a private good. allows consumers to see movies that were previously unavailable for several years. converted a pure public good into a collective good. has made all consumers worse off.

converted a pure public good into a collective good. With broadcast television, anyone with an antenna could receive television signals and one person's watching did not prevent others from watching. With pay-per-view technology, those who don't pay can be excluded from watching.

Price discrimination means charging: higher prices to women and minorities. different prices for different products because production costs are different. the same price to all buyers even if production costs are different. different prices to different buyers for essentially the same good or service.

different prices to different buyers for essentially the same good or service. Price discrimination is the practice of charging different buyers different prices for essentially the same good or service.

A natural monopoly is a monopoly that arises from: having an exclusive right to operate in a national park. having exclusive control over the natural resources used to produce a good. a firm's natural desire to maximize its profit. economies of scale.

economies of scale. A monopoly that results from economies of scale is called a natural monopoly.

The government subsidizes education because: it is a pure public good. private firms will not provide education. the government can provide a better education than can private firms. education is thought to have positive externalities.

education is thought to have positive externalities. Since education entails positive externalities, market demand will not reflect all of the benefits of education.

The marginal cost of providing another viewer with access to HBO is zero. Since only people who pay for HBO can watch it: fewer than the socially optimal number of people will have access to HBO. more than the socially optimal number of people will have access HBO. HBO will not be profitable in the long run. access to HBO is nonexcludable.

fewer than the socially optimal number of people will have access to HBO. The marginal cost of providing another viewer with access to HBO is zero. Since people have to pay for access to HBO, we know that the marginal benefit of providing another viewer with access is greater than zero. Since marginal benefit is greater than marginal cost, less than the socially optimal number of people will have access to HBO.

44). If a boxing fight is shown on pay-per-view television every Saturday at 4pm, the demand curve for each fight is given below. Picture If there is a pay-per-view charge to watch a fight, the outcome is ______ because ______. efficient; prices will allocate the program to those who value it the most efficient; the marginal cost of an additional viewing household is zero inefficient; the marginal cost of an additional viewing household is zero inefficient; television stations would not always make a profit

inefficient; the marginal cost of an additional viewing household is zero Since the marginal cost of an additional viewing household is zero, the efficient number of viewing households is 50 million (since this is when marginal benefit of an additional viewing household is zero). If there is a pay-per-view charge to watch a fight, then there will be fewer than 50 million viewing households.

9). Suppose a monopolist faces the demand curve shown below: Picture If you were to draw the monopolist's marginal revenue curve, it would: lie on top of the demand curve. intersect the vertical axis at $35. intersect the horizontal axis at 35. have a slope equal to the reciprocal of the slope of the demand curve.

intersect the horizontal axis at 35. For any straight-line demand curve, the corresponding marginal revenue curve will have twice the slope of the demand curve and the same vertical intercept as the demand curve. As a result, the horizontal intercept of the marginal revenue curve will be half the horizontal intercept of the demand curve.

National defense is an example of a good that is: neither nonrival nor nonexcludable. largely nonrival and nonexcludable. only nonexcludable. only nonrival

largely nonrival and nonexcludable. One person's enjoyment of national defense does not diminish others' enjoyment of national defense, and people who don't pay for national defense can't be excluded from enjoying its benefits.

26).Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture If Erie Textiles does not install the filter, there will be a net social ______ of ______ (in thousands of dollars). loss; $35 gain; $75 loss; $110 gain; $200

loss; $35 Net benefits without the filter are $475 and with the filter are $510.

A monopoly that results from economies of scale is called a(n): antitrust violator. large-scale monopolist. natural monopoly. cost-plus firm.

natural monopoly. A monopoly that results from economies of scale is called a natural monopoly.

29). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture Suppose you observe that Erie has not added a filter. You could conclude that the Coase Theorem failed to solve the externality problem because: Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers. negotiation with many individual fishermen and bird watchers was too costly. Erie has a property right to the river. regulators prevent application of the Coase Theorem when the environment is at stake.

negotiation with many individual fishermen and bird watchers was too costly. The Coase Theorem only applies if it is not costly to negotiate.

27). Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Picture Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter. up to $310 thousand dollars no more than $235 thousand dollars no more than $75 thousand dollars nothing

no more than $235 thousand The increase in the fishermen's and bird watchers' benefits is $310 minus $75 = $235.

If it is difficult, or costly, to prevent people who do not pay for a good from consuming the good, then the good is a ______ good. nonexcludable pure public private nonrival

nonexcludable A nonexcludable good is a good that is difficult, or costly, to prevent nonpayers from enjoying.

If a good can be consumed by one person without reducing its availability to others, then it is a ______ good. nonexcludable pure public common nonrival

nonrival A nonrival good is a good whose consumption by one person does not diminish its availability to others.

In the case of either a positive or negative externality, a good's market price will: be too low. be too high. 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.

not fully reflect a good's social marginal cost or social marginal benefit. When there are externalities, the market equilibrium price will not fully capture a good's social marginal cost or social marginal benefit.

Assume that each day ten thousand children watch Sesame Street on public television and that watching Sesame Street generates a benefit of $100 per child per year. Once a year, public televisions hold a pledge drive asking viewers to make voluntary contributions in order to keep the programming available to everyone. If public television stations collect less than $100 per child during the pledge drive, then this is evidence: that the government should not subsidize public television. that parents do not care about their children. of the free-rider problem. that head taxes are regressive.

of the free-rider problem. Since public television is nonexcludable, the free-rider problem will emerge, so every parent has an incentive to contribute less than $100 in hopes that others will make donations.

If a firm functions in an oligopoly, it is: one of a small number of firms that produce goods that are either close or perfect substitutes. the only firm that produces a good with no close substitutes. one of a large number of firms that produce goods that are either close or perfect substitutes. one of a large number of firms that produce a good with no close substitute.

one of a small number of firms that produce goods that are either close or perfect substitutes.

31). Refer to the figure below. This graph suggests that the private market provides incentives to: Picture eliminate the externalities generated by paper production. under-produce paper relative to the social optimum. over-produce paper relative to the social optimum. over-price paper relative to the social optimum.

over-produce paper relative to the social optimum. The private market would provide 350 tons; the socially optimal quantity is 300 tons.

A good or service that is both rival and excludable is a: public good. private good. collective good. commons good.

private good

Because monopolists charge a price in excess of marginal cost, it must be the case that monopolists: earn a positive economic profit. earn a negative economic profit. produce more than the socially optimal level of output. produce less than the socially optimal level of output.

produce less than the socially optimal level of output. The marginal benefit to society of the last unit produced is measured by price. Thus, if price is greater than marginal cost, this implies that the marginal benefit to society of the last unit produced is greater than the marginal cost to society of the last unit produced, so that society would benefit if output were to increase.

10). Suppose a monopolist faces the demand curve shown below. Picture The monopolist maximizes its profits by: charging $70 for each unit. producing 35 units, since this is where total revenue is maximized. producing the level of output at which marginal revenue minus marginal cost is greatest. producing the level of output at which marginal revenue equals marginal cost.

producing the level of output at which marginal revenue equals marginal cost. Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.

A good or service that is highly nonrival and highly nonexcludable is a(n) ______ good. pure public commons collective private

pure public A pure public good is a good that, to a high degree, is both nonrival and nonexcludable.

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. quantity of coal produced will be less than the socially optimal quantity. 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 greater than the socially optimal quantity. Firms do not consider external costs when making their output decisions, so if a good generates a negative externality, then they will produce more than the socially optimal quantity.

"Market power" refers to a firm's ability to: undercut its competitors' prices. force consumers to buy high-priced products. raise its price without losing all of its sales. influence the price its competitors charge.

raise its price without losing all of its sales. Market power is defined as a firm's ability to raise price and not lose all of its sales.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______. small; perfectly elastic large; perfectly inelastic small; relatively inelastic large; relatively inelastic

small; relatively inelastic If demand is inelastic, a tax will increase price but will not change the quantity demanded by a large amount.

Citizens of Tinytown are considering building a new park. If each voter in Tinytown has a reservation price that is less than the total cost of the park, then: the benefit of the park is less than the cost of the park, so the park should not be built. some sort of collective action by voters will be necessary to fund the park. a private firm will have an incentive to build the park. the park will never be built.

some sort of collective action by voters will be necessary to fund the park. If no one person values the park enough to pay for its total cost, then the park will only be built if the voters decide to fund it collectively.

Economies of scale exist when: firms become larger. input prices are falling. the average cost of production falls as output rises. doubling all the inputs leads to less than double the output.

the average cost of production falls as output rises. When production is subject to economies of scale, the average cost of production declines as the number of units produced increases.

Suppose a perfectly competitive firm and a monopolist are both charging $5 for their respective products. From this, one can infer that: the marginal benefit from selling an additional unit of output is $5 for both firms. the marginal benefit from selling an additional unit of output is $5 for the competitive firm and less than $5 for the monopolist. the marginal benefit from selling an additional unit of output is less than $5 for both firms. the competitive firm is charging too much, and the monopolist is charging too little.

the marginal benefit from selling an additional unit of output is $5 for the competitive firm and less than $5 for the monopolist. Perfectly competitive firms face a horizontal demand curve, so selling an additional unit of output increases revenue by the price of the good. Imperfectly competitive firms face a downward-sloping demand curve, so selling an additional unit of output increases revenue by less than the price of the good.

If the consumption of good generates an external benefit, then the market equilibrium quantity: will be socially optimal. will be less than the socially optimal quantity. will be greater than the socially optimal quantity. could be either less than or greater than the socially optimal quantity.

will be less than the socially optimal quantity. If a good generates an external benefit, then marginal benefit to society of another unit of the good is greater than the private benefit of another unit, implying that the market equilibrium quantity will be less than the socially optimal quantity.

32). Refer to the figure below. Private incentives in this market generate deadweight loss equal to _______. Picture ½ × UW × LM ½ × UV × LN ½ × VW × LN ½ × VW × KM

½ × VW × KM Deadweight loss is generated by transactions between V and W that do not occur at the private market equilibrium even though the social benefit of those transaction is greater than their MC.