ECON Midterm 2
Suppose a firm is attempting to maximize profits. If the firm increases production from 10 units to 11 units, and the market price is $20 per unit, total revenue for 11 units is
$220
Austin's total fixed cost is $3,600. He employs 20 workers and pays each worker $60. If labor is his only variable cost, what is Austin's total cost?
$4,800
There are four potential responses to environmental problems through regulation: (a) Command-and-Control Regulation (b) Marketable Permits (c) Pollution Change or (d) Better-Defined Property Rights. Assign the following problem to the proper regulatory outlet. Government requires that auto manufacturers limit pollution to specified threshold.
(a) Command-and-Control Regulation
There are four potential responses to environmental problems through regulation: (a) Command-and-Control Regulation (b) Marketable Permits (c) Pollution Change or (d) Better-Defined Property Rights. Assign the following problem to the proper regulatory outlet. Government requires that auto manufacturers use a new, cleaner, technology in producing cars.
(a) Command-and-Control Regulation
There are four potential responses to environmental problems through regulation: (a) Command-and-Control Regulation (b) Marketable Permits (c) Pollution Change or (d) Better-Defined Property Rights. Assign the following problem to the proper regulatory outlet. Auto manufacturers are allowed to pollute as much as they wish, provides that they have purchased a sufficient number of pollution vouchers.
(b) Marketable Permits
There are four potential responses to environmental problems through regulation: (a) Command-and-Control Regulation (b) Marketable Permits (c) Pollution Charge or (d) Better-Defined Property Rights. Assign the following problem to the proper regulatory outlet. An auto manufacturer is charged a tax for all units of pollution emitted into a river.
(c) Pollution Charge
The _______________ principle pushes governments towards a progressive tax system but efficiency considerations push them in the other direction.
Ability-to-pay
_____________ occurs when people must choose from an undesirable selection of goods because of asymmetric information. One party knowing less about the good than the other is the cause for this.
Adverse selection
According to the ________________ of tax fairness, those who gain from public spending should bear the burden of the tax that pays for that spending. For example, those who use the road should pay for its upkeep, those who fly on airplanes should pay for air traffic control, and so on.
Benefits principle
______ taxes are taxes on specific goods, such as tobacco and gasoline. They are not income based.
Excise
A premium is a payment to an insurance company in return for the insurance company's promise to pay a claim in certain states of the world. When the premium is equal to the expected value of an individual's medical expenses-the expected value of their future claim against the policy-then this is a ______________ policy.
Fair insurance (policy)
T/F: Tax incidence is determined by which group (buyers or sellers) must write the check to the government.
False
T/F: When the price elasticity of demand is high and the price elasticity of supply is low, the burden of a tax falls mainly on consumers.
False
T/F: According to the optimal output rule, profits are maximized by producing where the difference between marginal revenue and marginal cost is the greatest
False.
T/F: Miles is 2 years old and watches Sesame Street every morning. He usually finds the first 30 minutes of the show very entertaining, but loses interest quickly after that point. This accurately describes increasing marginal utility.
False.
T/F: As a result of light pollution in most cities, families that do not live in the country are unable to go stargazing. Assume the government places an optimal Pigouvian tax on electricity used at night to reduce light pollution so that people can enjoy the stars. As a result of the tax, consumers pay a lower price for electricity while producers lower output.
False. As a result of the tax, consumers ought to pay a higher price for electricity while producers lower output
The federal government levies taxes on businesses and individuals in different ways. Medicare and payroll taxes are examples of what type of tax?
Flat or proportional tax.
The change in the quantity of a good consumed that results from a change in the overall purchasing power of the consumer due to a change in the price of that good is known as the ______________ of the price change. Along with the substitution effect, this is another means by which changes in prices alter consumption choices.
Income effect
Lauren uses her income from working at a call center to buy caviar, the only thing she enjoys apart from leisure. An ounce of caviar costs $30.00, and she can work up to 8 hours a day at an hourly wage of $11.50. How much leisure and caviar can Lauren consume in a day if she works the maximum number of hours? (round to 2 decimal places)
Leisure: 16 hours Caviar: 3.07 oz.
Lauren uses her income from working at a call center to buy caviar, the only thing she enjoys apart from leisure. An ounce of caviar costs $30.00, and she can work up to 8 hours a day at an hourly wage of $11.50. If a day has 24 hours, how much leisure and caviar can she consume if she does not work at all?
Leisure: 24 hours Caviar: 0 oz.
____________ is the change in total utility generated by consuming one additional unit of a particular good. Focus on this factor when maximizing total utility.
Marginal utility
Is the following an example of a negative externality? A person gets a flu-shot and is therefore less likely to spread illness to others.
No, this is not an example of a negative externality.
Is the following an example of a negative externality? A person who lives alone buys a DVD, but finds the movie unenjoyable.
No, this is not an example of a negative externality.
Is the following an example of a negative externality? A person with no allergies that gets a mosquito bite from a disease-free mosquito.
No, this is not an example of a negative externality.
Individual income tax is an example of what type of tax?
Progressive tax
Social security tax, where people with higher incomes pay a smaller share of their income in tax is known as a(n) ____________ tax.
Regressive
The impact of taxes on different groups in society varies. Some taxes create a larger burden for poorer people while others create a larger burden for wealthier people. __________ taxes are more burdensome for poorer people and less burdensome for wealthier people.
Regressive
______________ individuals will choose to reduce the risk they face when that reduction leaves the expected value of their income or wealth unchanged.
Risk-averse
State whether the following scenario describes decreasing, constant or increasing marginal utility. Sheila is a coffee addict. She finds that regardless of whether she visits Starbucks three times a day or once a month, each Grande Latte that she drinks tastes amazing.
The scenario describes constant marginal utility.
State whether the following scenario describes decreasing, constant or increasing marginal utility. Brian likes running. His friend challenges him to run a marathon all of a sudden without prior training. As he begins the race, he feels exuberance and confidence as he passes runner after runner, thinking this is the greatest feeling ever. At mile 10, he starts slowing down and feeling tired. Bu mile 20, he experiences the dreaded runner's "wall." Brian is later seen screaming in agony saying :no more" and regrets running the marathon.
The scenario describes decreasing marginal utility.
State whether the following scenario describes decreasing, constant or increasing marginal utility. Michelle rarely ate out as a child since her parents would cook every night. She remembers that it was a real treat to go out and get fast food. now, Michelle has finished her first semester at college and has had McDonals's once a week for the past 5 months. She plans to learn to cook soon so she doesn't have to eat out any more, being sick of fast food.
The scenario describes decreasing marginal utility.
State whether the following scenario describes decreasing, constant or increasing marginal utility. You are taking a principles of economics class using Sapling Learning. As you use Sapling Learning more and more, you find both doing homework as well as learning the subject to be increasingly enjoyable.
The scenario describes increasing marginal utility
State whether the scenario below describes a positive externality, negative externality or neither. KingClaw fishing company illegally hunts the Coelacanth, a critically endangered fish that is close to extinction.
This is an example of a negative externality.
State whether the scenario below describes a positive externality, negative externality or neither. The US government decides to house all of its nuclear waste material at Cactus Cliff, WY. As with all nuclear waste, there is no failsafe protection method.
This is an example of a negative externality.
State whether the scenario below describes a positive externality, negative externality or neither. Jane raises bees to produce honey for her business, but her bees also pollinate many flowers in the neighborhood where she lives.
This is an example of a positive externality
_______________ are licenses to emit limited quantities of pollutants that can be bought and sold by polluters. The main problem with these permits is the flip-side of the problem with ______ taxes: because it is difficult to determine the optimal quantity of pollution, governments can find themselves issuing too many permits (so not enough pollution is reduced) or too few permits (so that too much pollution is reduced)
Tradable emissions permits; emissions
T/F: An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions.
True
T/F: The effect of an excise tax on the equilibrium price is the same regardless of who the tax is levied upon
True
T/F: An example of adverse selection is when a car dealer sells someone a car that is a lemon.
True.
T/F: Beth likes pillows since they are really comfortable to sleep on. However, she finds that if there are more than 3 pillows on her bed, they become too tall to sleep on. This scenario demonstrates decreasing marginal utility.
True.
T/F: Economic profits could be negative even if accounting profits are positive
True.
T/F: In the long run, firms will exit an industry if the market price is consistently less than their break-even price
True.
T/F: Price and marginal revenue are the same in perfect competition.
True.
T/F: Stink tofu, a Chinese specialty, typically requires an acquired taste before becoming truly enjoyable. This normally occurs after the first few bites. This accurately describes increasing marginal utility.
True.
T/F: When diminishing returns exist, then the marginal cost curve is upward-sloping
True.
T/F: When economic profits in an industry are zero, it means that firms are doing as well as they could in other markets.
True.
Is the following an example of a negative externality? A factory emits pollution into the air as a by-product of production
Yes, it is an example of a negative externality.
Is the following an example of a negative externality? A neighbor plays loud music that annoys the surrounding community.
Yes, it is an example of a negative externality.
Is the following an example of a negative externality? A person smokes a cigaretter and imposes a secondhand smoke on others.
Yes, it is an exmaple of a negative externality.
The term 'diminishing returns' refers to: a) A decrease in the extra output due to the use of an addition unit of a variable input, when more and more of the variable input is used and all other things are held constant b) a decrease in total output due to overcrowding, when too little labor is used with too much land or capital
a) A decrease in the extra output due to the use of an addition unit of a variable input, when more and more of the variable input is used and all other things are held constant
Which of the following are examples of an adverse selection problem? (It is possible that more than one items should be selected) a) A person buying a used car b) A person buying a car alarm because they have car insurance c) A person buying health insurance
a) A person buying a used car [and] c) A person buying health insurance
You own a small deli that produces sandwiches, soups and other items. Which of the following is a decision most likely to be made in the long run at your deli? a) You renovate the second floor of your building to increase the size of the dining room b) You order more bread sticks from the local bakery c) You ask your beverage distributor to deliver more soft drinks next week d) You place a newspaper ad to attract part-time workers from the local college
a) You renovate the second floor of your building to increase the size of the dining room
The shut-down point in the short run is a) the point in which economic profit is zero b) the minimum point of AVC c) the intersection of the MC and ATC curves d) the minimum point of AFC
a) the minimum point of AVC
Expected utility is defined as the expected value of an individual's a) total utility given the uncertainty about the future b) marginal utility given the uncertainty about the future c) marginal utility given fixed insurance premiums d) total utility given the equilibrium price level
a) total utility given the uncertainty about the future
Total inefficiency caused by a tax is the sum of _________ and ___________.
administrative costs; deadweight loss
Despite the possibility of exceptions, economists generally agree that the principle of diminishing marginal utility is a good model because a) The marginal utility curve slopes upward b) Given enough of something, the next unit of a good or activity will eventually provide less utility than the previous c) Most goods and services qualify under the exceptions
b) Given enough of something, the next unit of a good or activity will eventually provide less utility than the previous
How much utility is gained by spending an additional dollar on Good X? a) the average utility of Good X divided by the price of Good X b) MUx / Px c) TUx / Px d) MUy / Py
b) MUx / Px
In the short run, a perfectly competitive firm produces output and earns zero economic profit if a) P > ATC b) P = ATC c) P < ATC d) AVC > P > ATC
b) P = ATC
A demand curve that is downward-sloping will ensure that a) P = MR b) P > MR c) P < MR d) P = MC
b) P > MR
The Environmental Protection Agency is attempting to rule on whether pollution from greenhouse gas emissions endangers public safety. One of the many greenhouse gas polluters is cows and their farts. Can cow fart pollution be controlled? What is the ideal level of cow fart pollution? Economists have devised a theory to help address this issue. Identify the statement that economic theory believes to be true from the list below: a)The benefit of pollution cleanup to society is always less than the cost of pollution cleanup, especially is all costs are borne by the producer. b) The efficient level of pollution removal occurs where the marginal benefit of pollution equals the marginal cost of pollution (some cow farts can be allowed) c) If the cost of paying a pollution charge (fart tax) is less than the cost of reducing pollution, the farmer (and his or her cows) will have an incentive to reduce pollution
b) The efficient level of pollution removal occurs where the marginal benefit of pollution equals the marginal cost of pollution (some cow farts can be allowed)
(Dan Ariely's TED talk shown in class) In European organ donation decisions, what matters most in peoples' choices? a) Whether or not their family will be compensated b) Whether or not they have to check a box to opt in to the program c) Whether or not they have eaten a full breakfast on the day of the decision
b) Whether or not they have to check a box to opt in to the program
Diminishing marginal returns means that: a) each additional unit of an input used will cause output to decrease b) each additional unit an input will increase output, but by smaller and smaller amounts c) the firm is maximizing profit
b) each additional unit an input will increase output, but by smaller and smaller amounts
(Dan Ariely's TED talk shown in class) What single factor does Ariely argue makes the biggest difference in predicting people's choices? a) Their income b) Their relative level of attractiveness c) The way the choice is framed d) Their level of education
c) The way the choice is framed
The ___________ is the increase in output obtained by hiring an additional worker. a) average product b) total product c) marginal product d) marginal cost
c) marginal product
In the short run: a) all inputs are fixed b) all inputs are variable c) some inputs are fixed and some inputs are variable d) all costs are variable
c) some inputs are fixed and some inputs are variable
Marginal cost is the change in total cost divided by ___________; The amount by which total cost increases when an additional unit is produced
change in output
The principle of diminishing marginal utility states that the additional utility a(n) _______ receives from an additional unit of a good or service (decreases/increases) as consumption of it (decreases/increases)
consumer; decreases; increases
The following are all associated with a network externality except: a) A teleportation device that allows its users to be magically transported to any other location where there is another person who has also purchased the device b) Operating systems like Windows and Linux c) A facebook account d) A private airport e) Cell Phone
d) A private airport The benefit to a consumer of some goods decreases when more people are using the good. This occurs when a good is not associated with network externalities. A private airport would be more useful for you if you were the only one using it as opposed to if more people owned such good.
All of the following are consistent with the Ability-to-pay principle except: a) Income Tax b) Progressive Property Tax c) Federal Bonuses Tax d) Carbon Tax
d) Carbon Tax Carbon Tax is consistent with the Benefits Principle
Charlie is deciding how much time he should spend at work. He has 10 hours to spend on work per week, and the rest of the time is spent either at school or studying. Currently, his boss pays him $16 per hour. Suppose that his boss reduces his wage to $10 per hour. We know that when Charlie's wage decreases: a) He works more and consumed more b) He consumes more leisure c) He works more hours but consumes less d) There is not enough information to tell
d) There is not enough information to tell
Most insurance companies require a(n) ___________ meaning they compensate for losses only above a certain amount, so that coverage is always less than 100%. The insurance for on a car, for example, may pay for repairs only after the first $500 in loss. This means that a careless driver who gets into a fender bender will end up paying $500 in repairs even if he is insured, which provides at least some incentive to be careful and reduce ______________
deductible; moral hazard
The averal total cost curve in the short run slopes upward due to
diminishing returns
An individual can engage in _______________ by investing in several different things, so that the possible losses are independent events. This reduces overall risk.
diversification
One way to deal with pollution is to charger polluters a(n) __________ tax. This us a tax that depends on the amount of pollution a firm produces. Taxes can be used to discourage any activity that generate negative externalities, such as driving during rush hour. In general, taxes designed to reduce external costs are known as _________ taxes.
emissions; Pigouvian
Suppose that the market for haircuts in a community is a perfectly competitive constant-cost industry and that the market is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for haircuts. In the long-run, we expect that more firms will (enter/exit) the market, driving the price of haircuts (down/up) and the profits of individual firms back down to _______
enter; down; zero
The nature of the tax systems means that there is usually a trade-off between __________ and ___________
equity; efficiency
If the economic profit for a firm is negative, the firm should (enter/exit) the industry in the long run
exit
The environmental costs of pollution are the best-known example of a(n) ___________-an uncompensated cost that an individual or firm imposes on others. Another example is traffic congestion. An individual who chooses to drive during rush hour increases congestion and so increases the travel time of other drivers.
external cost
James finds a new job that doubles his income. He adjusts his consumption. From this we know that for every normal good James buys, James' marginal utility per dollar will (fall/stay constant/rise)
fall
Health insurance is one of the most hotly debated topics. Unlike a perfectly competitive market, health insurance and health care markets contain a lot of asymmetric information. For a simplified model, there are two types of people: 1. Healthy people who never get sick and 2. Unhealthy people who have very high health care costs Suppose that each people can work for either firm (a) which pays for all health insurance costs and has perfect insurance or firm (b) which pays a small part of the health insurance costs and requires high co-payments, but they pay a higher wage, enough to compensate healthy people for their health costs, but not unhealthy people. Which type of people will work for firm (a) and which for firm (b)
firm (a) 2. unhealthy workers only will work for firm (a) firm (b) 1. healthy workers only will work for firm (b)
A firm's ____________ are costs that are incurred even if there is no output. In the short run, these costs (decrease/do not change/increase) as production increases.
fixed costs; do not change
As a result of light pollution in most cities, families that do not live in the country are unable to go stargazing. Assume the government places an optimal Pigouvian tax on electricity used at night to reduce light pollution so that people can enjoy the stars. As a result of the tax, consumers pay a (lower/higher) price for electricity while producers (lower/higher) output
higher; lower
The ____________ of a tax is a measure of who really pays it.
incidence
The _______ of an excise tax depends on the _______ elasticity of the taxed good's supply and demand curves.
incidence; price
Suppose the marginal cost curve in the short run first decreases, then reaches a minimum, and then increases. If we are at an output where marginal cost is decreasing, then marginal product must be (decreasing/increasing) and average variable cost bust be (decreasing/increasing)
increasing; decreasing
Governments that are interested in minimizing the efficiency costs of taxation should only tax goods where demand or supply, or both, are relatively (inelastic; elastic)
inelastic
When the larger tax incidence falls on producers, it is because the supply of Good A is more _________ than the demand for Good A.
inelastic
The economic entity with the (least/most) flexibility in terms of their production and consumption _________ incur the largest burden of excise tax
least; substitutes
A(n) ____________ tax, promotes economic efficiency as it does not distort incentives
lump-sum
Margaret Thatcher's poll tax is an example of a(n) ___________, a tax that is the same for everyone regardless of any actions people take. It is widely perceived as much less fair than the tax structure it replaced, in which local taxes are proportional to property values.
lump-sum tax
When people that aren't responsible for the entire costs of their actions take riskier actions than they would otherwise, it is known as __________
moral hazard
For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have (no noticeable/a huge) effect on prices and beef is a (standardized/differentiated) product
no noticeable; standardized
Technological advancements are considered (negative/neutral/positive) externality because __________ receive the majority of benefits. Too (little/much) of this type of externality is usually provided.
positive; third parties; little
If a local California avocado stand operates in a perfectly competitive market, that stand owner will be a __________
price-taker
Given two states of the world (Y and Z), complete the formula for calculating the formula for calculating expected utility (Utility of Y times _____________) plus ( Utility of Z times _____________)
probability of Y; probability of Z
Average (Total) Cost is total cost divided by ________________
quantity of output
A marketable permit provides its owner with the right to pollute a specified amount. The number of permits in existence is determined by ______. Who is allowed to purchase permits
regulators; anyone is allowed to purchase permits
Most people prefer, other things equal, to reduce _________-uncertainty about future outcomes
risk
Average variable cost is the ____ of all costs that change as output changes divided by the __________________
sum; number of units produced
Suppose Apple Inc. creates the first ever solar powered cell phone battery. The battery absorbs ambient light and converts it into electrical power. Also, the battery stores excess light as energy to last 10 hours in the dark. At a conference, a representative from Apple Inc. makes a presentation about the battery to representatives from many other companies, proclaiming the invention will revolutionize the cell phone industry. A few months later, Microsoft creates a solar powered cell phone battery that lasts 12 hours in the dark. This example of the spreading of knowledge is known as a ___________ which is a _____________ externality.
technology spillover; positive
A firm's _____________ are costs that increase as quantity produced increases. These costs often show __________________ illustrated by the increasingly steeper slope of the total cost curve.
variable costs; diminishing marginal returns