Economics First Semester Review
Which of the following is true in the short run?
"If I can get more than enough to cover my variable costs, I will produce, ignoring my fixed costs." In theory, fixed costs will never rise, which means you can pay them off even a penny at a time.
In a competitive industry, suppose the marginal revenue product (MRP) of the last pastry baker hired is $60, the MRP of the last bagel maker hired is $30, and a bakery must pay pastry bakers $80 per day and bagel makers $20 per day. The bakery should hire
Fewer pastry bakers and more bagel makers
The cartel model of oligopoly predicts that
All the firms in the industry act in unison to set a monopoly price
What would cause an outward shift in a production possibilities frontier?
An increase in capital goods
When more firms enter a monopolistically competitive industry, the long-run effect is:
An increase in substitutes lowering demand
Mr. Carpenter devotes his working time to producing tables and chairs. An increase in the demand for chairs will result in
An increase in the opportunity cost of producing tables
Which of the following will decrease demand for beef?
An increase in the price of potatoes, if potatoes and beef are complementary goods.
In a perfectly competitive labor market for nurses, all of the following statements are true EXCEPT:
An increase in the supply of nurses will increase unemployment and leave wages unchanged Wages will decrease if the supply of nurses increases.
A leftward shift in the supply curve of watches could be caused by
An increase in wages paid to workers who produce watches
What does the downward slope of the Demand curve reveal?
As the price of the product falls, more people are willing to purchase it.
If government regulators set price such that a natural monopolist earns only normal profit, price will be set equal to
Average total cost
After graduating from high school, Peggy Smith decided to enroll in a two-year program at the local community college rather than to accept a job that offered a salary of $12,000 per year. If the annual tuition and fees are $4,600, the annual opportunity cost of attending the community college is
$16,600 You are losing the potential income of $12,000, PLUS spending an additional $4,600 on tuition.
The table above shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and the total fixed cost is $100, the average total cost of producing 40 units of output is
$4 Add the fixed cost to the cost of labor to make the 40 units. This is $100 plus $60 for labor for a total cost of $160. Divided by 40 units to get the AVERAGE total cost, you get $4.
The payoff matrix above gives the profits associated with the strategic choices of two firms in an oligopolistic industry. The first entry in each cell is the profit to Firm A and the second to Firm B. If each firm simultaneously chooses its pricing strategy without collusion, Firm A's and Firm B's profits would be which of the following? Firm A Firm B
$50 $50 Oligopolists will always choose the lower-price option in order not to be undercut by competitors. If neither colludes, both will choose the lower-price option and end up with the lowest possible profits. This tendency to choose the lower-price option is known as the Nash Equilibrium.
The table below represents points on an economy's current production possibilities curve: Good X Good Y 1,000 0 990 100 980 200 970 300 The opportunity cost of increasing production of good Y from 0 to 200 is
20 units of X
Which of the following is not a determinant of the demand for hamburgers?
A change in hamburger-making technology
Technological advances will lead to
A decrease in average total costs
Assume that demand for bottled water is relatively price elastic. An increase in supply of water will result in which of the following?
A decrease in price, leading to an increase in total revenue
Leather and beef are jointly produced such that an increase in the production of one results in an equal increase in the production of the other. An increase in the demand for leather will most likely cause
A decrease in the price of beef
In a competitive market where firms are incurring losses, which of the following should be expected as the industry moves to long-run equilibrium?
A higher price and fewer firms
Antitrust legislation is designed to make it illegal for a firm to monopolize an industry. Which of the following best states the economic rationale for this legislation?
A monopolist produces too little of the good, charging consumers a price that exceeds the marginal cost of production
A society that wishes to achieve greater income equality is most likely to have which of the following?
A progressive income tax system and high estate and gift taxes
Which of the following would shift the short-run supply curve for strawberries?
A strike by all farmworkers
In the market shown in the graph above, at a price of $5, there will be
A surplus and price will eventually fall
Assume that the market for apples is in equilibrium at a price of $35 per bushel. If the demand for apples decreases, which of the following will occur?
A surplus will occur at $35, leading to a decrease in price and in quantity supplied. Remember, a change in price does NOT change supply or demand, only QUANTITY SUPPLIED or QUANTITY DEMANDED.
In which of the following cases is the government's action appropriate for reducing inefficiency?
A toll on a congested bridge
Marginal costs is defined as the
Change in total cost resulting from producing an additional unit of output.
Which of the following is a key assumption of consumer choice theory?
Consumers maximize their utility.
If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?
Consumers will bear most of the burden of the tax
A governmental welfare program that taxes the labor income of the wealthy and redistributes the tax revenue to low-income citizens will
Decrease income inequality and efficiency With any taxation, there is always some loss of efficiency, even if the tax does generate positive effects.
Which of the following changes in the demand for and supply of a good will necessarily result in an increase in both the equilibrium price and equilibrium quantity of the good in a market?
Demand Supply Increase No change
If the firm's long-run average total cost increases as output increases, the firm is experiencing
Diseconomies of scale
Assume that the last worker a firm hires produces 50 additional units of output per hour and the last machine rented produces 5,500 units of output per hour. A worker's hourly wage is $10, and the rental cost of the machine is $1,100 per hour. In order to minimize the cost of its current output, the firm should:
Do nothing, because production costs are already minimized Both labor and capital are producing 5 units per dollar.
Which of the following best explains why it is difficult to maintain lasting collusive agreements?
Each firm realizes that its profits would increase if it were the only firm to violate the collusive agreement by increasing production slightly
A perfectly competitive firm hires three workers in a perfectly competitive labor market. The marginal products of the three workers are shown in the table below. Worker Marginal Product 1 50 2 30 3 20 Which of the following will be true?
Each worker will receive a wage based on the marginal product of the last worker hired. Since you hire out until the point where MRP equals MRC, the last worker hired (and his productivity) will determine the wage rate in perfect competition.
In the long run, an oligopolist can make ____________ profit due to...
Economic, high barriers of entry preventing industry expansion
Assume that the price of good X decreases from $10 to $9 per unit and that the quantity demanded of good X increases from 25 to 30 units. In this price range, the demand for good X is
Elastic
Suppose the marginal product of capital is 40 and capital costs $10 per unit and the marginal product of labor is 20 and labor costs are $4 per unit. Under these conditions, a firm would minimize costs by
Employing more labor and less capital Capital is producing 4 units per dollar, while labor is producing 5 units per dollar. Use more labor!
Suppose that the market for low-wage labor is perfectly competitive and initially in equilibrium. If the government establishes a minimum wage above this equilibrium, which of the following will occur?
Employment of low-wage workers will decrease and unemployment will increase.
Which of the following is most likely to make a country's income distribution more equal?
Establishing a progressive income tax system
If a perfectly competitive industry is in long run equilibrium, which of the following is most likely to be true?
Firms are earning a return on investment that is equal to their opportunity costs
What is considered a primary reason for the Law of Diminishing Marginal Returns in the short run?
Firms have limited space and capital for workers to use, leading to overcrowding and inefficiency as workers continue to increase.
Why does the Supply curve slope upward?
Firms must charge higher prices to handle higher costs of production at high levels of output.
Suppose that price in a perfectly competitive industry decreases and it is now below minimum average total cost but remains above minimum average variable cost. Which of the following will occur in the short run?
Firms will produce the output at which marginal cost equals the new price. As long as you can produce (P is greater than or equal to minimum AVC), you will produce the output at which MC equals MR (which is P in perfect competition).
Which of the following would create a positive externality?
Flu vaccination
Which of the following will most likely lead to zero economic profits?
Free entry and exit of firms
Assume that good X is a normal good. Which of the following helps to explain why a decrease in the price of good X increases the quantity demanded of good X?
Good X becomes relatively less expensive than its substitutes, so consumers buy more of good X and fewer of the substitutes.
A monopoly is different from a perfect competitor in that a monopoly
Has a marginal revenue curve that lies below its demand curve
Characteristics of a pure public good include which of the following? I. Nonpaying consumers cannot be excluded from consuming the good. II. Consumption by any one person does not reduce the availability of the good to others. III. The amount consumed depends on the price paid.
I and II only
Scarcity is correctly described by which of the following statements? I. Scarcity exists if there are more uses for a resource than can be satisfied at one time. II. Scarcity exists if decisions must be made about alternative uses for resources. III. Scarcity would not exist in a society in which people wanted to help others instead of themselves.
I and II only
An opportunity cost is entailed in which situations? I.) A student decides to attend college full time II.) A family uses its $20,000 in savings to purchase an automobile III.) A farmer decides to grow more wheat and less corn
I, II, and III
Changes in which of the following would affect the growth of an economy: I. Quantity and quality of human and natural resources II. Amount of capital goods available III. Level of technology
I, II, and III
For an economy with a straight line production possibility frontier, which of the following must be true if you are on this frontier? I.) The opportunity cost of producing one more unit is constant II.) Resources are completely adaptable to alternative uses III.) Resources are used efficiently
I, II, and III
The circular flow of economic activity between consumers and producers includes which of the following? I. Households buy factor services from firms II. Households sell factor services to firms III. Households buy outputs from firms IV. Households sell outputs to firms
II and III only
Pam and Tara run two competing lemonade stands in a town. In the payoff matrix above, the first entry in each cell shows the profits to Pam, and the second entry in each cell shows the profits to Tara. According to the information, which of the following is true?
If Pam sets the high price, Tara will do best by charging the low price
Which of the following best describe the relationship between the average total cost curve and the marginal cost curve in the short run?
If the average total cost curve is rising, the marginal cost curve is above the average total cost curve.
A production possibility curve is bowed outward, indicating increasing opportunity cost because of
Imperfect adaptability of resources to alternative uses
Economic profits can be calculated as accounting profit minus which of the following?
Implicit costs
Which of the following explains why a production possibilities curve is often represented as concave (bowed out) from the origin?
Increasing opportunity cost
To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is
Inelastic
Which of the following is the best example of the free rider problem?
It is difficult to exclude those who do not pay for a good from enjoying the benefits of the good
In the short run, which of the following is true of a firm's average total cost of production?
It is equal to average fixed cost plus average variable cost.
National defense is an example of a public good because
It is nonexcludable and nonrival
Which of the following is true of the substitution effect on an increase in the price of a normal good?
It works to reinforce the income effect
Which of the following is most likely to reduce inequality in a country's distribution of income?
Job training for low-skill workers
A profit-maximizing firm will hire
Labor until its wage rate equals its marginal revenue product
An individual's labor supply curve is derived from that person's preferences about the trade-off between income and
Leisure
If the marginal revenue product (MRP) of labor is less than the wage rate in a competitive market, then
Less labor should be employed
If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be
Less than the average total cost
Private supply of public goods is most likely to result in
Less than the efficient level of output due to the free-rider problem
Assume that both the product market and labor market are perfectly competitive. It would be profitable for a firm to hire additional labor if the ratio of the wage to the marginal product of labor is
Less than the output price
Economies of scale exist when
Long-run average total cost decreases as output increases.
Let W denote the nominal wage, P the output price, and MPL the marginal product of labor. Which of the following relationships correctly estimates the marginal cost (MC) of production for a perfectly competitive firm in the short run?
MC = W/ MPL If you are producing at equilibrium, MR = MC. If you are a perfect competitor, MR also = P. Therefore, MC = MR = P. The price of the product (P) in a perfectly competitive industry, where there is no economic profit, can be found by dividing the worker wage (W) by how many units the workers make (MPL). Or, to look at it another way, if MC = W / MPL, then MC x MPL = W. The wage is equal to the cost of producing the last unit times how many units are made.
ABC Corp. sells its products in a perfectly competitive market for a price of $15 per unit and hires workers at a daily wage of $75. Labor is the only factor cost, and the first is currently earning profits. If ABC hires one more worker and output increases by 5 units per day, the firm's profits will
Remain unchanged
Assume a firm uses only two inputs, capital (K) and labor (L), to produce its output. Let the marginal product of capital be MPK, the marginal product of labor be MPL, and the price of labor be PL. The least-cost combination of capital and labor needed to produce a given level of output is given by which of the following?
MPL/PL = MPK/PK
For a firm hiring labor in a perfectly competitive labor market, the marginal revenue product curve slopes downward after some point because, as more of a factor is employed, which of the following declines?
Marginal Product
A firm sells its output in a perfectly competitive market and hires two inputs, capital and labor, in perfectly competitive factor markets. The product price is $15 per unit, the wage is $75 per day, and the marginal product of capital is 3. If the firm is choosing the least-cost combination of labor and capital, the firm's marginal product of labor and the price of capital must be equal to which of the following?
Marginal Product of Labor Price of capital 5 $45
A chemical plant pollutes a river that serves as the water supply for a nearby town. From an economist's point of view, pollution from the plant should be reduced until the
Marginal benefit from cleaner water is equal to the marginal cost of making the water cleaner
The socially optimal price for a monopolist is where price equals
Marginal cost
In the short run, a profit-maximizing firm, faced with U-shaped average costs, is producing a level of output at which the average total cost of production is minimized. At this level of output, which of the following is true for the firm?
Marginal cost equals average total cost.
Which of the following statements about marginal cost is true?
Marginal cost is the increase in total cost that result from increasing production by one unit.
Pollution abatement policies will improve efficiency if the
Marginal cost of abatement is less than the marginal benefit of abatement
Assume that a firm uses only one variable input. If a firm is experiencing diminishing returns, which of the following is true as more of the variable input is used?
Marginal cost will increase.
When consumption of a good generates a positive externality, which of the following must be true at the market equilibrium?
Marginal social benefit is greater than marginal private benefit.
While producers will often sell at a loss during the ________________ because they cannot alter production, sometimes they will prefer to accept a total loss because _____________________.
Market period; they do not want consumers to grow accustomed to such low prices.
In a mixed economy, what to produce and how much to produce are determined by
Markets and the government
In the short run, a monopolistically competitive firm
May make economic profits, but it fails to make economic profits in the long run because of the entry of new firms.
All of the following are included in the opportunity cost of attending college except
Money spent on underwear and socks
In a competitive labor market, an increase in labor productivity will result in which of the following, other things constant?
More labor being employed
An oligopolist is
Neither productively nor allocatively efficient
A public good is a good that is
Nonrivalrous and nonexcludable in consumption
Suppose that a large number of unskilled workers enter a nation's labor market. If the labor market is competitive, the number of unskilled workers hired and the wage rate will most likely change in which of the following ways?
Number of Unskilled Workers Hired Wage Rate Increase Decrease
Which of the following is the best example of a negative externality?
Oil leakages from drilling platforms in the Gulf of Mexico A negative externality is something that harms innocent third parties.
Collusion, price leadership, and price wars are usually observed in which of the following market structures?
Oligopoly
To correct for positive externalities, the government should
Pay a subsidy equal to the marginal external benefit
Assume that the government increases the per-unit excise tax on gasoline suppliers and also that people commute longer distances to work as population shifts to the suburbs. As a result, the equilibrium price and quantity of gasoline will most likely change in which of the following ways?
Price Quantity Increase Indeterminate
A market is clearly NOT perfectly competitive if which of the following is true in equilibrium?
Price exceeds marginal cost
Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
Price exceeds marginal cost, and the firm earns zero economic profits.
Which of the following is true for both a monopolistically competitive firm and a perfectly competitive firm in long-run equilibrium?
Price is equal to average total cost.
For a certain firm, the marginal revenue product of the last unit of labor is $60, and the marginal revenue product of the last unit of capital is $100. Which of the following combinations of factor prices would be necessary for the firm to maximize profits?
Price of labor Price of capital $60 $100 The profit maximizing equation is (MRP of labor / cost of labor) = (MRP of capital / cost of capital) = 1.
If an industry ignores the external costs it generates in its production, which of the following will be true at the competitive market equilibrium output?
Price will be less than the marginal social cost
Public goods are typically provided by the government, because private firms tend to
Produce less than the socially optimum quantity
The fundamental difference between a market economy and a command economy lies where?
Property rights and protection of private property
Which of the following is necessary in a well-functioning capitalist economy but not in a command economy?
Protection of property rights
Monopolistic competition can essentially be described as
Pure competition but with differentiated products
A Lorenz curve can be used by economists to do which of the following?
Show the distribution of personal income
Whenever the production of a good creates negative externalities, an unregulated market will result in
Society's marginal cost being higher than the firm's marginal cost
Which of the following best explains why the short-run average total cost curve is U-shaped?
Spreading total fixed costs over a larger output, and eventually diminishing returns.
Assuming that all residents of the city of Smallville prefer to have streetlights installed citywide, which of the following best explains why individual residents do NOT install the optimal number of streetlights?
Streetlights are nonexcludable.
If positive externalities exist in the market for flu shots, which of the following is true?
Subsidizing flu shots will lead to the socially efficient level of output
In the United States, the federal government redistributes income primarily by
Taxing different levels of income at different rates
Which of the following is a government policy that is intended to address a market failure?
Taxing the use of pesticides by farmers. A market failure is caused by a negative EXTERNALITY, meaning pollution from pesticides rather than rising production costs.
The study of economics is primarily concerned with which of the following:
The allocation of scarce resources, given unlimited wants
Assume a consumer finds that his total expenditure on compact discs stays the same after the price of compact discs declines. Which of the following is true for this price change?
The consumer's demand for compact discs is unit price elastic
During a football game, it starts to rain and grow colder outside. ROTC, which operates the concession stand, raises the price of hot chocolate from $2.00 to $3.00 and sells more coffee than ever before. Why?
The demand curve for coffee shifted right
Consumer surplus is defined as
The difference between the value the consumers place on a good and the price they pay
Price leadership involves prices in an oligopoly being set by
The dominant firm
If the price of a firm's variable input increases, which of the following will occur?
The firm will decrease its level of production
The demand for a resource is downsloping on a standard graph. What makes this occur?
The law of diminishing marginal returns
If the price of a good produced by a competitive firm increases, then
The marginal revenue product of labor will increase Remember, marginal product is unaffected by price. Marginal REVENUE product is marginal product multiplied by price, so it is directly affected by price.
Under an efficient policy to address the problem of pollution created from the manufacturing of good X, which of the following is true?
The marginal social benefit of pollution reduction equals the marginal social cost of pollution reduction
Given a concave production possibilities frontier, it can be determined that
The opportunity cost of the goods increases.
A firm is currently producing at the profit-maximizing level of output. If the marginal product of labor is 10 units per hour and the firm pays a wage rate of $8 per hour, which of the following is true?
The output price is $0.80 per unit
The surgeon general has determined that smoking causes cancer and heart disease for both smokers and nonsmokers who breathe smoke-filled air. If cigarette prices are determined in a free market, which of the following will be true?
The price of cigarettes will be too low, and the quantity sold will be too high.
If the production of a good generates a negative externality, which of the following is true at the private market equilibrium?
The private market equilibrium quantity is greater than the socially optimal quantity.
If resources were perfectly substitutable in all activities, which of the following would be true?
The production possibilities curve would be a straight line
In the current labor market, suppose that the wage rate for accountants is significantly higher than the wage rate for economists. In the long run, if you observed that the wage rate for economists rose while the wage rate for accountants fell, which of the following would best explain your observation?
The supply of economists must have decreased, and the supply of accountants must have increased.
Assume that the price elasticity of demand for good X is constant and is equal to -0.5 and the price elasticity of demand for good Y is constant and is equal to -2. Assume that goods X and Y have identical upward-sloping elastic supply curves. If a per-unit excise tax of the same amount is levied on good X and on good Y, which of the following would be true?
The tax share paid by consumers of good X would be relatively higher than that paid by consumers of good Y.
Opportunity cost is defined as
The value of the next best alternative that is forgone when an activity is pursued
Which of the following situations would necessarily lead to an increase in the price of peaches?
The wage paid to peach farm workers rises at the same time that researchers find that eating peaches reduces the chances of a person's developing cancer
Which of the following will occur if the government imposes a price ceiling below the equilibrium price of a good?
There will be a shortage in the market
Which of the following will occur if the government imposes a price ceiling below the equilibrium price of a good?
There will be a shortage in the market.
If the firm can sell as many potatoes as it wants for $2 per pound and has to pay each worker $5 per hour, how many workers should the firm employ to maximize profits?
Third worker
From the point of view of economic efficiency, a monopolist produces
Too little of a good and charges too high a price
The price of an airline ticket is typically lower if a traveler buys the ticket several weeks before the flight's departure rather than on the day of departure. This pricing strategy is based on the assumption that
Travelers' demand becomes less elastic as the departure date approaches
If the demand for good Y increases as the price of good X decreases, it can be concluded that
X and Y are complementary goods
If the income elasticity of demand for good X is negative and the cross-price elasticity of demand between good X and good Y is negative, which of the following must be true?
X is an inferior good and is complement to Y
Oscar spent his entire income on only two goods: good X and good Y. At his current consumption of the two goods, the marginal utility of X is 8 and the marginal utility of Y is 2. If the price of X is $4.00 and the price of Y is $0.50, then to maximize his total utility, Oscar should have
bought less X and more Y To maximize utility, you must consume both products at the point where they provide the same marginal utility per dollar.
Assuming a linear downward-sloping demand curve, as a monopoly firm sells additional units of output, its marginal revenue will
decrease continuously
The short-run supply curve for a firm is
its marginal cost curve above the minimum point of its average variable cost curve
Antitrust policy is designed to
maintain a competitive business environment
Consumer surplus exists because of the
willingness of some consumers to pay a price higher than the market price for some units of a good
Marginal Revenue Product is found using the equation
Δ Total Revenue ÷ Δ Resource quantity
