micro final

What measures of cost is best described as "the increase in total cost that arises from an extra unit of production?"

marginal cost

The competitive firm maximizes profit when it produces output up to the point where Answer marginal cost equals total revenue. marginal revenue equals average revenue. marginal cost equals marginal revenue. price equals average variable cost.

marginal cost equals marginal revenue.

A monopolist maximizes profit by producing the quantity at which Answer marginal revenue equals marginal cost. marginal revenue equals price. marginal cost equals price. marginal cost equals demand. none of the above occurs.

marginal revenue equals marginal cost.

At the profit‐maximizing level of output, __________________ equals ____________________.

marginal revenue; marginal cost

A larger tax always generates more tax revenue.

as a tax increases, revenue first rises and then falls as the tax shrinks the market to a point where all trades are eliminated and tax revenue is zero.

The firm's efficient scale is the quantity of output that minimizes

average total cost

In the long run, some firms will exit the market if the price of the good offered for sale is less than Answer marginal revenue. marginal cost. average revenue. average total cost.

average total cost.

The efficient scale of production is the quantity of output that minimizes

average total cost.

Diseconomies of scale occur when

long-run average total costs rise as output increases

A monopoly is the sole seller of a product with no close substitutes. Answer

True

Corrective taxes give factory owners an economic incentive to

reduce pollution

The average fixed cost of producing four units is Answer $26. $10. $5. $2.50. none of the above. SS 3

$2.50.

The economic profit at Madelyn's pottery factory is Answer $30,000.

$30,000.

A common resource is neither rival in consumption nor excludable.

False: it is rival in consumption but not excludable.

Suppose that requiring motorcycle riders to wear helmets reduces the probability of a motorcycle fatality from 0.3 percent to 0.2 percent over the lifetime of a motorcycle rider and that the cost of a lifetime supply of helmets is $500. It is efficient for the government to require riders to wear helmets if human life is valued at Answer $100 or more. $150 or more. $500 or more. $50,000 or more. $500,000 or more.

$500,000 or more.

Use the following information to answer questions 3 and 4. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year. The accounting profit at Madelyn's pottery factory is Answer $30,000. $35,000. $70,000. $75,000. $80,000.

$75,000

The average total cost of producing three units is Answer $3.33. $6. $9.33. $18. $28. SS 3

$9.33.

A tax causes a deadweight loss because it eliminates some of the potential gains from trade.

True

If the price is , the firm will earn profits equal to the area SS 4

(P4-P3)x Q3

Common resources are overused because common resources are free to the consumer. Answer

True

The marginal product of labor as production moves from employing one worker to employing two workers is Answer 0. 10. 17. 23. 40. SCREENSHOT 2

17.

If a buyer's willingness to pay for a new Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is Answer $0. $2,000. $28,000. $30,000.

2,000

Suppose that the price of a new bicycle is $300. Sue values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike? Answer $100 $200 $300 $400 $500

200

Total revenue equals the quantity of output the firm produces times the price at which it sells its output.

True

The efficient scale of production is Answer one unit. two units. three units. four units. five units. SS 3

4

The marginal cost of changing production from three units to four units is Answer $5. $6. $7. $8. $9. SS 3

8

If a tax is placed on the product in this market, consumer surplus is the area Answer A. A + B. A + B + E. A + B + C + D. D.

A

The profit-maximizing monopolist will choose the price and quantity represented by point Answer SS 5

A

If there is no tax placed on the product in this market, consumer surplus is the area Answer A + B + C. D + C + B. A + B + E. C + D + F. SCREENSHOT

A + B + E.

Which of the following is not a barrier to entry in a monopolized market? Answer The government gives a single firm the exclusive right to produce some good. The costs of production make a single producer more efficient than a large number of producers. A key resource is owned by a single firm. A single firm is very large.

A single firm is very large.

If a tax is placed on the product in this market, total surplus is the area

A+B+C+D

If there is no tax placed on the product in this market, total surplus is the area

A+B+C+D+E+F

The deadweight loss associated with monopoly pricing is represented by the area SS 5

ABD

Which of the following statements is true? Answer All costs are fixed in the long run. All costs are variable in the long run. All costs are fixed in the short run. All costs are variable in the short run.

All costs are variable in the long run.

To reduce pollution by some targeted amount, it is most efficient if each firm that pollutes reduces its pollution by an equal amount.

False: firms that can reduce pollution at a lower cost should reduce their pollution more than firms that can reduce pollution at a greater cost.

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

False: free markets allocate output to buyers who have a willingness to pay that is above the price.

If a tax is placed on the product in this market, tax revenue paid by the buyers is the area

B

If a tax is placed on the product in this market, tax revenue paid by the sellers is the area

C

If there is no tax placed on the product in this market, producer surplus is the area Answer A + B + C + D. C + D + F. D. C + F. A + B + E.

C + D + F.

According to the Coase theorem, an externality always requires government intervention in order to internalize the externality.the

Coase theorem suggests that private parties can solve the problem of an externality on their own if there are no transaction costs.

Which of the following is true regarding tradable pollution permits and corrective taxes? Answer Corrective taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits. Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can reduce pollution at the lowest cost. To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights. Corrective taxes and tradable pollution permits create an efficient market for pollution.

Corrective taxes and tradable pollution permits create an efficient market for pollution.

If a tax is placed on the product in this market, producer surplus is the area

D

The efficient price and quantity are represented by point SS 5

D

If a tax is placed on the product in this market, deadweight loss is the area Answer B + C. B + C + E + F. A + B + C + D. E + F. A + D.

E+F

If the city government sells apples at a roadside stand, the apples are public goods because they are provided by the government.

False: goods are categorized as public or private based on their characteristics, not who provided them, so an apple sold to a consumer is private regardless of who provided the apple.

Producer surplus is a measure of the unsold inventories of suppliers in a market.

False: it is a measure of the benefits of market participation to the sellers in a market.

Consumer surplus is the amount a buyer is willing to pay for a good minus the seller's cost.

F: consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays.

If Bob values smoking in a restaurant at $10 and Sue values clean air while she eats at $15, according to the Coase theorem, Bob will not smoke in the restaurant only if Sue owns the right to clean air.

False: the original distribution of property rights to the air will not affect the efficient solution

Wages and salaries paid to workers are an example of implicit costs of production.

False: wages and salaries are explicit costs of production because dollars flow out of the firm.

If your willingness to pay for a hamburger is $3.00 and the price is $2.00, your consumer surplus is $5.00.

False: 3-2=1

Public goods are related to positive externalities because the potential buyers of public goods ignore the external benefits those goods provide to other consumers when they make their decision about whether to purchase public goods. Answer T F Common resources are overused because common resources are free to the consumer.

False: Common resources are overused because common resources are free to the consumer.

In the long run, as a firm expands its production facilities, it generally first experiences diseconomies of scale, then constant returns to scale, and finally economies of scale.

False: a firm generally experiences economies of scale, constant returns to scale, and diseconomies of scale as the scale of production expands.

A natural monopoly is a monopoly that uses its ownership of natural resources as a barrier to entry into its market.

False: a natural monopoly is a firm with an average total cost curve that continually declines at least to the quantity that satisfies the entire market.

The socially optimal price for a fishing license is zero.

False: a positive price is optimal so that the price reduces the quantity demanded of fish to the socially optimal level.

The government should continue to spend to improve the safety of our highways until there are no deaths from auto accidents.

False: at some point, the cost of increasing safety (reducing highway deaths) exceeds the value of a life.

Average total costs are total costs divided by marginal costs.

False: average total costs are total costs divided by the quantity of output

A tax always makes a market less efficient.

False: corrective taxes can make a market more efficient.

Deadweight loss is the reduction in consumer surplus that results from a tax.

False: deadweight loss is the reduction in total surplus that results from a tax.

If the production function for a firm exhibits diminishing marginal product, the corresponding total-cost curve for the firm will become flatter as the quantity of output expands.

False: diminishing marginal product means that it requires ever greater amounts of an input to produce equal increments of output so total costs rise at an increasing rate.

The majority of economists do not like the idea of putting a price on polluting the environment.

False: economists generally think that a market for pollution will reduce pollution most efficiently

Most economists argue that the most efficient solution to the problem of monopoly is that the monopoly should be publicly owned.

False: economists usually prefer private ownership to public ownership because private owners have a greater incentive to reduce costs.

The efficient scale for a firm is the quantity of output that minimizes marginal cost.

False: efficient scale minimizes average total costs

A public good is both rival in consumption and excludable.

False: it is neither rival in consumption nor excludable

A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve.

False: it is the portion of the MC curve that lies above its average-total-cost curve

A competitive firm's short-run supply curve is the portion of its marginal-cost curve that lies above its average-total-cost curve.

False: it is the portion of the MC curve that lies above its average-variable-cost curve

Monopolists are price takers.

False: monopolists are price makers

The supply curve for a monopolist is always positively sloped.

False: monopolists have no supply curve

National defense is a classic example of a common resource.

False: national defense is an example of a public good

The most common source of a barrier to entry into a monopolist's market is that the monopolist owns a key resource necessary for production of that good.

False: owning a key resource is the rarest source of barriers to entry.

Producing more of a product always adds to total surplus.

False: producing above the equilibrium quantity reduces total surplus because units are produced for which cost exceeds the value to buyers.

When the government uses cost-benefit analysis to decide whether to provide a public good, the potential benefit of the public good can easily be established by surveying the potential consumers of the public good.

False: quantifying benefits is difficult and respondents have little incentive to tell the truth.

A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.

False: taxes collected from either the buyers or the sellers are equivalent. That is why economists simply use a tax wedge when analyzing a tax and avoid the issue altogether.

A market that generates a negative externality that has not been internalized generates an equilibrium quantity that is less than the optimal quantity.

False: the equilibrium quantity is greater than the optimal quantity.

If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output.

False: the firm increases profits if it reduces output.

In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.

False: the firm will continue to operate in the short run as long as price exceeds average variable costs.

The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.

False: the goods offered for sale are largely the same and (possibly) firms can freely enter or exit the market.

A monopolist produces an efficient quantity of output, but it is still inefficient because it charges a price that exceeds marginal cost and the resulting profit is a social cost.

False: the inefficiency generated by a monopoly results from the failure of the monopolist to produce units of output where the value to consumers equals or exceeds the cost of production. The monopolist's profits are not a cost to society but are just a redistribution from consumer surplus to producer surplus.

The short-run market supply curve is more elastic than the long-run market supply curve.

False: the long-run market supply curve is more elastic than the short-run market supply curve.

When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

False: the loss of producer and consumer surplus exceeds the revenue from the tax. The difference is deadweight loss.

The average-total-cost curve crosses the marginal-cost curve at the minimum of the marginal-cost curve.

False: the marginal-cost curve crosses the average-total-cost curve at the minimum of the average-total-cost curve.

A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.

False: the more elastic the demand curve, the greater the deadweight loss, and the demand for cigarettes (a necessity) should be more inelastic than the demand for luxury boats (a luxury).

If Bob values smoking in a restaurant at $10 and Sue values clean air while she eats at $15, according to the Coase theorem, Bob will not smoke in the restaurant only if Sue owns the right to clean air.

False: the original distribution of property rights to the air will not affect the efficient solution.

Club goods are free to the consumer of the good.

False: they are excludable so a price must be paid to receive them, but they are not rival in consumption, so they can be enjoyed by many at the same time.

In the long run, perfectly competitive firms earn small but positive economic profits.

False: they earn zero economic profits in the long run

Total surplus is the cost to sellers minus the value to buyers.

False: total surplus is the value to buyers minus the cos t to sellers.

Which of the following is not a characteristic of a competitive market? Answer There are many buyers and sellers in the market. The goods offered for sale are largely the same. Firms can freely enter or exit the market. Firms generate small but positive economic profits in the long run.

Firms generate small but positive economic profits in the long run.

Which of the following statements about price and marginal cost in competitive and monopolized markets is true? Answer In competitive markets, price equals marginal cost; in monopolized markets, price equals marginal cost. In competitive markets, price exceeds marginal cost; in monopolized markets, price exceeds marginal cost. In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost.

In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost.

Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true? Answer It is efficient for Bob to continue to play loud music. It is efficient for Bob to stop playing loud music only if Tom has the property right to peace and quiet. It is efficient for Bob to stop playing loud music only if Bob has the property right to play loud music. It is efficient for Bob to stop playing loud music regardless of who has the property right to the level of sound.

It is efficient for Bob to stop playing loud music regardless of who has the property right to the level of sound.

Suppose each of 20 neighbors on a street values street repairs at $3,000. The cost of the street repair is $40,000. Which of the following statements is true? Answer It is not efficient to have the street repaired. It is efficient for each neighbor to pay $3,000 to repair the section of street in front of his home. It is efficient for the government to tax the residents $2,000 each and repair the road. None of the above is true.

It is efficient for the government to tax the residents $2,000 each and repair the road.

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a Answer deadweight curve. tax revenue curve. Laffer curve. Reagan curve. None of the above is correct.

Laffer

A larger tax always generates a larger deadweight loss. If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue. Answer

True

In the short run, competitive firms will temporarily shut down production if the price falls below SS 4

P1

In the long run, some competitive firms will exit the market if the price is below SS 4

P2

In the long run, the competitive equilibrium is SS 4

P2Q2

The profit earned by the profit-maximizing monopolist is represented by the area Answer SS 5

P4 ACP 1

Which of the following statements about price discrimination is not true? Answer Price discrimination can raise economic welfare. Price discrimination requires that the seller be able to separate buyers according to their willingness to pay. Perfect price discrimination generates a deadweight loss.

Perfect price discrimination generates a deadweight loss.

If the price is , a competitive firm will maximize profits if it produces SS 4

Q3

Which of the following is true with regard to the burden of the tax in Exhibit 4? Answer The buyers pay a larger portion of the tax because demand is more inelastic than supply. The buyers pay a larger portion of the tax because demand is more elastic than supply. The sellers pay a larger portion of the tax because supply is more elastic than demand. The sellers pay a larger portion of the tax because supply is more inelastic than demand.

The sellers pay a larger portion of the tax because supply is more inelastic than demand.

Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music and if there are no transaction costs? Answer Bob will pay Tom $100, and Bob will stop playing loud music. Tom will pay Bob between $100 and $150, and Bob will stop playing loud music.

Tom will pay Bob between $100 and $150, and Bob will stop playing loud music.

Common resources are related to negative externalities because consumers of common resources ignore the negative impact of their consumption on other consumers of the common resource. If someone owned the property rights to clean air, that person could charge for the use of the clean air in a market for clean air, and thus, air pollution could be reduced to the optimal level. A fireworks display at a private amusement park is a good provided by a natural monopoly.

True

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

True

Cost to the seller includes the opportunity cost of the seller's time.

True

Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.

True

Fixed costs plus variable costs equal total costs. Answer

True

For a competitive firm, marginal revenue equals the price of the good it sells. If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three. A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.

True

For any given demand curve for pollution, a regulator can achieve the same level of pollution with either a corrective tax or by allocating tradable pollution permits.

True

If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product.

True

If a market generates a negative externality, a corrective tax will move the market toward a more efficient outcome. Answer

True

If a market generates a negative externality, the social cost curve is above the supply curve (private cost curve). If a market generates a positive externality, the social value curve is above the demand curve (private value curve). Answer

True

If a tax is doubled, the deadweight loss from the tax more than doubles. A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceed the costs to the sellers. Answer

True

If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.

True

If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

True

If total revenue is $100, explicit costs are $50, and implicit costs are $30, then accounting profit equals $50. If there are implicit costs of production, accounting profits will exceed economic profits. Answer

True

If transaction costs exceed the potential gains from an agreement between affected parties to an externality, there will be no private solution to the externality. Answer T F A corrective tax sets the price of pollution while tradable pollution permits set the quantity of pollution. Answer T F An advantage of using tradable pollution permits to reduce pollution is that the regulator need not know anything about the demand for pollution rights. Answer T F

True

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will be U-shaped. Answer

True

In a competitive market, both buyers and sellers are price takers. In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market. In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

True

In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold. If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax. Answer

True

In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale. If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production.

True

Price discrimination is only possible if there is no arbitrage. Price discrimination can raise economic welfare because output increases beyond that which would result under monopoly pricing.

True

Private markets have difficulty providing public goods due to the free-rider problem.

True

Producer surplus is the area above the supply curve and below the price.

True

Public goods are related to positive externalities because the potential buyers of public goods ignore the external benefits those goods provide to other consumers when they make their decision about whether to purchase public goods. Answer T F Common resources are overused because common resources are free to the consumer. Answer

True

The average-total-cost curve in the long run is flatter than the average-total-cost curve in the short run. Answer

True

The demand curve facing a monopolist is the market demand curve for its product. For the monopolist, marginal revenue is always less than the price of the good. The monopolist chooses the quantity of output at which marginal revenue equals marginal cost and then uses the demand curve to find the price that will induce consumers to buy that quantity.

True

The height of the supply curve is the marginal seller's cost.

True

Universities are engaging in price discrimination when they charge different levels of tuition to poor and wealthy students. Using regulations to force a natural monopoly to charge a price equal to its marginal cost of production will cause the monopoly to lose money and exit the industry.

True

When Smokey the Bear says, "Only you can prevent forest fires," society is attempting to use moral codes and social sanctions to internalize the externality associated with using fire while camping.

True

When marginal costs are below average total costs, average total costs must be falling. Answer

True

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. If the price is $25, how many vases will be sold and what is the value of consumer surplus in this market? Answer One vase will be sold, and consumer surplus is $30. One vase will be sold, and consumer surplus is $5. Two vases will be sold, and consumer surplus is $5. Three vases will be sold, and consumer surplus is $0. Three vases will be sold, and consumer surplus is $80.

Two vases will be sold, and consumer surplus is $5.

Consumer surplus is equal to the

Value to buyers - Amount paid by buyers.

If buyers are rational and there is no market failure, Answer free market solutions are efficient. free market solutions generate equality. free market solutions maximize total surplus. all of the above are true. a and c are correct.

a and c

A negative externality affects market efficiency in a manner similar to Answer a private good. a public good. a common resource. an excludable good.

a common resource.

The "invisible hand" is

a concept developed by Adam Smith to describe the virtues of free markets.

A person who regularly watches public television but fails to contribute to public television's fundraising drives is known as Answer a common rider. a costly rider. a free rider.

a free rider.

Which of the following is an example of a common resource? Answer a national park

a national park

When an individual buys a car in a congested urban area, it generates Answer an efficient market outcome. a technology spillover. a positive externality. a negative externality.

a negative externality.

A positive externality is an external benefit that accrues to the buyers in a market while a negative externality is an external cost that accrues to the sellers in a market.

a positive externality is a benefit that accrues to a bystander, and a negative externality is a cost that accrues to a bystander.

A congested toll road is Answer a private good.

a private good.

A negative externality generates Answer a social cost curve that is above the supply curve (private cost curve) for a good. a social cost curve that is below the supply curve (private cost curve) for a good. a social value curve that is above the demand curve (private value curve) for a good. none of the above.

a social cost curve that is above the supply curve (private cost curve) for a good.

A positive externality generates Answer a social cost curve that is above the supply curve (private cost curve) for a good. a social value curve that is above the demand curve (private value curve) for a good. a social value curve that is below the demand curve (private value curve) for a good. none of the above.

a social value curve that is above the demand curve (private value curve) for a good.

A tax will generate a greater deadweight loss if supply and demand are inelastic.

a tax generates a greater deadweight loss when supply and demand are more elastic.

Which of the following would likely cause the greatest deadweight loss? Answer a tax on cigarettes a tax on salt a tax on cruise line tickets a tax on gasoline

a tax on cruise line tickets

Producer surplus is the area Answer above the supply curve and below the price. below the supply curve and above the price. above the demand curve and below the price. below the demand curve and above the price. below the demand curve and above the supply curve.

above the supply curve and below the price.

If there are implicit costs of production, Answer economic profit will exceed accounting profit. accounting profit will exceed economic profit.

accounting profit will exceed economic profit.

Taxes on labor income tend to encourage Answer workers to work fewer hours. second earners to stay home. the elderly to retire early. the unscrupulous to enter the underground economy. all of the above.

all

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient. Equilibrium in a competitive market maximizes total surplus. Answer The two main types of market failure are market power and externalities.

all True

If a market is efficient, then Answer the market allocates output to the buyers who value it the most. the market allocates buyers to the sellers who can produce the good at least cost. the quantity produced in the market maximizes the sum of consumer and producer surplus. all of the above are true. none of the above is true.

all of the above

Which of the following are potential solutions to the problem of air pollution? Answer auction off pollution permits grant rights of the clean air to citizens so that firms must purchase the right to pollute regulate the amount of pollutants that firms can put in the air all of the above

all of the above

In long-run equilibrium in a competitive market, firms are operating at Answer the minimum of their average-total-cost curves. the intersection of marginal cost and marginal revenue. their efficient scale. zero economic profit. all of the above.

all of the above.

Perfect price discrimination is efficient, but all of the surplus is received by the consumer.

all of the surplus is received by the producer.

The term market failure refers to a market that fails to

allocate resources efficiently

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should Answer choose a price above the market equilibrium price. choose a price below the market equilibrium price. allow the market to seek equilibrium on its own. choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers).

allow the market to seek equilibrium on its own.

Laissez-faire is a French expression which literally means

allow them to do.

The gas-guzzler tax that is placed on new vehicles that get very poor mileage is an example of Answer a tradable pollution permit. an application of the Coase theorem. an attempt to internalize a positive externality. an attempt to internalize a negative externality.

an attempt to internalize a negative externality.

When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of Answer an attempt to internalize a positive externality.

an attempt to internalize a positive externality.

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause Answer an increase in the price of the good and an increase in the number of firms in the market. an increase in the price of the good but no increase in the number of firms in the market. an increase in the number of firms in the market but no increase in the price of the good.

an increase in the number of firms in the market but no increase in the price of the good.

If a market generates a side effect or externality, then free market solutions Answer generate equality. are efficient. are inefficient. maximize producer surplus.

are inefficient

If a producer has market power (can influence the price of the product in the market) then free market solutions Answer generate equality. are efficient. are inefficient. maximize consumer surplus.

are inefficient

When marginal costs are below average total costs, Answer average fixed costs are rising. average total costs are falling. average total costs are rising. average total costs are minimized.

average total costs are falling.

If marginal costs equal average total costs, Answer average total costs are rising. average total costs are falling. average total costs are minimized.

average total costs are minimized.

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will Answer slope upward. be U-shaped.

be U-shaped.

If a production function exhibits diminishing marginal product, its slope Answer becomes flatter as the quantity of the input increases.

becomes flatter as the quantity of the input increases.

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve Answer becomes flatter as the quantity of output increases. becomes steeper as the quantity of output increases. is linear (a straight line). could be any of the above.

becomes steeper as the quantity of output increases.

Consumer surplus is the area Answer above the supply curve and below the price. below the supply curve and above the price. above the demand curve and below the price. below the demand curve and above the price. below the demand curve and above the supply curve.

below the demand curve and above the price.

Total surplus is the area Answer above the supply curve and below the price. below the supply curve and above the price. above the demand curve and below the price. below the demand curve and above the price. below the demand curve and above the supply curve.

below the demand curve and above the supply curve.

When a monopolist produces an additional unit, the marginal revenue generated by that unit must be Answer above the price because the output effect outweighs the price effect. above the price because the price effect outweighs the output effect. below the price because the output effect outweighs the price effect. below the price because the price effect outweighs the output effect.

below the price because the price effect outweighs the output effect.

trade between the U.S. and India

benefits both the U.S. and India

A private good is

both rival in consumption and excludable.

Deadweight loss is greatest when Answer both supply and demand are relatively inelastic. both supply and demand are relatively elastic. supply is elastic and demand is perfectly inelastic. demand is elastic and supply is perfectly inelastic.

both supply and demand are relatively elastic.

suppose that the supply curve is highly elastic and the demand curve is highly inelastic. if a tax is imposed on this market, who will suffer the greater tax burden, buyers or sellers?

buyers

the price elasticity of demand measures

buyers responsiveness to the change in the price of a good

Any point on a countries PPF represents a combination of two goods that an economy

can produce using all available resources and technology

A tax on gasoline is likely to

cause a greater deadweight loss in the long run when compared to the short run.

Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will Answer improve efficiency. raise the price of the good. attract additional firms to enter the market. cause the monopolist to exit the market.

cause the monopolist to exit the market.

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has Answer increased efficiency. reduced the price buyers pay. generated no tax revenue. caused a deadweight loss.

caused a deadweight loss.

The Tragedy of the Commons is a parable that illustrates why Answer public goods are underproduced. private goods are underconsumed. common resources are overconsumed.

common resources are overconsumed.

What is the fundamental basis for trade among nations?

comparative advantage

When describing the opportunity cost of two producers, economists use the term

comparative advantage

Buyers and sellers are price takers is a characteristic of which type of market?

competitive

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality? Answer costs incurred to reduce the pollution

costs incurred to reduce the pollution

The reduction of a tax

could increase tax revenue if the tax had been extremely high.

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss.

Total cost can be divided into two types of costs:

fixed costs and variable costs

An increase in the price of a good along a stationary demand curve Answer increases consumer surplus. decreases consumer surplus. improves the material welfare of the buyers. improves market efficiency.

decreases consumer surplus.

The production process described above exhibits Answer constant marginal product of labor. increasing marginal product of labor. diminishing marginal product of labor. increasing returns to scale. decreasing returns to scale. SS 2

diminishing marginal product of labor.

The monopolist's supply curve Answer is the marginal-cost curve above average variable cost. is the marginal-cost curve above average total cost. is the upward-sloping portion of the average-total-cost curve. is the upward-sloping portion of the average variable cost. does not exist.

does not exist.

If a competitive firm doubles its output, its total revenue Answer more than doubles. doubles. less than doubles. cannot be determined because the price of the good may rise or fall.

doubles.

When a tax is imposed on the buyers of a good, the demand curve shifts

downward by the amount of the tax

an increase in quantity demanded results into a movement __________ and to the __________ along the demand curve.

downward; right

What explains why long-run average cost at first decreases as output increases?

gains from specialization of inputs

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience

economies of scale

Joe has ten baseball gloves, and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize Answer efficiency, Joe should receive the glove. efficiency, Sue should receive the glove. consumer surplus, both should receive a glove. equity, Joe should receive the glove.

efficiency, Joe should receive the glove.

The size of the deadweight loss generated from a tax is affected by the

elasticities of both supply and demand.

For a competitive firm, marginal revenue is

equal to the price of the good sold.

A negative externality (that has not been internalized) causes the Answer optimal quantity to exceed the equilibrium quantity. equilibrium quantity to exceed the optimal quantity. equilibrium quantity to equal the optimal quantity. equilibrium quantity to be either above or below the optimal quantity.

equilibrium quantity to exceed the optimal quantity.

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

exactly triple

If a person can be prevented from using a good, the good is said to be Answer a common resource. a public good. rival in consumption. excludable.

excludable

Which of the following represents the firm's long‐run condition for exiting a market?

exit if P < ATC

Accounting profit is equal to total revenue minus Answer implicit costs. explicit costs. the sum of implicit and explicit costs. marginal costs. variable costs.

explicit costs.

When marginal cost is less than average total cost, average total cost is

falling

When a production function gets flatter, the marginal product is increasing.

false: marginal product is the slope of the production function, so marginal product is decreasing when the production function gets flatter.

When a tax on a good starts small and is gradually increased, tax revenue will Answer rise. fall. first rise and then fall. first fall and then rise. do none of the above.

first rise and then fall.

Which of the following markets would most closely satisfy the requirements for a competitive market? Answer gold bullion

gold bullion

Compared to a perfectly competitive market, a monopoly market will usually generate

higher prices and lower output

A country has a comparative advantage in a product if the world price is

higher than that country's domestic price without trade.

Foregone rent on office space owned and used by the firm is an example of what kind of cost?

implicit

The difference between accounting profit and economic profit is

implicit costs

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay of the firm, where explicit costs do

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a one‐unit decrease in output will _____________ the firm's profit

increase

if the price elasticity of supply is 1.2, and price increased by 5% , quantity supplied would

increase by 6%

The purpose of antitrust laws is to Answer regulate the prices charged by a monopoly. increase competition in an industry by preventing mergers and breaking up large firms.

increase competition in an industry by preventing mergers and breaking up large firms.

The marginal product of labor is equal to the

increase in output obtained from a one unit increase in labor.

Trade enhances the economic well-being of a nation in the sense that trade results in a(n)

increase in total surplus

If marginal revenue exceeds marginal cost, a monopolist should Answer increase output.

increase output.

When price is greater than marginal cost for a firm in a competitive market, there are opportunities to

increase profit by increasing production

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it Answer increased production. decreased production.

increased production.

If a tax on a good is doubled, the deadweight loss from the tax Answer stays the same. doubles. increases by a factor of four. could rise or fall.

increases by a factor of four.

An increase in the price of a good along a stationary supply curve Answer increases producer surplus. decreases producer surplus. improves market equity. does all of the above.

increases producer surplus.

A production function describes how a firm turns

inputs into output

The long-run market supply curve Answer is always more elastic than the short-run market supply curve.

is always more elastic than the short-run market supply curve.

A firm that shuts down temporarily has to pay

its fixed costs but not its variable costs

if goods A and B are compliments then an increase in the price of good A will result in

less of good B being sold

when demand is inelastic, the price elasticity of demand is

less than 1, and price and total revenue will move in the same direction

In the short run, a firm operating in a competitive industry will shut down if price is

less than average variable cost

Adam Smith's "invisible hand" concept suggests that a competitive market outcome Answer minimizes total surplus. maximizes total surplus. generates equality among the members of society. does both b and c.

maximizes total surplus.

If the size of a tax increases, tax revenue

may increase, decrease, or remain the same

If marginal cost is equal to average total cost, then average total cost is

minimized

Which of the following is an example of a public good? Answer whales in the ocean apples on a tree in a public park hot dogs at a picnic national defense

national defense

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a Answer perfect competitor. natural monopoly. government monopoly. regulated monopoly.

natural monopoly.

A public good is Answer both rival in consumption and excludable. neither rival in consumption nor excludable.

neither rival in consumption nor excludable.

if a price ceiling is not binding, then there will be

no effect on the price or quantity sold

A club good is Answer both rival in consumption and excludable. neither rival in consumption nor excludable. rival in consumption but not excludable. not rival in consumption but excludable.

not rival in consumption but excludable.

An externality is the impact of

one person's actions on the well-being of a bystander

The value of a business owner's time is an example of

opportunity cost

A positive externality (that has not been internalized) causes the Answer

optimal quantity to exceed the equilibrium quantity.

A free rider is a person who Answer receives the benefit of a good but avoids paying for it. produces a good but fails to receive payment for the good. pays for a good but fails to receive any benefit from the good. fails to produce goods but is allowed to consume goods.

receives the benefit of a good but avoids paying for it.

Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, people in Mass. start buying their alcohol in surrounding states. Which principle does this best illustrate?

people respond to incentives

the invisible hand works to promote general wellbeing in the economy primarily through

people's pursuit of self-interest

the term "price takers" refers to buyers and sellers in

perfectly competitive markets

If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be Answer perfectly elastic.

perfectly elastic.

In the long run, the competitive firm's supply curve is the Answer entire marginal-cost curve. portion of the marginal-cost curve that lies above the average-total-cost curve.

portion of the marginal-cost curve that lies above the average-total-cost curve.

In the short run, the competitive firm's supply curve is the Answer entire marginal-cost curve. portion of the marginal-cost curve that lies above the average-total-cost curve. portion of the marginal-cost curve that lies above the average-variable-cost curve.

portion of the marginal-cost curve that lies above the average-variable-cost curve.

Research into new technologies is what type of externality?

positive externality

Total revenue equals

price x quantity

A positive externality affects market efficiency in a manner similar to a Answer private good. public good. common resource. rival good.

public good

a perfectly inelastic demand implies that buyers

purchase the same amount as before when the price rises or falls

When governments employ cost-benefit analysis to help them decide whether to provide a public good, measuring benefits is difficult because Answer one can never place a value on human life or the environment. respondents to questionnaires have little incentive to tell the truth. there are no benefits to the public because a public good is not excludable.

respondents to questionnaires have little incentive to tell the truth.

When a tax is placed on a product, the price paid by buyers _________, and the price received by sellers __________.

rises; falls

If one person's consumption of a good diminishes other people's use of the good, the good is said to be Answer a common resource. a club good. rival in consumption. excludable.

rival

A common resource is Answer both rival in consumption and excludable. neither rival in consumption nor excludable. rival in consumption but not excludable.

rival in consumption but not excludable.

Economics primarily deals with the concept of

scarcity

Dioxin emission that results from the production of paper is a good example of a negative externality because

self-interested paper producers will not consider the full cost of the dioxin pollution they create

Tradable pollution permits Answer set the price of pollution. set the quantity of pollution.

set the quantity of pollution.

A corrective tax on pollution Answer sets the price of pollution.

sets the price of pollution.

Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a Answer large deadweight loss and the burden of the tax would fall on the buyer of diamonds. small deadweight loss and the burden of the tax would fall on the buyer of diamonds. large deadweight loss and the burden of the tax would fall on the seller of diamonds. small deadweight loss and the burden of the tax would fall on the seller of diamonds.

small deadweight loss and the burden of the tax would fall on the seller of diamonds.

To internalize a positive externality, an appropriate public policy response would be to Answer ban the good creating the externality. have the government produce the good until the value of an additional unit is zero. subsidize the good. tax the good.

subsidize the good.

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

sunk costs

an improvement in technology will shift the __________ curve to the _____________.

supply; right

To internalize a negative externality, an appropriate public policy response would be to Answer ban the production of all goods creating negative externalities. have the government take over the production of the good causing the externality. subsidize the good. tax the good.

tax the good

Public ownership of natural monopolies Answer tends to be inefficient.

tends to be inefficient.

A buyer's willingness to pay is Answer that buyer's consumer surplus. that buyer's producer surplus. that buyer's maximum amount he is willing to pay for a good. that buyer's minimum amount he is willing to pay for a good.

that buyer's maximum amount he is willing to pay for a good.

When markets fail to allocate resources efficiently, the ultimate source of the problem is usually Answer that prices are not high enough so people overconsume. that prices are not low enough so firms overproduce. that property rights have not been well established.

that property rights have not been well established.

A bow shaped PPF can be explained by the fact that

the OC of one good in terms of the other depends on how much of each good the economy is producing

Medical care clearly enhances people's lives. Therefore, we should consume medical care until Answer everyone has as much as they would like. the benefit buyers place on medical care is equal to the cost of producing it. buyers receive no benefit from another unit of medical care. we must cut back on the consumption of other goods.

the benefit buyers place on medical care is equal to the cost of producing it.

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then Answer producer surplus is maximized. consumer surplus is maximized. total surplus is maximized. the value placed on the last unit of production by buyers exceeds the cost of production. the cost of production on the last unit produced exceeds the value placed on it by buyers.

the cost of production on the last unit produced exceeds the value placed on it by buyers.

The marginal cost curve crosses the average total cost curve at

the efficient scale, the minimum point on the average total cost curve, and at a point where the marginal cost curve is rising.

the 2 loops in the circular flow diagram represent

the flow of inputs and outputs and the flow of dollars

Public goods are difficult for a private market to provide due to Answer the public goods problem. the rivalness problem. the Tragedy of the Commons. the free-rider problem.

the free-rider problem.

Cengage Learning is a monopolist in the production of your textbook because Answer Cengage Learning owns a key resource in the production of textbooks. Cengage Learning is a natural monopoly. the government has granted Cengage Learning exclusive rights to produce this textbook. Cengage Learning is a very large company.

the government has granted Cengage Learning exclusive rights to produce this textbook.

If education produces positive externalities, we would expect

the government to subsidize education

If John values having his hair cut at $20 and Mary's cost of providing the haircut is $10, any tax on haircuts larger than $10 will eliminate the gains from trade and cause a $20 loss of total surplus.

the loss in total surplus is the buyer's value minus the seller's cost or 20-10=10

Which of these curves is the competitive firm's short‐run supply curve?

the marginal cost curve above average variable cost

The seller's cost of production is Answer the seller's consumer surplus. the seller's producer surplus. the maximum amount the seller is willing to accept for a good. the minimum amount the seller is willing to accept for a good. none of the above.

the minimum amount the seller is willing to accept for a good.

Several arguments for restricting trade have been advanced. Those arguments do not include

the no-deadweight-loss argument

The most efficient pollution control system would ensure that Answer each polluter reduce its pollution an equal amount. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount. no pollution of the environment is tolerated. the regulators decide how much each polluter should reduce its pollution.

the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.

Economic profit is equal to total revenue minus Answer implicit costs. explicit costs. the sum of implicit and explicit costs. marginal costs. variable costs.

the sum of implicit and explicit costs.

The Laffer curve relates

the tax rate to tax revenue

An externality is Answer the benefit that accrues to the buyer in a market. the cost that accrues to the seller in a market. the uncompensated impact of one person's actions on the well-being of a bystander. the compensation paid to a firm's external consultants. none of the above.

the uncompensated impact of one person's actions on the well-being of a bystander.

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then Answer producer surplus is maximized. consumer surplus is maximized. total surplus is maximized. the value placed on the last unit of production by buyers exceeds the cost of production. the cost of production on the last unit produced exceeds the value placed on it by buyers.

the value placed on the last unit of production by buyers exceeds the cost of production.

According to the Coase theorem, private parties can solve the problem of externalities if Answer each affected party has equal power in the negotiations. the party affected by the externality has the initial property right to be left alone. there are no transaction costs. the government requires them to negotiate with each other. there are a large number of affected parties.

there are no transaction costs.

A monopoly is able to continue to generate economic profits in the long run because Answer potential competitors sometimes don't notice the profits. there is some barrier to entry to that market.

there is some barrier to entry to that market.

The government engages in an industrial policy Answer to internalize the negative externality associated with industrial pollution. to internalize the positive externality associated with technology-enhancing industries. to help stimulate private solutions to the technology externality. by allocating tradable technology permits to high technology industry.

to internalize the positive externality associated with technology-enhancing industries.

The competitive firm's long‐run supply curve is that portion of the marginal cost curve that lies above average

total cost

Average total cost is equal to

total cost/output

Efficiency is attained when

total surplus is maximized.

If regulators break up a natural monopoly into many smaller firms, the cost of production Answer will fall. will rise.

will rise.

Suppose an industry emits a negative externality such as pollution, and the possible methods to internalize the externality are command-and-control policies, corrective taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would likely rank them in the following order (from most favored to least favored): Answer corrective taxes, command-and-control policies, tradable pollution permits. command-and-control policies, tradable pollution permits, corrective taxes. tradable pollution permits, corrective taxes, command-and-control policies.

tradable pollution permits, corrective taxes, command-and-control policies.

The inefficiency associated with monopoly is due to Answer the monopoly's profits. the monopoly's losses. overproduction of the good. underproduction of the good.

underproduction of the good.

If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be Answer perfectly elastic. downward sloping. upward sloping.

upward sloping.

A grocery store should close at night if the Answer total costs of staying open are greater than the total revenue due to staying open. total costs of staying open are less than the total revenue due to staying open. variable costs of staying open are greater than the total revenue due to staying open.

variable costs of staying open are greater than the total revenue due to staying open.

Which of the following is a variable cost in the short run? Answer wages paid to factory labor

wages paid to factory labor

In the short run, a firm incurs fixed costs

whether it produces output or not

The maximum price that a buyer will pay for a good is called the

willingness to pay.

In the long run, each firm in a competitive industry earns

zero economic profits