Micro Practice Final Answers

In class, we discussed two different types of efficiency: productive efficiency and allocative efficiency. Carefully define each type of efficiency.

Productive Efficiency is the production of any particular good in the least costly way. In the long run, pure competition forces firms to produce at the minimum average total cost of production, P = min ATC Allocative Efficiency is the particular mix of goods and services most highly valued by society. The output level where P = MC

What is the economic meaning of the expression that "there is no such thing as a free lunch"? A. It means that scarce resources are used up to provide freebies and giveaways B. It means that sometimes people may take friends out to lunch and pay for them C. It means that all items in the lunch menu have specific prices D. It means that products only have value because people are willing to pay for them

A. It means that scarce resources are used up to provide freebies and giveaways

The degree of inequality in the distribution of income in an economy is depicted in a(n): A. Lorenz curve B. Phillips curve C. Engels curve D. Indifference curve

A. Lorenz curve

Government programs that pay benefits to those who are unable to earn income because of permanent disabilities or to those who have very low incomes and dependent children are called: A. Public assistance programs B. Social insurance programs C. Affirmative action programs D. Dependent programs

A. Public assistance programs

The kinked demand model of oligopoly assumes that: A. Rivals will ignore price increases but will match price cuts B. Rivals will ignore price cuts but will match price increases C. The oligopolistic firms are colluding D. A firm faces a more elastic demand curve if it cuts its price, and less elastic if it raises price

A. Rivals will ignore price increases but will match price cuts

A tax structure is called progressive when: A. The average tax rate decreases if income decreases B. High-income groups pay more taxes absolutely than do low-income groups C. The average tax rate on low-income groups exceeds the tax rate of high-income groups D. The average tax rate is constant, but the absolute amount of taxes paid increases with income increases

A. The average tax rate decreases if income decreases. The opposite way of thinking what we talked about. The average tax rate increases if income increases.

The benefits-received principle of taxation is: A. The basis for the gasoline tax B. Easy to apply because benefits received are conveniently measurable C. Applied in income-redistribution programs D. The principle behind the income tax system

A. The basis for the gasoline tax. (Ability to pay would be for income tax)

As a result of a fall in the price of gasoline, consumers can afford to take more driving trips. This is an illustration of: A. The income effect B. The substitution effect C. Diminishing marginal utility D. The rationing function of prices

A. The income effect

A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: A. total variable costs. B. total costs. C. total fixed costs. D. marginal costs.

A. Total variable costs

Refer to the figure above. A nation that has an income distribution of perfect equality would be represented by the above curve: A. a B. b C. c D. d

A. a

The graph depicts a monopolistically competitive firm 7. Refer to the above graph. In the short run, this monopolistically competitive firm will set price at: A. $65 and produce 45 units of output B. $65 and produce 35 units of output C. $50 and produce 35 units of output D. $50 and produce 50 units of output

B. $65 and produce 35 units of output (MR=MC)

Which would cause an increase in the demand for product A? A. A decrease in the price of product A B. A decrease in the price of a complementary product B C. A decrease in the cost of producing product A D. A decrease in the price of a substitute product B

B. A decrease in the price of a complementary product B

Refer to the above production possibilities curves. Curve (a) is the current curve for the economy. A shift from curve (a) to curve (b) suggests: A. A shift from unemployment to full employment B. An improvement in capital goods technology but not in consumer goods technology C. An improvement in consumer goods technology but not in capital goods technology D. A change in the needs and wants of the society

B. An improvement in capital goods technology but not in consumer goods technology.

On the graph above, what is the profit-maximizing level of output for a pure monopolist? A. A B. B C. C D. D

B. B (MR=MC)

A perfectly elastic demand curve implies that the firm: A. must lower price to sell more output. B. can sell as much output as it chooses at the existing price. C. realizes an increase in total revenue which is less than product price when it sells an extra unit. D. is selling a differentiated (heterogeneous) product.

B. Can sell as much output as it chooses at the existing price

The role of the entrepreneur in society is to: A. Provide capital to the firm which the management combines with labor B. Bring the factors of production together and take the risks of producing C. Control the land upon which all production takes place to get the most rent D. Regulate what products are considered safe to market

B. Control the land upon which all production takes place to get the most rent.

The economizing problem for society is: A. To achieve a more equitable distribution of income in society B. Due to the fact that productive resources are scarce relative to economic wants C. To establish prices which are fair for both producers and consumers D. That product prices often rise more rapidly than incomes of consumers

B. Due to the fact that productive resources are scarce relative to economic wants.

Cash expenditures a firm makes to pay for resources are called: A. Implicit costs B. Explicit costs C. Normal profit D. Opportunity costs

B. Explicit costs

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called: A. Nonrivalry B. Nonexcludability C. Nontaxability D. Nondiscrimination

B. Nonexcludability

A government will create a surplus of a product when it: A. Sets a price ceiling for the product above the current equilibrium price B. Sets a price floor for the product above the current equilibrium price C. Sets a price floor for the product below the current equilibrium price D. Subsidizes a complementary product

B. Sets a price floor for the product above the current equilibrium price

When diminishing marginal utility starts happening as a person consumes more and more of a given good: A. Total utility will diminish B. Total utility will increase at a diminishing rate C. Marginal utility will become negative D. Total utility will become negative

B. Total utility will increase at a diminishing rate.

If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue: A. may be either greater or less than $5. B. will also be $5. C. will be less than $5. D. will be greater than $5.

B. Will also be $5

Which of the following will not cause the supply curve to shift? A. A change in the costs of resources needed to produce the good B. A technological change in the production of the good C. A change in the price of the good D. A change in the prices of other goods that could be produced

C. A change in the price of the good.

Which of the following is a normative economic statement? A. The Federal budget surplus rose by 10 billion dollars B. A fall in the unemployment rate is expected next month C. A trade deficit of 20 billion dollars will harm the economy D. The Federal funds rate was reduced by half a percentage point

C. A trade deficit of 20 billion dollars will harm the economy.

A state government wants to increase the taxes on cigarettes to increase tax revenue. This tax would only be effective in raising new tax revenues if the price elasticity of demand is: A. Unity B. Elastic C. Inelastic D. Perfectly elastic

C. Inelastic

When compared with the purely competitive industry with identical costs of production, a monopolist will produce: A. More output and charge the same price B. More output and charge a higher price C. Less output and charge a higher price D. Less output and charge the same price

C. Less output and charge a higher price.

A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the: A. Total utility is the same for each good B. Marginal utility of each good is maximized C. Marginal utility per dollar spent is the same for all goods D. Marginal utility per dollar spent is maximized for each good

C. Marginal utility per dollar spent is the same for all goods

An "increase in the quantity supplied" suggests a: A. Rightward shift of the supply curve B. Movement down along the supply curve C. Movement up along the supply curve D. Leftward shift of the supply curve

C. Movement up along the supply curve

Pure monopolists: A. Maximize MR B. Are price takers C. Operate where P > MC D. Confront demand curves that are perfectly inelastic

C. Operate where P>MC (not allocatively efficient)

Given the oligopolistic firm pictured above, what is the profit-maximizing price? A. P1 B. P2 C. P3 D. P4

C. P3 (MR=MC)

The goal of product differentiation and advertising in monopolistic competition is to make: A. The firm allocatively efficient even if it is not productively efficient B. The firm productively efficient even if it is not allocatively efficient C. Price less of a factor and product differences more of a factor in consumer purchases D. Price more of a factor and product differences less of a factor in consumer purchases

C. Price less of a factor and product differences more of a factor in consumer purchases

You are told that the four-firm concentration ratio in an industry is 20. Based on this information you can conclude that: A. Each of the top four firms has 20 percent of industry sales B. The four largest firms account for a combined 80 percent of the industry sales C. The four largest firms account for 20 percent of industry sales D. Each of the four largest firms accounts for 5 percent of industry sales

C. The four largest firms account for 20 percent of industry sales.

As a result of a decrease in the price of MP3 music, consumers download more songs and buy fewer CDs. This is an illustration of: A. Consumer sovereignty B. The income effect C. The substitution effect D. Diminishing marginal utility

C. The substitution effect

The demand for Cheerios cereal is more price-elastic than the demand for cereals as a whole. This is best explained by the fact that: A. Cheerios are a luxury B. Cereals are a necessity C. There are more substitutes for Cheerios than for cereals as a whole D. Consumption of cereals as a whole is greater than consumption of Cheerios

C. There are more substitutes for Cheerios than for cereals as a whole.

A cartel is: A. A form of covert collusion B. Legal in the United States C. Always successful in raising profits D. A formal agreement among firms to collude

D. A formal agreement among firms to collude.

If many people in a community get flu shots, the whole community benefits including those that did not get flu shots. This is one illustration of A. The market efficiently allocating resources B. Monopoly power due to lack of competition C. Supply-side market failures D. Demand-side market failures

D. Demand-side market failures. Positive externality. Community doesn't see full willingness to pay for flu shots if they all benefit.

In the long run, a representative firm in a monopolistically competitive industry will end up: A. Having an elasticity of demand that will be less than it was in the short run B. Having a larger number of competitors than it will in the short run C. Producing a level of output at which marginal cost and price are equal D. Earning a normal profit, but not an economic profit

D. Earning a normal profit, but not an economic profit

Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that: A. Ellie should make no change in consumption B. Given another dollar, Ellie should buy an additional unit of Beta C. In order to maximize utility, Ellie should buy more of Beta and less of Alpha D. In order to maximize utility, Ellie should buy more of Alpha and less of Beta

D. In order to maximize utility, Ellie should buy more of Alpha and less of Beta. There's more satisfaction with Alpha than there is with Beta. 40/$1- Alpha 20/$1- Beta

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem? A. Levy a tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources B. Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products C. Levy a tax on the producers of electricity and use the tax revenues to clean up the river D. Levy a tax on the producers of paper products and use the tax revenues to clean up the river

D. Levy a tax on the producers of paper products and use the tax revenues to clean up the river.

If the price elasticity of demand for orange juice is 0.8, then a reduction in the price of orange juice will cause buyers to buy: A. Fewer bottles of orange juice, and their total spending on orange juice will decrease B. Fewer bottles of orange juice, but their total spending on orange juice will increase C. More bottles of orange juice, and their total spending on orange juice will increase D. More bottles of orange juice, but their total spending on orange juice will decrease

D. More bottles of orange juice, but their total spending on orange juice will decrease. Total revenue is falling, because price has the bigger change. Price drops, Quantity goes up.

In which market model is there mutual interdependence? A. Monopolistic competition B. Pure competition C. Pure monopoly D. Oligopoly

D. Oligopoly

Resources are efficiently allocated when production occurs at that output at which: A. P equals MR B. P equals AVC C. P exceeds MR D. P equals MC

D. P equals MC

What are the major arguments in the case for income inequality? What is the argument for income equality?

The case for income inequality is based on incentives and economic efficiency. Redistribution of income from the higher-income groups to the lower-income groups reduces the economic incentives of both groups to work, save, or invest. The high-income groups will not reap the full rewards from their efforts and the low-income groups may become less motivated to improve their condition. Thus, the productive output of both groups may be reduced, resulting in less productive activity for the economy and a smaller aggregate income to distribute. What is the argument for income equality? Utility maximization. Income equality would be the utility maximizing distribution of Income as the disutility caused by transferring income from high income earns to low income earners would be less than the utility that low income earners would gain. Those against income equality argue that the structure of income payouts determine the level of income earned. They argue that taxing those who earn high incomes to transfer that taxation to those with low incomes reduces the incentive of both groups to earn high incomes. They ask, "Why would someone earning a high income be motivated to earn more if it will simply be taxed away to give to the poor?" Moreover, they argue, "Why would a low-income earner be motivated to earn a higher income if their income is supplemented by high-income earners?" Thus income equality removes the incentives to work hard.