Microeconomics 202 Final Exam Study Guide

From the perspective of an externality, most communities have zoning laws to:

control external costs.

An imperfectly competitive firm is one that:

has at least some influence over the market price.

If the marginal cost of pollution abatement differs across firms, then regulations that require all polluters to reduce pollution by a fixed proportion will be:

inefficient

An estimation technique that begins with an initial approximation, which is then modified in accordance with additional information, is known as:

anchoring and adjustment

Fungibility is the property of an entity whose individual units:

are interchangeable.

It is impossible for total utility to be ______ when marginal utility is ______.

decreasing; positive

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ______ because it generates a ______ economic surplus.

wash clothes; bigger

According to the theory of disappearing political discourse, politicians remain silent about issues because politicians:

fear that if they speak out they will be misunderstood.

Gasoline prices tend to be higher at stations that are just off the freeway than they are at stations in the middle of town. The most likely reason for this is that:

people who buy gas at freeway exit stations tend to have higher search costs.

The free-rider problem occurs when:

people who do not pay for a good or service cannot be excluded from enjoying it.

Suppose a firm's total revenue is $100 when it sells 10 units, and $110 when it sells 11 units. The firm, therefore, is a(n):

perfect competitor

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic

A benefit of an activity received by people not participating in the activity is called a(n):

positive externality

Imperfect price discrimination occurs when a monopolist:

price discriminates but some buyers pay less than their reservation price

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output.

Total revenue minus both explicit and implicit costs defines a firm's:

profit

If a consumer buys two different goods, the rational spending rule requires that the:

ratio of marginal utility to price be equal for the two goods.

The phenomenon that unusual events are likely to be followed by more nearly normal is known as:

regression to the mean

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

resources; satisfaction

The marginal cost of collecting information:

rises as more information is collected.

The law of demand indicates that as the cost of an activity:

rises, less of the activity will occur.

In the market for used cars, the lemons model predicts that:

sellers are more likely to sell low-quality cars than high-quality cars.

If sellers have more information about the quality of goods than do buyers, then:

sellers of better-than-average goods will have difficulty getting their asking price.

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney's customers have reservation prices of $5. When Sydney's cart is located on a sidewalk in an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations. Total economic surplus will be maximized if Sydney:

sells only in the upscale mall and charges $10.

An increase in an economy's productive resources will lead the production possibilities curve to:

shift outward

Joaquin's marginal utility from an additional slice of pumpkin pie is 4 utils and his marginal utility from an additional slice of pecan pie is 6 utils. If a slice of pumpkin pie costs $2.50, and a slice of pecan pie costs $3.00, then Joaquin:

should reallocate his spending towards pecan pie and away from pumpkin pie.

The tendency for marginal utility to decline as consumption increases beyond some point is called:

the law of diminishing marginal utility

An increase in the quantity of tea demanded occurs if:

the price of tea falls

When it comes to enacting policy changes, loss aversion often leads to status quo bias because:

the resistance from those who stand to lose from the policy often overwhelms the support from those who stand to gain.

The tendency for a resource that has no price to be used until its marginal benefit falls to zero is referred to as:

the tragedy of the commons.

Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is:

the value she places on seeing the movie

A prisoner's dilemma illustrates situations in which:

there is a conflict between the narrow self-interest of individuals and the broader interests of a group.

When a market is in equilibrium:

there is neither excess demand nor excess supply.

A commitment problem exists when people cannot achieve their goals because:

they cannot make credible threats or promises.

When marginal revenue is zero:

total revenue is maximized.

If marginal utility is positive, then as consumption increases:

total utility will increase

The _______ is a game in which the first player has the power to confront the second player with a take-it-or-leave-it offer.

ultimatum bargaining game

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs.

According to economists, the satisfaction people get from their consumption activities is called:

utility

Growing rice requires extensive irrigation in California. Economists consider water to be a ______ for rice farmers in California.

want

Taking a limousine to a five-star restaurant in New York is a:

want to both Joe Average and Richie Rich.

Higher education is a ______ and assigned textbooks are ______.

want;want

The accompanying table below shows the relationship between the number of times you get your car washed each month and your total monthly benefit from car washes. Each car wash costs $15. What's the average benefit of 4 car washes per month? Number of Car Washes Per Month: 0, 1, 2, 3, 4, 5, 6 Total Monthly Benefit from Car Washes $0, $20, $36, $48, $56, $60

$14

According to the textbook, expensive advertising campaigns are:

a credible signal of product quality.

The existence of a negative externality will result in:

a greater than optimal level of production.

A risk-averse individual will:

accept only better-than-fair gambles.

A risk-neutral individual will:

accept only gambles with an expected value of zero or greater.

Better information about consumers' reservation prices generally leads to:

acquisition of goods by consumers who are willing to pay the highest price

The _______ assumes that people choose efficient means to achieve their ends, but it regards goals as objects of choice that are subject to a similar efficiency requirement.

adaptive rationality standard

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as:

adverse selection

The profit maximizing rule MR = MC applies to:

all firms

Choosing to study for an exam until the extra benefit (e.g., improved score) equals the extra cost (e.g., the value of foregone activities) is:

an application of the Cost-Benefit Principle

In some countries, medical care is provided free-of-charge to citizens and is paid for by the government. In those countries, medical care:

is rationed by some non-monetary method.

Cartel agreements are difficult to sustain because:

it's a dominant strategy for each cartel member to cheat on the cartel agreement.

De Beers accounts for approximately 80% of diamond sales worldwide. The source of its market power is:

its exclusive ownership of South African diamond mines.

Rules of thumb that reduce computation costs are known as:

judgmental and decision heuristics.

The use of psychological incentives to solve commitment problems would be least effective in games played:

once between strangers.

The essential cause of the tragedy of the commons is the fact that:

one person's use of a commonly held resource imposes an external cost on others.

When the government imposes a tax on a good, total economic surplus will:

only increase if the good entails a negative externality.

The ______ combination of goods is the combination that yields the highest total utility given a consumer's income.

optimal

If Doug has just watched a television show in which the main character is killed in an airplane crash, then the availability heuristic predicts that he will:

overestimate the dangers of air travel.

Which of the following is NOT an example of a good with network economies?

A computer printer

After subsistence levels of food, shelter, and clothing have been provided, economists refer to all other goods and services as:

"wants"

You save $10 on gas every week because you take the bus to school. You have class 5 days a week. What is your average benefit per day of taking the bus to school?

$2 ($10 % 5)

Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Dusty can buy a maximum of ______ loaves of bread or a maximum of ______ jars of peanut butter.

20; 10

Which of the following is NOT an example of an activity with external benefits?

Eating a sandwich in the dining hall

The insight that people can always arrive at efficient solutions to the problems caused by externalities if they can negotiate the purchase and sale of the right to perform activities that cause externalities is called the _______.

Coase Theorem

Which of the following statements is true?

Comparative advantage does not require absolute advantage.

The price of bananas will increase in response to:

an excess demand for bananas.

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good.

Which of the following industries does not fit the natural monopoly model?

Fast food restaurants

Which of the following is NOT a commitment device?

High fines for illegal parking on campus.

Joe is shopping for a new computer. A computer can be delivered to Joe's home for $1,200. Alternatively, Joe can pick up the same computer at the warehouse for $1,000. How should Joe buy the computer?

Joe should drive to the warehouse if his cost of driving to the warehouse is less than $200.

Blair has vast riches and consumes thousands of dollars' worth of consumer goods each week, yet she is never satisfied. Why not?

People's wants are unlimited

The downward slope of the production possibilities curve illustrates the:

Scarcity Principle

______ is the general resistance to change, often stemming from loss aversion.

Status quo bias

Which one of the following government actions is intended to generate positive externalities?

Subsidies for planting trees on hillsides

Which of the following is the most likely to be a fixed factor of production at a farm?

The land on which the farm is located

If country A can produce more of practically everything than can country B, then which of the following statements is true?

Trade can benefit both countries.

A pure monopoly exists when:

a single firm produces a good with no close substitutes

Two goods are complements if:

an increase in the price of one good leads to a decrease in demand for the other.

Information about the quality of a product is

both beneficial to have and costly to obtain, and therefore subject to economic principles

Suppose a cup of tea costs $0.60 and a scone costs $1.20. If Edith spends all of her income on these two goods, and at her current level of consumption, she receives a marginal utility of 6 utils from the last cup of tea she buys and a marginal utility of 24 utils from the last scone she buys, then Edith should:

buy less tea and more scones

As Lynn eats more pizza, we would typically expect her marginal utility from eating pizza to:

decrease

Shelly purchases a leather purse for $400. One can infer that:

her reservation price was at least $400.

A perfectly price discriminating monopolist's profit is ______ the profit of a monopolist who charges the same price to all of its customers.

higher than

If a monopolist's marginal revenue is $25 and its marginal cost is $19, then the monopolist should:

increase its output

Economies of scale arise from:

increasing returns to scale

Statistical discrimination occurs when:

individuals are judged on the basis of the groups to which they belong.

Cory gets 18, 23, and 25 units worth of total utility from consuming 10, 11, and 12 raw oysters, respectively, and the price per oyster is 25 cents. Thus, one can infer that Cory:

is experiencing diminishing marginal utility.

According to the Weber-Fechner law, the perceived size of a change in a stimulus will be large when the change in the stimulus:

is large in proportion to the original stimulus.

The tendency for consumers to purchase more of a good or service as its price falls is captured by the:

law of demand

The most efficient distribution of pollution abatement is such that the:

marginal cost of abatement is the same across all polluters.

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. You got ______ utility from eating the first pie than from eating the third pie.

more

When the expected value of search increases:

more searches occur.

The slope of a production possibilities curve is ______ because ______.

negative; producing more of one good requires producing less of the other

If the demand for steak increases as income increases, then steak is a(n):

normal good

An implication of scarcity is that

people must make trade-offs

According to the textbook, the owners of restaurants encourage tipping in order to:

solve a commitment problem with their wait staff.

In sequential games, the player who moves first:

sometimes has an advantage and sometimes has a disadvantage.

The textbook notes that the last time a major league batter hit .400 was in 1941. This is because:

specialization by pitchers, infielders, and outfielders has made it harder for batters to hit.

Which of the following is an example of an activity with an external cost?

speeding on the interstate

In order to achieve the socially optimal level of output, goods that entail negative externalities should be:

taxed

Whether studying the output of the U.S. economy or how many classes a student will take, a unifying concept is that:

wants are limited and resources are scarce, so trade-offs have to be made

Suppose Chris is offered the following gamble: with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. The expected value of this gamble is ______.

-$1

Which of the following is a characteristic of a perfectly competitive market?

1. There are many sellers, each of which sells only a small fraction of the total quantity exchanged. 2. Buyers and sellers are well-informed. 3. Sellers can easily buy and sell the productive resources needed to enter the market.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product.

What might cause a demand curve to shift to the right?

An increase in the price of a substitute

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:

MUc/Pc will fall.

Refer to the accompanying table. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes. Time to Make a Pie- Martha 60 minutes ; Julia 50 minutes Time to Make a Cake- Martha 80 minutes ; Julia 60 minutes

Marth; Julia

Office workers and word processing programs are complements if:

a decrease in the wage paid to office workers leads to an increase in the demand for word processing programs.

Shelter for homeless people is an example of:

a need

The long run is best defined as:

a period of time sufficiently long that all factors of production are variable.

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed.

Whose income do you predict will be more affected by the expansion of Internet access:

a. Stockbrockers b. Pharmacists c. Bookstore owners

Traditional economic models assume that people care about:

absolute consumption.

Any combination of goods that can be produced with currently available resources is an:

attainable Point

Traditional economic models _______ the fact that people sometimes regret making decisions with perfectly predictable consequences.

cannot explain

To understand how the price of a good is determined in a free market, one must account for the desires of:

buyers and sellers

According to the textbook, social norms:

can help curtail positional arms races.

Consider a graph of a production possibilities curve. If a producer is operating at an inefficient point, then that producer:

can produce more of one good without producing less of the other good.

Psychological incentives:

can serve as commitment devices.

Emotions like guilt and sympathy:

can solve commitment problems.

If a country's economic decisions are made by an individual or small number of individuals, then it has a:

centralized economy

A movement along a demand curve from one price-quantity combination to another is called a:

change in quantity demanded

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase. Suppose this graph describes a town in which the only way to gather any information about the good is through Consumer Reports. If the subscription price of Consumer Reports increases, then the impact of this could be portrayed by the marginal:

cost curve shifting from MC1 to MC0.

In the realm of public policy, loss aversion makes it:

difficult to enact policy changes.

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her ______ would be ______

economic surplus; $3000 ($15,000-$12,000)

A natural monopoly is a monopoly that arises from:

economies of scale

According to the textbook, the most important and enduring source of market power is:

economies of scale

If a country is producing at point where an increase in the production of one good requires a reduction in the production of another good, then it must be producing at an:

efficient point

The major difficulty with using a tax on pollution instead of a fixed percentage reduction regulation is:

establishing the optimal size of the tax.

The Scarcity Principle applies to

everyone

The marginal benefit of additional information:

falls as more information is collected.

According to the law of demand, when the price of shoes ______, people will consume ______ shoes.

falls; more

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce

Economics is best defined as the study of

how people make choices in the face of scarcity and the implications of those choices for society as a whole.

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increases the output.

If Terry's total utility is maximized when he owns 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs.

less than

Refer to the accompanying table. According to the table, Corey has the absolute advantage in: Pizzas made per hour- Corey 12 ; Pat 10 Pizzas delivered per hour- Corey 6; Pat 15

making pizza

The additional utility gained from consuming an additional unit of a good is called:

marginal utility

The primary objective of an imperfectly competitive firm is to:

maximize profit

The primary objective of most private firms is to:

maximize profit

The rational spending rule is derived from the consumer's desire to:

maximize utility

Suppose Ginger is going to buy a house and a dishwasher. Assuming the marginal cost of searching for both is the same, one can predict that Ginger will

spend more time searching for the house than the dishwasher.

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus is known as:

the Weber-Fechner law

The optimal amount of information to acquire before making a purchase is:

the amount such that the marginal cost of acquiring information equals the marginal benefit.

Typically, when people use anchoring and adjustment to estimate something, the importance of _______ in influencing their assessment is too large.

the anchor

Dean should play golf instead of preparing for tomorrow's exam in economics if:

the economic surplus from playing golf is greater than the economic surplus from studying

The sum of the possible outcomes of a gamble multiplied by their respective probabilities is known as:

the expected value of the gamble.

The ultimatum bargaining game is a game in which:

the first player confronts the second player with a take-it-or-leave-it offer.

Refer to the accompanying table below. The marginal cost of the 3rd unit of this activity is: Units of Activity: 0, 1, 2, 3, 4, 5, 6, Total Cost: $0, $30, $40, $60, $100, $150, $210 Total Benefit: $0, $100, $160, $190, $210, $220, $225

$20

Refer to the accompanying table below. The average cost of 4 units of this activity is: Units of Activity: 0, 1, 2, 3, 4, 5, 6, Total Cost: $0, $30, $40, $60, $100, $150, $210 Total Benefit: $0, $100, $160, $190, $210, $220, $225

$25

Ann and Barbara are computer programmers in Nashville who are planning to move to Seattle. Each owns a house that has just been appraised for $100,000. But whereas Ann's house is one of hundreds of highly similar houses in a large, well-known suburban development, Barbara's is the only one that was built from her architect's design. Who will benefit more by hiring a realtor to assist in selling her house, Ann or Barbara?

Barbara

Which of the following would be considered a factor of production in the provision of bus service?

Bus drivers

A positional externality:

arises in situations in which rewards depend on relative performance.

One reason the demand curve slopes ______ is that as prices fall ______.

downward; more people find that the price is now less than their reservation price.

When a pharmaceutical company introduces a new drug, its research and development costs are ______, and the cost of the chemicals used in manufacturing the drug are ______.

start-up costs; variable costs

Excess demand occurs

when price is below the equilibrium price.

Suppose you are planning to sell your house. You value your house at $200,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $220,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $250,000. Assume that the realtor's opportunity cost of negotiating the sale is $5,000. In this case, how much additional economic surplus is generated by using a realtor to sell your house?

$25,000

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:

$35 ($15+$20)

You paid $35 for a ticket (which is non-refundable) to see SPAM, a local rock band, in concert on Saturday. Assume that $35 is the most you would have been willing to pay for a ticket. Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert. You would have to work 4 hours and she would pay you $11/hr. The psychic cost to you of working is $2/hr. What is the opportunity cost of going to the concert?

$36

For the fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat all of the meals, your average cost for a meal is:

$4 (600%150)

_______ is the tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude:

Loss aversion

Carlos is risk-neutral and has an ancient farmhouse with great character for sale in Slaterville Springs. His reservation price for the house is $130,000. The only possible local buyer is Whitney, whose reservation price for the house is $150,000. The only other houses on the market are modern ranch houses that sell for $125,000, which is exactly equal to each potential buyer's reservation price for such a house. Suppose that if Carlos does not hire a realtor, Whitney will learn from her neighbor that Carlos's house is for sale and will buy it for $140,000. However, if Carlos hires a realtor, he knows that the realtor will put him in touch with an enthusiast for old farmhouses who is willing to pay up to $300,000 for the house. Carlos also knows that if he and this person negotiate, they will agree on a price of $250,000. If realtors charge a commission of 5 percent of the selling price and all realtors have opportunity costs of $2,000 for negotiating a sale, will Carlos hire a realtor?

a. Carlos will hire a realtor b. Total economic surplus without the realtor: $20,000 c. Total economic surplus with the realtor (including the realtor's surplus): $168,000

Suppose Paul just saw a car accident while driving home from work. According to the availability heuristic, this is likely to make Paul think that:

car accidents are more common than they really are.

Suppose you camped out in front of an electronics store to be one of the 200 lucky people able to purchase the latest gaming system. You bought the system for $350. Two weeks later you see that the same system can be sold on e-Bay for $600, so you sell your system. Your market role was as a:

consumer at the electronics store and a seller on e-Bay.

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the first three pies you ate.

increased

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

marginal revenue

The monopolist will maximize profits at the output level for which:

marginal revenue equals marginal cost.

One problem with antitrust laws is that they:

may prevent companies from achieving economies of scale.

In most markets, scarce goods or services are rationed among competing users using:

monetary prices