Test 2
Which of the following is an example of a public good? -A weather warning system -A television set -A sofa -A bottle of soda
A weather warning system
Social demand
The demand for a good or service that reflects both the private and external benefits of its consumption.
The satisfaction or happiness one gets from consuming a good or service is called: -Price -Utility -Income _profits
Utility
normal good
a good that consumers demand more of when their incomes increase
unit elastic demand
the percentage change in quantity demanded equals the percentage change in price; the resulting price elasticity has an absolute value of 1.0
When the price of a product is increased 10%, the quantity demanded decreases by 15%. The price elasticity for demand for this product is: *-1.5 *-0.15 *-0.67 *-67
-1.5
Assume MUc and MUd represent the marginal utility that a consumer gets from products C and D, the respective prices of which are Pc and Pd. The consumer will increase his total utility from a specific money outlay by spending more on C and less on D if initially: -MUd<MUc -MUe/Pc<MUd/Pc -MUe/Pc>MUd/Pd -MUd>MUc
-MUe/Pc>MUd/Pd
External benefits in consumption refer to benefits occurring to those: -Who are selling the product to the consumers -Who bought and consumed the product -Others than the ones who consumed the product -Who are consuming the product abroad
-Others than the ones who consumed the product
When producers do not have to pay the full price of producing a product, they tend to: -Overproduce the product because of positive externality -Underproduce the product because of positive externality -Underproduce the product because of negative externality -Overproduce the product because of negative externality
-Overproduce the product because of negative externality
Which of the following defines marginal utility? -The change it total utility divided by the price of a product -The maximum amount of satisfaction or happiness derived by consuming a product -The total satisfaction or happiness from consuming a good, service, or combination of goods and services -The additional satisfaction or happiness received from the consumption of an additional unit of a good or service
-The additional satisfaction or happiness received from the consumption of an additional unit of a good or service
The price elasticity of demand for a popular sporting event is -2. If the price of a ticket for this event increases by 10%, the quantity of the tickets demanded will decrease by: -5% -20% -10% -0.2%
20%
Externality
A cost or benefit imposed on people other than the consumers and producers of a good or service.
When interpreting the Ed value as either elastic or inelastic , we look at the: -Ed coefficient with its negative sign -Absolute value of the Ed coefficient (dropping the negative sign) -Percent change in price -Percent change in quantity
Absolute value of the Ed coefficient (dropping the negative sign)
which of the following is an example of a positive externality (additional social benefit)? -An increase in the value of land you own when a nearby development is completed -The costs paid by a company to build an automated factory -Falling property values in a neighborhood where a disreputable nightclub is operating -The higher price that you pay when you buy a heavily advertised product
An increase in the value of land you own when a nearby development is completed
In a situation where an externality occurs, the "third party" refers to those who: -Buy the product from others -Produce the product for others -Trade the product with others outside the country or community -Are not directly involved in the transaction or activity
Are not directly involved in the transaction or activity
Graphically, producer surplus is measured as the area: -Under the demand curve and below the actual price -Under the demand curve and above the actual price -Above the supply curve and above the actual price -Below the supply curve and below the actual price
Below the supply curve and below the actual price
A public good: -Generally results in substantial negative externalities -Can never be provided by a nongovernmental organization -Costs essentially nothing to produce and is thus provided by the government at a zero price -Cannot be provided to one person without making it available to others as well
Cannot be provided to one person without making it available to others as well
When a competitive market maximizes economic surplus , it implies that: -The marginal benefit of having the product is greater than the marginal cost -Buyers are getting the maximum consumer surplus from the product - Combined consumer and producer surplus is maximized. -Quantity demanded is lower than quantity supplied
Combined consumer and producer surplus is maximized.
The difference between the maximum price that a consumer is willing to pay for a product and the actual price the consumer pays is called: -Utility -Consumer surplus -Consumer demand -Market failure
Consumer surplus
The decision making process followed by consumers to maximize utility assumes that: -Consumers behave rationally, attempting to maximize their satisfaction -Consumers have unlimited incomes -Consumers do not know how much marginal utility they obtain from consuming additional units of various products -Consumers are unable to rank their preferences
Consumers behave rationally, attempting to maximize their satisfaction
If the demand for product X is inelastic, a 4 percent increase in the price of X will_____ the quantity demanded of X by ____ than 4%: -Decrease, more -Decrease, less -Increase, more -Increase, less
Decrease, less
Total revenue decreases as the price of a good increase, if the demand for the good is: -Elastic -Inelastic -Unitary Elastic -Perfectly Elastic
Elastic
The price elasticity of demand of a linear demand curve is: -Elastic in high price ranges, and inelastic in low price ranges -Elastic but does not change at various parts on the curve -Inelastic but does not change at various parts on the curve -1 at all points on the curve
Elastic in high price ranges, and inelastic in low price ranges
Which of the following is an example of a negative externality (additional social cost)? -An increase in the value of land you own when a nearby development is completed -The costs paid by a company to build an automated factory -Failing property values in a neighborhood where a disreputable nightclub is operating -The higher price you pay when you buy a heavily advertised product
Failing property values in a neighborhood where a disreputable nightclub is operating
If the equilibrium wage for fast food restaurants is $8 and the government enforces a minimum wage of $15: -Fast food restaurants will hire fewer people -Workers will be able to find more jobs -Workers will get paid less -Overall, society will be better off
Fast food restaurants will hire fewer people
Time period
Firms have difficulty increasing quantity they supply during short time periods
Unlike a private good, a public good: -Has no opportunity costs -Has benefits available to all, including nonpayers -Produces no positive or negative externalities -Is characterized by rivalry and excludability
Has benefits available to all, including nonpayers
Assume that the product alpha and the product beta are both priced at $1 per unit and that Ellie has $20 to spend on both alpha and beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utilities of the last unit of alpha and beta that she purchases are 40 units and 20 units, respectively. This indicates that: -Ellie should make no change in consumption -Given another dollar, Ellie should buy an additional unit of beta -In order to maximize utility, Ellie should buy more beta and less Alpha -In order to maximize utility, Ellie should buy more alpha and less beta
In order to maximize utility, Ellie should buy more alpha and less beta
Oscar makes purchases of an existing product (X) such that the marginal utility of the last unit he consumes is 10 utils and the price is $5. He also tries a new product (Y) and the marginal utility of the last unit he consumes is 8 utils and the price is $1. The equal marginal principle suggests that Oscar should: -Increase the consumption of product X and decrease his consumption of product Y -Increase his consumption of Product X and Y -Increase his production of product Y, and decrease the production of product X -Decrease his consumption of Product X and Y
Increase his production of product Y, and decrease the production of product X
You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues from that product, you should: -Increase the price of the software -Decease the price of the software -Hold the price of the software constant -Increase the supply of the software
Increase the price of the software
A negative income elasticity of demand indicates that the product: -Is an inferior good -Is a normal good -Is a complimentary good -Is a substitute good
Is an inferior good
Sharon purchases two products with a given fixed budget, orange juice and soda. Her marginal utility from orange juice is 60, and her marginal utility from soda is 30. The price of a bottle of orange juice is $2.00, and the price of soda is $1.00. These data suggest that: -Is maximizing her total utility from the given fixed budget -Should buy more X and less Y -Should but more Y and less X -Should buy less Y and X
Is maximizing her total utility from the given fixed budget
Producer surplus: -Is the difference between the maximum price consumers are willing to pay for a product and the lower equilibrium price -Rises as equilibrium price falls -Is the difference between the maximum price consumers are willing to pay for a product and the minimum price producers are willing to accept -Is the difference between the minimum price producers are willing to accept for a product and the higher equilibrium price
Is the difference between the minimum price producers are willing to accept for a product and the higher equilibrium price
Deadweight losses occur when the quantity of an output produced is: -Less than the competitive equilibrium quantity -Greater than the competitive equilibrium quantity -Less than or grater than the competitive equilibrium quantity -such as the marginal benefit of the output is just equal to the marginal cost
Less than or grater than the competitive equilibrium quantity
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. Which policy is most appropriate for dealing with this problem? -Levy a tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources -Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products -Levy a tax on the producers of electricity and use the tax revenues to clean up the river -Levy a tax on the producers of paper products and use the tax revenues to clean up the river
Levy a tax on the producers of paper products and use the tax revenues to clean up the river
After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the: -Marginal utility for four slices of pizza is negative -Total utility for five slices is negative -Marginal utility is positive for the fourth slice and negative for the fifth -Marginal utility for the fourth slice is the largest amongst all the slices
Marginal utility is positive for the fourth slice and negative for the fifth
A consumer with a limited income will maximize utility when each good is purchased in amounts such that the -Total utility is the same for each good in a bundle -Marginal utility of each good in a bundle is maximized -Marginal utility per dollar spent on each of the final choices in a bundle is equal -Marginal utility per dollar spent on each of the final choices in a bundle is maximized for each good
Marginal utility per dollar spent on each of the final choices in a bundle is equal
Assume that a 3% increase in income across the economy produces a 1% decrease in the quantity of fast food demanded. The income elasticity of demand for fast food is ____________, and therefore fast food is _______________ -Negative, an inferior good -Negative, a normal good -Positive, an inferior good -Positive, a normal good
Negative, an inferior good
inelastic demand
Percent change in quality is less than percent change in price
The basic formula for the price elasticity of demand is: -Absolute decline in quantity demanded/percentage change in price -Percentage change in quantity demanded/percentage change in price -Absolute decline in price/absolute increase in quantity demanded -Percentage change in price/percentage change in quantity demanded
Percentage change in quantity demanded/percentage change in price
We would expect the cross price elasticity of demand between pepsi can coke to be: -Positive, indicating secondary goods -Positive, indicating general goods -Positive, indicating substitute goods -Negative, indicating substitute goods
Positive, indicating substitute goods
Marginal utility can be: -Positive, but not negative -Positive or negative, but not equal to zero -Positive, negative, or equal to zero -Decreasing, but not negative
Positive, negative, or equal to zero
In which instance will total revenues decline? -Price increases and Ed equals -.41 -Price increase and demand is unit elastic -Price decreases and demand is elastic -Price increase and Ed equals -2.47
Price increase and Ed equals -2.47
total revenue
Price x Quantity
The market system does not produce public goods because: -There is no need or demand for such goods -Private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them -Public enterprises can produce such goods at lower costs than can private enterprises -Their production seriously distorts the distribution of income
Private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them
When the marginal benefit of a output exceeds the marginal cost: -Production of that output should be increased, in order to maximize economic surplus -Production of that output should be decreased, in order to maximize economic surplus -increasing the production of that output would increase the missing surplus -Reducing the production of that output would reduce the missing surplus
Production of that output should be increased, in order to maximize economic surplus
If the consumption of a product or service involves external benefits, then the government can improve efficiency in the market by: -Providing a subsidy to correct for an overallocation of resources -Providing a subsidy to correct for an underallocation of resources -Imposing a corrective tax to correct for an overallocation of resources -Imposing a corrective tax to correct for an underalloaction of resources
Providing a subsidy to correct for an underallocation of resources
elastic demand
Quantity demanded is greater than percent change in price
perfectly inelastic demand
Quantity demanded is non responsive to price change
perfect elastic demand
Quantity demanded is so responsive to change in price, if price goes up or down by 1% quantity decreases to 0
perfectly elastic supply
Quantity supplied is responsive to price = infinity
perfectly inelastic supply
Quantity supplies is unresponsive to price =0
What are the two characteristics that differentiate private goods from public goods: -Rivalry and excludability -Negative externality and positive externality -Marginal cost and marginal benefit -Ownership and usage
Rivalry and excludability
Assume that Clara purchases a combination of products Y and Z such that, after she is done spending her limited income, MUy/Py = 25 and MUz/Pz= 15. Based on the equal marginal principle, Clara: -Is maximizing her total utility -Should have purchased more Y and less Z -Should have purchased less Y and more Z -Should have purchased less Y and less Z
Should have purchased more Y and less Z
If some activity creates external benefits as well as private benefits, the economic theory suggests that the activity ought to be: -Taxed -Prohibited -Subsidized -Left Alone
Subsidized
The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to accept it called the producer: -Revenues -Surplus -Costs -Utility
Surplus
Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following except: -Subsidizing the buyers of the product -Taxing the sellers of the product -subsidizing the sellers of the product -Providing the product itself
Taxing the sellers of the product
A positive externality or spillover benefit (additional social benefit) occurs when: -Product differentiation increase the variety of products available to consumers -The benefits associated with a product exceed those occurring to people who consume it -A firm does not bear all the costs of producing a good or service -Firms earn positive economic profits
The benefits associated with a product exceed those occurring to people who consume it
Which of the following is not an assumption of the decision making process followed by consumers to maximize utility? -The consumer behaves rationally -The consumer can rank his preferences -The consumer does not consider the prices of the products -The consumer has a limited income
The consumer does not consider the prices of the products
Consumer surplus arises in a market because: -At the current market price, quantity supplied is greater than quantity demanded. -At the current market price, quantity demanded is greater than quantity supplied. -The market price is below what some consumers are willing to pay for the product. -The market price is higher than what some consumers are willing to pay for the product.
The market price is below what some consumers are willing to pay for the product.
Which situation is consistent with the law of diminishing marginal utility: -The more pizza joe eats, the more he enjoys an additional slice -The more pizza Joe eats, the less he enjoys an additional slice -Joes marginal utility from eating pizza becomes positive after eating 3 slices -Joes marginal utility from eating pizza reaches a maximum when total utility is zero
The more pizza Joe eats, the less he enjoys an additional slice
Which is not a characteristic of a product with relatively inelastic demand? -The good is regarded by consumers as a necessity -There a large number of good substitutes for the good -Buyers spend a small percentage of their income on the product -Consumers have had only a short time period to adjust to changes in price
There a large number of good substitutes for the good
When diminishing marginal utility starts happening as a person consumes more and more of a given good: -Total utility will decrease at at diminishing rate -Total utility will increase at a diminishing rate -Marginal utility will increase at a diminishing rate -Total utility will become negative
Total utility will increase at a diminishing rate
In a free market economy, a product that entails a positive externality (additional social benefit) will be: -Overproduced -Underproduced -Produced at the optimal level -Provided solely the government
Underproduced
Which of the following statements is correct? -When marginal utility is decreasing, an increase in the quantity consumed will decrease total utility -When marginal utility is positive, an increase in the quantity consumed will decrease total utility -When marginal utility is positive, an increase in the quantity consumed will increase total utility -When marginal utility is zero, an increase in the quantity consumed will make total utility zero
When marginal utility is positive, an increase in the quantity consumed will increase total utility
inferior good
a good that consumers demand less of when their incomes increase
economic efficiency
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
positive externality
demand curve fails to include external benefits, the equilibrium price is artificially low and the equilibrium quantity is artificially low
market failure
market fails to allocate resources efficiently
social marginal benefit
private marginal benefit + external marginal benefit
social marginal cost
private marginal cost + external marginal cost
Assume that Alex would like to purchase a combination of product A and product B such that, after he is done spending his limited income, the MUa / Pa = 8 and MUb / Pb = 4. To maximize utility without spending more money, Alex should: -Purchase less of product A and more of B -purchase more of product A and less of B -Purchase more of both product A and B -Make no change in purchases for both product A and B
purchase more of product A and less of B
4 categories of goods
rivalry, non rivalry, excludability, non excludable
cross price elasticity for substitutes, complements, and unrelated
substitutes=positive, Complements=negative, Unrelated=Zero
private marginal benefit
the benefit to the consumer of an additional unit of a good or service
Allocatively efficiency occurs only at that output where: -Marginal benefit exceeds marginal cost by the greatest amount -Consumer surplus exceeds producer surplus by the greatest amount -the combined amount of consumer and producer surplus are maximized -The areas of consumer and producer surplus are equal
the combined amount of consumer and producer surplus are maximized
private marginal cost
the cost to the producer of an additional unit of a good or service
private demand
the demand for a good or service that considers only the private benefits of its consumption
Consumer Surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
Producer Surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
allocative efficiency
the particular mix of goods and services most highly valued by society where marginal benefit = marginal cost
productive efficiency
the production of any particular good in the least costly way
dead weight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
Economic Surplus
the sum of consumer surplus and producer surplus
social supply
the supply of a good or service that reflects both the private and external costs of its production
private supply
the supply of a good or service that reflects only the private costs of its production
social cost
the total cost of producing a good or service, including both the private cost and any external cost
negative externality
when supply curve fails to include external costs, the equilibrium price is artificially low, the equilibrium quantity is artificially low
