Microeconomics Exam #2

Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Private Cost
The cost borne by the producer of a good or service.
Social Cost
The total cost of producing a good or service, including both private cost and any external cost.
Private Benefit
The benefit received by the consumer of a good or service.
Social Benefit
The total benefit from consuming a good or service, including both the private benefit and any external benefit.
negative
When there is a _________ externality in producing a good or service, too much of the good or service will be produced at market equilibrium.
positive
When there is a _________ externality in consuming a good or service, too little of the good or service will be produced at market equilibrium.
Market Failure
A situation in which the market fails to produce the efficient level of output.
Property Rights
The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.
Transactions Costs
The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
Coase Theorem
The argument that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.
Pigovian Taxes and Subsidies
Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities
Command and Control Approach
A policty that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.
Rivalry
The situation that occurs when one person consuming a unit of a good means no one else can consume it.
Excludability
The situation in which anyone who does not pay for a good cannot consume it.
Private Good
A good that is both rival and excludable.
Public Good
A good that is both nonrival and nonexcludable.
Free Riding
Benefiting from a good without paying for it.
Common Resource
A good that is rival but not excludable.
Tragedy of the Commons
The tendency for a common resource to be overused.
Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
externality
The private cost will differ from the social cost when there is an__________.
consumer surplus, producer surplus
Economic efficiency is where _____ ______ and ____ ____ is maximized
d
Externalities affect the economic efficiency of a market equilibrium by causing a difference between:

a. The private cost of production and the social cost of production.
b. The private benefit of consumption and the social benefit of production.
c. Consumer surplus and producer surplus.
d. Both a and b.
e. All of the above.

a
Your neighbor John has a barking dog.

Which of the following statements is true?

a. It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders.
b. It creates only a negative externality by disrupting your sleep.
c. It does not create any externalities because you do not own the dog.
d. It does not create any externality because John bought the dog from a shelter.

positive
Getting a flu shot results in a _____ externality
d
An externality is not created by:

a. Generating Electricity
b. Producing Honey with Bees.
c. Conducting medical research.
d. consuming a pair of Gap jeans.
e. Producing college educations

social benefit
If a positive externality in consumption is present in a market, then the private benefit from consumption will be different than the ______ ________ from consumption.
the benefit received by the consumer of a good or service; the total benefits from consuming the good or service.
The private benefit is ________, while the social benefit is ________.
greater
A positive externality causes the social benefit from consuming the good to be ______ than the private benefit.
marginal benefit
The economically efficient level of pollution is that amount where the marginal cost of pollution reduction equals the _________ of pollution reduction.
low
The Coase Theorem states that if transaction costs are _____, private bargaining will result in an efficient solution to the problem of externalities.
a
The parties involved in an externality have an incentive to reach an efficient solution because:

a. both parties become better off when an efficient solution is reached.
b. government regulations compel private parties.
c. it is morally the right thing to do.
d. the party that causes negative externality does not have any legal right to do so.

c
Which one of the following factors helps determine the marginal cost of reducing crime?

a. medical expenses
b. property damage from crime.
c. resources devoted to courts.

b
Which one of the following factors helps determine the marginal benefit of reducing crime?

a. resources devoted to education.
b. personal injury from crime.
c. resources devoted to prison guards.

no
Would it be economically efficient to reduce the amount of crime to zero?
c
An example of a transaction cost is:

a. The cost associated with not reducing a negative externality.
b. The total cost of reducing a negative externality.
c. The cost associated with drawing up a binding contract to reduce a negative externality.
d. The cost of a negative externality on others.
e. The marginal cost of reducing a negative externality.

externalitites
A pivogian tax is a tax to bring about an efficient level of output in the presence of ________
c
At what level must a Pigovian tax be set to achieve efficiency? A pigovian tax must be set equal to:

a. The marginal social cost of production.
b. The market equilibrium price.
c. The cost of externality.
d. The marginal private cost of production.
e. The transaction cost associated with Coase bargaining.

c
An individual producer or a consumer “internalizes an externality” when

a. They ignore the externalities created by their actions.
b. They lobby against any government action related to the externalities caused by their actions.
c. in their own decisions they take into account the external effects of their actions.
d. they keep knowledge of the externalities private to them.

a
A producer or a consumer will internalize an externality because

a. They have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.
b. They face government regulation.
c. They are driven by their individual moral codes.
d. they are compelled by law.

rival, excludable
A private good is ______ and _______
nonrivalrous, nonexcludable
A public good is ________ and ________.
nonrivalrous, excludable
a quasi-public good is _______ and _______
rival, nonexcludable
A common resource is ______ and ______.
paying
Free riding is benefiting from a good without ______ for it.
nonexcludable
Free riding results in the market producing a quantity of public goods that is inefficiently low because they are __________.
Tragedy of Commons
The tendency for a common resource to be overused.
d
The tragedy of commons can be avoided by:

a. clearly defining and enforcing property rights.
b. setting a tax equal to the external cost of overusing common resources.
c. removing restrictions to increase access to common resources.
d. both a and b.
e. all of the above.

a
The three major types of firms in the United States are called

a. Sole proprietorships, partnerships, and corporations.
b. Small businesses, limited liability firms, and corporations.
c. sole proprietorships, not-for-profit companies, and government agencies.
d. non-profit corporations, government agencies, and limited liability firms.

Limited Liability
______ _______ means that share holders in a corporation cannot lose more than their investment in the firm.
encourage
The government grants limited liability to the owners of corporations to limit shareholder risk and thus ______ investment in corporations.
Sole proprietorship
Supposed that shortly after graduating from college you decide to start your own business. Assuming you are starting a small business and want it to be your business alone, which category of firm are you most likely to start?
more, right
The establishment of limited liability for the owners of corporations causes the businesses to produce ____ and over time the country’s production possibilities frontier shifts to the _____.
Corporations
_______ have greater ability to raise funds.
Corporations
_______ are costly to organize.
Corporations
______ account for the most profit in the United States.
Shareholders, managers
______ own the corporation, but it is controlled by _______.
bond
A _____ represents a loan to the company.
stock
A _____ represents part ownership of the company.
fall
A competitor launches a search engine that is just as good as Googles.

The price of Google’s stock would be expected to ______.

rise
The corporate income tax is abolished.

The price of Google’s stock would be expected to ______.

fall
Google’s board of directors becomes dominated by close friends and relatives of its top management.

The price of Google’s stock would be expected to ______.

rise
The price of wireless Internet connections unexpectedly drops, somore and more people use the Internet.

The price of Google’s stock would be expected to ______.

2%
Suppose Ford Motor Company issues bonds with a face value of $1,000 and an annual coupon payment of $20.

What is the interest rate Ford is paying on the borrowed funds?

explicit, implicit
A firm’s ______ cost is its monetary cost whereas its _____ cost is its non monetary opportunity cost.
unlikely
Suppose a business earned a positive accounting profit, but a negative economic profit, then it will be very _____ for the firm to remain in business in the long run.
Sarbanes Oxley
The ____ ____ act requires that CEOs of corporations certify the accuracy of financial statements.
Sole Proprietorship
A firm owned by a single individual and not organized as a corporation.
Partnership
A firm owned jointly by two or more persons and not organized as a corporation.
Corporation
A legal form of business that provides owners with protection from losing more than their investment should the business fail.
Asset
Anything of value owned by a person or a firm.
Limited Liability
The legal provision that shields owners of a corporation from losing more than they have invested in the firm.
Corporate Governance
The way in which a corporation is structure and the effect that structure has on the corporation’s behavior.
Principal Agent Problem
A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him.
Indirect Finance
A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).
Direct Finance
A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange.
Bond
A financial security that represents a promise to repay a fixed amount of funds.
Coupon
An interest payment on a bond.
Interest Rate
The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.
Stock
A financial security that represents partial ownership of a firm.
Dividends
Payments by a corporation to its shareholders.
Liability
Anything owed by a person or a firm.
Accounting Profit
A firm’s net income, measured as revenue minus operating expenses and taxes paid.
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity.
Explicit Cost
A cost that involves spending money.
Implicit Cost
A nonmonetary opportunity cost.
Economic Profit
A firm’s revenues minus all of its implicit and explicit costs.
technology
The processes a firm uses to turn inputs into outputs of goods and services.
technological change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Short Run
The period of time during which at least one of a firm’s inputs is fixed.
Long Run
The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
Total Cost
The cost of all the inputs a firm uses in production
Variable Cost
Costs that change as output changes.
Fixed Costs
Costs that remain constant as output changes.
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity.
Explicit Cost
A cost that involves spending money
Implicit Cost
A nonmonetary opportunity cost.
Production Function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
Average Total Cost
Total cost divided by the quantity of output produced.
Margin Product of Labor
The additional output a firm produces as a result of hiring one more worker.
Law of Diminishing Returns
The principle that, at some point, adding more a variable input, to the same amount of a fixed capital will cause the marginal product of the variable input to decline.
Average Product of Labor
The total output produced by a firm divided by the quantity of workers.
Marginal Cost
The change in a firm’s total cost from producing one more unit of a good or service.
Long-run average cost curve
A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
Economies of scale
The situation when a firm’s long-run average costs fall as it increase the quantity of output it produces.
Constant returns to scale
The situation in which a firms long-run average costs remain unchanged as it increases output.
Minimum efficient scale
the lvel of output at which all economies of scale are exhaused.
Diseconomies of scale
The situation in which a firms long run average costs rise as the firm increases output.
False
A firm is able to cut each worker’s wage rate by 10% and still produce the same level of output.

True or False: This is an example of positive technological change.

True
A training program makes a firm’s workers more productive.

True or False: This is an example of positive technological change.

True
An exercise program makes a firm’s workers more healthy and productive.

True or False: This is an example of positive technological change.

True
A firm cuts its workforce and is able to maintain its initial level of output.

True or False: This is an example of positive technological change.

False
A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before.

True or False: This is an example of positive technological change.

b
In economics, the best definition of technology is

a. The development of new products.
b. The process a firm uses to turn inputs into outputs
c. The process a firm uses to price output
d. the sophistication of the equipment enjoyed by consumers
e. the speed of communication

no
Is the amount of time that separates the short run from the long run from the same for every firm?
a
Which of the following is most likely to be a fixed cost for a farmer?

a. insurance premiums on propety
b. wages paid to farm workers
c. cost of fertilizer
d. cost of seeds

b
Which of the following is most likely to a variable cost for a business firm?

a. rent on the office building
b. cost of shipping products
c. property taxes
d. interest on long-term outstanding bonds

production function
A firm’s _______ ______ is best described as illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.
capital
A short-run production function holds constant the amount of _______.
fixed
A insurance policy payment is a _______ cost.
variable
Purchasing pizza dough is a _______ cost.
variable
The wages a firm pays workers is a ______ cost.
short
The law of diminishing returns applies in the _____ run.
perfectly competitive
For a market to be ______ ______, there must be many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
price taker
A _____ ______ is a firm that is unable to affect the market price.
small
A firm is likely to be a price taker when it represents a _____ fraction of the total market.
Yes, many, identical, High
Wheat Farming

a. Perfectly Competitive? (Yes/No)
b. Number of Firms? (Few, Many, One)
c. Type of Product (Identical, Differentiated)
d. Easy of entry (High, Low)

Format a,b,c,d

No, many, differentiated, high
Retail Bookselling

a. Perfectly Competitive? (Yes/No)
b. Number of Firms? (Few, Many, One)
c. Type of Product (Identical, Differentiated)
d. Easy of entry (High, Low)

Format a,b,c,d

No, few, differentiated, low
Manufacturing Automobiles

a. Perfectly Competitive? (Yes/No)
b. Number of Firms? (Few, Many, One)
c. Type of Product (Identical, Differentiated)
d. Easy of entry (High, Low)

Format a,b,c,d

No, Few, Differentiated, Low
Office building Construction

a. Perfectly Competitive? (Yes/No)
b. Number of Firms? (Few, Many, One)
c. Type of Product (Identical, Differentiated)
d. Easy of entry (High, Low)

Format a,b,c,d

marginal revenue
The increase in total revenue that results from selling one more unit of output
variable, total
In the short run, a firm’s shutdown point is the minimum point on the average _____ cost curve, while in the long run, a firm’s exit point is the the minimum point on the average _____ cost curve.
fixed costs
There are _____ ______ in the short run, but not in the long run.
market
The _______ supply curve is derived by horizontally adding the individual firms’ supply curves.
Allocative Efficiency
A state of the economy in which production is in accordance with consumer preferences.
Economic Loss
The situation in which a firm’s total revenue is less than its total cost, including all implicit costs.
Sunk Cost
A cost that has already been paid and cannot be recovered.