Principles of Microeconomics

The statement “Unemployment should be below 6 percent” is
a normative statement.
From 8 to 11 p.m., Sam can either attend a basketball game, a hockey match or the symphony. Suppose that Sam decides to attend the hockey match and thinks to herself that if she did not go to the match she would go to the symphony. Then the opportunity cost of attending the hockey match is
going to the symphony.
Resource use is allocatively efficient if the
marginal cost of what the resource produces is equal to the marginal benefit of what is produced.
Most students attending college pay tuition and are unable to hold a full-time job. For these students, tuition is
part of the opportunity cost of going to college. So are their forgone earnings from not holding a full-time job.
In economics, positive statements are about
the way things are.
Capital accumulation definitely
shifts the production possibilities frontier outward.
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The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is
Your employer has asked you to start working overtime and has offered to pay $18 per hour for every hour you work beyond forty hours a week. The wage rate for each of the first forty hours will continue to be the usual $15 per hour. In terms of dollars, what is the marginal benefit of working each hour of overtime?
Which of the following describes comparative advantage?
To produce a bushel of wheat Farmer John must give up 2 bushels of corn whereas Farmer Ben must give up 3 bushels of corn.
The principle of decreasing marginal benefit means that as the quantity of a good consumed
increases, its marginal benefit decreases.
According to economists,
market capitalism is the best system available and some government intervention and regulation can either help or harm the social interest.
Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements is true?
Washington has an absolute advantage in the production of both pecans and pears.
Suppose Joe can prepare 20 sandwiches or 10 pizzas in an hour and Beth can produce 36 sandwiches or 27 pizzas. The concept of comparative advantage concludes that
Beth should produce pizza and Joe should produce sandwiches.
Abe can catch 10 pounds of fish an hour or pick 10 pounds of fruit. Zeb can catch 30 pounds of fish an hour or pick 20 pounds of fruit. The opportunity cost of fish is ________ for Abe than for Zeb, and the opportunity cost of fruit is ________ for Abe than for Zeb.
higher; lower
A person has a comparative advantage in producing a particular good if that person
can produce it at lower opportunity cost than anyone else can.
When an economist talks of scarcity, the economist is referring to the
inability of society to satisfy all human wants because of limited resources.
A good economic model
includes only those features of the world that are needed for the purpose at hand
A positive relationship exists between two variables if
a reduction in one variable is associated with a decrease in the other variable.
The opportunity cost of something you decide to get is
the highest valued alternative you give up to get it.
If Taco Bell decides to produce more tacos and fewer burritos, Taco Bell is answering the ________ part of one of the two big economic questions.
Which of the following is NOT true concerning a society’s production possibilities frontier (PPF)?
Consumers will receive equal benefits from the two goods illustrated in the PPF.
“OPEC should supply more oil so that the world’s economies can grow more rapidly.” This is an example of
a normative statement.
Which of the following is NOT a factor of production?
175 shares of Microsoft stock
Dell Computers decides to produce PCs and sell them directly over the Internet and via Best Buy. This is an example of
a microeconomic decision.
Consider a production possibilities frontier with corn on the vertical axis and cars on the horizontal. Unusually good weather for growing corn shifts
the vertical intercept upward but does not shift the horizontal intercept.
The opportunity cost of economic growth is
present consumption that a nation gives up to accumulate capital.
Increasing opportunity cost implies that
producing additional units of one good results in increasing amounts of lost output of the other good.
Which of the following is a positive statement?
An increase in the price of pizza will lead fewer students to buy pizza.
Panasonic sends its HDTV salespeople to training sessions. This is an example of
a firm investing in workers’ human capital
On December 10 the price of a Christmas tree is $50 and 100 trees are purchased. On December 20 the demand for Christmas trees decreases so that the price falls to $30 and 20 trees are purchased. From this set of facts, the
supply of Christmas trees is elastic
The increase in the demand for widgets, shown in the figure above, is the result of a decrease in the price of McBoover devices from $11 to $9. Therefore, the cross-price elasticity for these two products is
Suppose a drought increased the price of corn by 25 percent while it decreased the quantity by 50 percent. The price elasticity of demand equals
The opportunity cost of a hot dog in terms of hamburgers is the
ratio of the money price of a hot dog to the money price of a hamburger.
Which of the following decreases the demand for an inferior good?
an increase in income
Goods whose income elasticities are negative are called
inferior goods.
Each point on the demand curve reflects
the highest price consumers are willing and able to pay for that particular unit of a good.
If University of Nebraska increased its season football ticket sales from 43,000 to 47,000 when it lowered price from $350.00 to $300.00, then its demand for season tickets must be ________ because total revenue ________ when the price was lowered.
inelastic; decreased
You are the new vice president in charge of advertising at Taco Bell. In your upcoming advertising campaign, you plan to degrade the fast food competitor whose product is the closest substitute for Taco Bell’s tacos. That would be the fast food chain whose cross elasticity of demand with your tacos is equal to
positive 1.55.
Which of the following best reflects an increase in quantity demanded and not an increase in demand?
The price of hair styling falls.
The price elasticity of demand for gasoline is 0.40. If the price of gasoline rises by 20 percent, there will be
an increase in the total revenue received from the sale of gasoline.
Which of the following goods would have the smallest elasticity of demand?
insulin sold to diabetics
“Last October, due to an early frost, the price of a pumpkin increased by 10 percent compared to the price in the previous Halloween seasons. As a result, the quantity demanded county-wide decreased from 2 million to 1.5 million.” Based on this statement, the
demand for pumpkins is elastic.
If peanut butter and jelly are complements, then their cross elasticity of demand must be
a negative number.
Deb’s income has just risen from $950 per week to $1,050 per week. As a result, she decides to increase the number of movies she attends each month by 5 percent. Her demand for movies is
income inelastic.
When the price of a Caesar salad is $5.00, the demand for Caesar salads is elastic, and when the price is $4.00, the demand is inelastic. If Mike’s Roadside Restaurant cuts the price from $5.00 to $4.00, its total revenue from Caesar salads ________.
might increase, decrease, or remain the same
When economists speak of preferences as influencing demand, they are referring to
an individual’s attitudes toward goods and services.
Auto workers negotiate a wage increase. How does this wage hike affect the supply of cars?
It decreases the supply.
Consider the market for broccoli. If the price of a pound of broccoli increases, what happens to the supply of broccoli?
There will be no change in the supply of broccoli, but instead there is an increase in the quantity supplied of broccoli
A decrease in the supply of sugar increases the price of sugar from $1.00 a packet to $1.25 a packet. The quantity decreases from 100 packets a day to 80 packets a day. The price elasticity of demand of sugar is ________.
Twenty years ago a stove cost $300 and a refrigerator cost $1,500. Today a stove costs $600, while a refrigerator costs $1,800. Which of the following statements is true?
The relative price of a stove has increased.
The quantity of CDs that firms plan to sell this month depends on all of the following EXCEPT the
quantity of CDs that people plan to buy.
In the market for magazines, the “income effect” means that
an increase in the price of magazines will reduce the total purchasing power of magazine readers, making them able to afford fewer magazines.
Scarcity guarantees that
wants will exceed demands.
Ham and eggs are complements. If the price of ham rises, the demand for eggs will
decrease and the demand curve for eggs will shift leftward.
Which goods have more elastic demands?
goods with many substitutes
You observe that an increase in the price of salsa decreases the demand for tortilla chips and increases the demand for potato chips. You can conclude that
salsa and tortilla chips are complements.
The law of demand implies that, other things remaining the same,
B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will decrease.
If the price of chicken falls, then in the market for beef,
the demand curve for beef shifts leftward.
Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is ________.
Consider the market for heart transplants. The demand for a heart transplant is perfectly inelastic and the supply curve is upward sloping. If a $1,000 tax per transplant tax is imposed on buyers (the recipients), how will the tax be divided between the buyer and seller?
The buyers will pay the entire tax.
One consequence of rent ceilings set below the equilibrium rent is that
search costs for housing increase.
Which of the following is a correct statement about markets for prohibited goods?
Penalizing sellers of an illegal good decreases supply and penalizing buyers decreases demand.
Penalizing either buyers or sellers of an illegal good decreases the quantity bought.
Taxing a good at a sufficiently high rate can achieve the same consumption level as prohibition.

D) All of the above are correct statements.

At the current level of output, the marginal social cost of tennis balls is greater than the marginal social benefit. Then
more than the efficient quantity of tennis balls is being produced.
Suppose a tax is imposed on a good. This will
increase the price paid by the buyer and decrease the price received by the seller.
Consider the market for hot dogs. As long as the marginal benefit of consuming hot dogs is greater than the price of hot dogs,
people receive consumer surplus from eating hot dogs.
Among the sources of economic inefficiency are all of the following EXCEPT
The assertion that if resources are allocated efficiently, they also are allocated fairly is made by
Robert Nozick, who believes that equality of opportunity is fair.
If the same fine is imposed on buyers and sellers of an illegal good so that the cost of breaking the law is the same for both, then
the supply and demand curves both shift leftward by equal amounts.
Jane is willing to pay $50 for a pair of shoes. The actual price of the shoes is $30. Her consumer surplus on this pair of shoes is
Using the “It’s not fair if the result isn’t fair” principle of fairness, an income tax designed to transfer wealth from the rich to the poor
decreases efficiency and increases equity.
In order to have an effect, a price ceiling must be set ________.
below the equilibrium price
When the Smiths were shopping for their present home, the asking price from the previous owner was $250,000.00. The Smiths had decided they would pay no more than $245,000.00 for the house. After negotiations, the Smiths actually purchased the house for $239,000.00. Therefore, the previous owner earned a producer surplus of
an amount unknown given the information in the question.
Four people each have a different willingness to pay for one unit of a good: George will pay $15, Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price decreases from $9 to $8 then the consumer surplus from this unit will increase by
Suppose a $1 tax is placed on a good. The more elastic the supply of the good, the
larger the increase in the after-tax price.
When a rent ceiling is imposed in a housing market, the opportunity cost of housing equals the
value of the time and resources spent searching plus the rent.
Utilitarianism is based on the argument that
the greater a person’s income, the smaller is the marginal benefit of a dollar.
Which of the following is true?
Force helps support the legal system on which markets function.
Which of these is NOT a potential source of inefficiency?
increasing marginal costs
When a government fines and/or imprisons convicted drug dealers, it is attempting to reduce the illegal drug trade by shifting the ________ curve for illegal drugs ________.
supply; leftward
How a sales tax is divided between buyers and sellers is determined by
the elasticities of supply and demand.
Sal likes to eat pizza. The ________ is the maximum amount that Sal is willing to pay for one more piece of pizza.
marginal benefit
If policy makers believe that the equilibrium wage rate is too low, policy makers can raise wages by legislating a minimum wage, that is, a wage
floor above the equilibrium wage.
A minimum wage set above the equilibrium wage will
create a surplus of labor.
Which of the following represents the marginal cost of a soda?

I. The opportunity cost of producing another soda.
II. The minimum price someone is willing to pay for another soda.

I only
Among the factors that create a deadweight loss and inefficiency are
minimum wages, rent ceilings, and taxes.
If the government decreases the tax on cell phones, ________.
the deadweight loss decreases
Assume that your state government has placed a price ceiling of $.20 per kilowatt hour on electricity. The equilibrium price per kilowatt hour for electricity is $.25. The government’s action will result in
a deadweight loss.
Suppose there are four firms that are each willing to sell one unit of a good. Each firm has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C $10, and Firm D $12. If the market price is $11, then the total producer surplus is
) $10
A sales tax is imposed on the sellers of gasoline. This tax shifts
the supply of gasoline curve leftward.
The change in consumption that results from a change in the relative price of goods while staying on the same indifference curve is the
substitution effect.
Katie finds that the marginal utility from a compact disc is 30 and the marginal utility from a pizza is 10. The price of a compact disc is $15 and the price of a pizza is $10. In order to increase her utility, Katie should
consume more compact discs and fewer pizzas.
A measure of all the satisfaction you receive from all the coffee that you consume is your
total utility from coffee
Larry spends all his $800 monthly income on pizza and gasoline. The price of pizza is $4 a slice, and the price of gasoline is $2 per gallon. If Larry buys 150 slices of pizza per month, his budget constraint will allow him to buy ________ gallons of gas per month.
An indifference curve shows
different combinations of two goods among which the consumer is indifferent.
The predictions of marginal utility theory
support the idea that the demand curve slopes downward.
Samara’s income is $30 a month and she spends all of it on music downloads and gasoline. The price of a music download is $1.50 and the price of a gallon of gasoline is $3. At Samara’s best affordable point, her marginal rate of substitution is ________ per video tape.
0.5 of a download
Lucky buys hats for $20 but Lucky will not sell one of her hats for less than $35. Lucky is ________.
displaying the endowment effect
Suppose the price of soda is $2 each and the price of a pizza slice is $4 each. David maximizes his utility by buying only sodas and pizza. He buys 5 sodas and 10 slices of pizza. If the price of a soda increases to $3 each, David will
decrease the number of sodas bought and move along the demand curve for soda.
Which of the following statements is true?
Marginal utility theory assumes that marginal utility diminishes as more of any good is consumed.
The variables that determine a household’s budget line are
prices and income.
A decrease in consumption will result in
total utility decreasing, but marginal utility increasing
Junkfood Jill spends all of her income on jellybeans and Jolt cola. Suppose that Jill’s income is $30, the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. Which of the following combinations of jellybeans and Jolt cola lies inside of Jill’s budget line?
2 bags of jellybeans and 8 bottles of Jolt
Keesha consumes only milkshakes and burgers. At her consumer equilibrium, which of the following is true when Keesha can buy any portion of a unit of a milkshake or burger?
The marginal utility per dollar will be the same for each good.
For a consumer, a budget line shows the boundary between
what is affordable and what is not affordable.
Which of the following statements is FALSE?
A consumer has only one indifference curve.
Ernie has an income of $40 which he plans to spend on cookies and milk. The price of milk is $1 per gallon, and the price of cookies is $2 per dozen. If Ernie buys 12 gallons of milk, how many dozens of cookies will he buy if he spends all of his income?
Real income is equal to ________ and a relative price is given by ________.
the dollar amount of income divided by the dollar price of a good; the dollar price of one good divided by the dollar price of the good whose relative price is being calculated
Which of the following is NOT a divisible good?
Michelle spends all of her income on mangos and rice. Mangos cost $2 per pound and rice costs $1.50 per pound. If Michelle is spending all of her income and the marginal utility per dollar spent is 20 for the last pound of mangos purchased and 10 for the last pound of rice purchased, then
Michelle should buy more mangos and less rice to maximize utility.
When the consumer is at his or her best affordable consumption point, it is the case that the marginal rate of substitution is
equal to the price ratio.
The total utility you get from eating slices of pizza on a given night is the
sum of the marginal utilities of all slices eaten.
Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. Melissa’s real monthly income in terms of concerts is
The paradox of value is illustrated by the fact that
a pound of bread is cheaper than a pound of gold.
When the price of only one good rises, the relative price of that good
Because we cannot observe or measure utility
None of the above answers are correct.
Economists using marginal utility theory assume that consumers’ objectives are to
maximize their total utility
Danny has $12 to spend on two goods: pies and soda. The price of a pie is $4, and the price of a can of soda is $2. To maximize his utility, Danny buys ________.
the combination that gives him the same marginal utility per dollar spent on pies as on soda
“I really enjoy watching movies. The first one is best. After that I still enjoy movies but the last one is not as much fun to watch as the one before it.” This statement reflects the
principle of diminishing marginal utility.
Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is ________ and the income effect of this price decrease is ________.
reflected by the change in the slope of the budget line; that Bart has greater purchasing power
Fernando charges the restaurant Flaming Fernando’s $1,000 annually for use of his name. If Fernando increases the fee for use of his name,
the restaurant’s average fixed cost and average total cost curves shift upward.
When the average product of labor is greater than the marginal product of labor,
the average product of labor is decreasing as labor increases.
The long run is distinguished from the short run because only in the long run
the quantities of all factors of production can be varied.
In perfect competition, the price of the product is determined where the market
supply curve and market demand curve intersect.
Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi’s pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is
economic depreciation.
A firm’s marginal cost is $82, its average total cost is $50, and its output is 800 units. Its total cost of producing 801 units is
greater than $40,080
A firm that is maximizing its profit
is economically efficient and technologically efficient.
Entry in a perfectly competitive market
shifts the market supply curve rightward
decreases the market price.
Bubba’s BBQ has fallen on some hard times. Bubba has analyzed his past revenue and cost information and knows that if he shuts down, he will incur an economic loss equal to $20,000 in remaining lease payments. Apparently, Bubba’s current planning horizon is
the short run because he still faces some fixed costs.
Which of the following would be classified as a fixed cost for the proprietor who owns and operates the local Texaco station?
The rent paid on the 10 year lease for the property on which the station is located.
The law of diminishing returns states that as a firm increases
a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases.
The accountant for Muzhi’s Sushi claims that Muzhi has accomplished “technological efficiency.” This means that Muzhi’s Sushi
produces a given output using the least inputs.
A firm’s long-run average cost curve
tells the firm which plant size to use and which quantity of labor to use to minimize the cost of producing any level of output.
Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy’s cost curves. The current market price is 2 cents per page. With no change in demand and technology, in the long run, the price will
remain unchanged.
Greg and Todd form a partnership and start a business in which each has a 50 percent share of the profit. After a year, the firm goes bankrupt and has debts of $20,000. Greg has no money, but Todd has $25,000 in the bank. Todd must pay ________ of debt.
On a national level, the concentration ratio for grocery stores is very low. But, the “true” market for grocery stores is local in nature. What limitation does the geographic market put on the measure of concentration for grocery stores?
On the local level, grocery stores are more concentrated than they appear on the national level.
Mr. Sweet opened a candy store. He rented a building for $30,000 a year. During the first year of operation, Sweet paid $40,000 to his employees, $10,000 for utilities, and $20,000 for goods he bought from other firms. His total revenue was $135,000. Sweet’s best alternative to running this candy store is to work for Wal-Mart as a sales associate for $15,000 a year. What is Sweet’s total opportunity cost?
Which of the following correctly characterize principals and agents in important examples of the principal-agent problem?
In the doctor/patient relationship, the patient is the principal and the doctor is the agent, In the lawyer/client relationship, the client is the principal and the lawyer is the agent.
Coca Cola and Pepsi, which together account for about 85 percent of the soft drink market, are best described as being in
an oligopolistic market.
Electric utility companies have built larger and larger electric generating stations and, as a result, the long-run average cost of producing each kilowatt hour decreased. This is an example of
economies of scale.
The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum
average variable cost.
If the donut industry is perfectly competitive and is in long-run equilibrium, then the price of a donut
equals long-run average cost.
After constructing a new factory, the cost of building the factory is a
sunk cost.
A firm’s total product curve shows
how the amount of output changes when the quantity of labor changes
When Fatz confectionery can lower the cost of manufacturing and packaging a pound of candy by doubling the quantity manufactured and packaged each day, it will achieve
economies of scale.
The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. What happens in the short run?
The firms increase production.
There is a technological advance in a perfectly market. Which of the following statements is NOT true?
Technological change brings permanent gains to producers and temporary gains to consumers.
An example of a perfectly competitive firm is
an oat farmer in the United States
Which of the following may yield economies of team production for Jitters Coffee Company, Inc.?
Dividing the process of packaging and shipping coffee into several specialized tasks, each performed by different people.
Quantity (pizzas per hour) Total cost, TC (dollars per hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

Giuseppe’s Pizza is a perfectly competitive firm. The firm’s costs are shown in the table above. If the market price is $15, how much economic profit does the firm make

A monopolistically competitive firm is making a positive economic profit. In the long run, which of the following is most likely?
It will produce less output and it will charge a lower price.
What condition must exist for a monopolist to effectively price discriminate?
The monopolist must produce a good that cannot be resold.
Brand name drugs are chemically identical to their generic counterparts. Yet, consumers often prefer the brand name product to the generic product. Making consumers think that a brand name drug differs from its generic counterpart is an example of
product differentiation.
When Dominant Pizza is willing to sell a pizza to a student who lives on-campus at a lower price than it sells the identical pizza to a student who lives a block away from the campus, the pizza firm is ________.
practicing price discrimination
Monopolistic competition differs from monopoly because in monopolistic competition,
there are many firms.
Excess capacity is the
difference between a perfectly competitive firm’s and a monopolistically competitive firm’s output.
difference between a perfectly competitive firm’s and a monopoly’s output.
output at the maximum point of the ATC curve.
D) None of the above answers is correct.
Economists are critical of monopoly because
monopolists can create a deadweight loss.
In monopolistic competition, a firm can determine what price to set for its good because
the demand for its good is not perfectly elastic.
How is a monopolistically competitive firm similar to a perfectly competitive firm?
Both will observe entry into the industry if economic profit is positive.
The ABC Nail Company has entered into a collusive agreement with the other firm in the industry, the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the agreement?
ABC lowers the price of its nails.
The total industry output increases.
The total profits in the nail industry will decrease.
D) All of the above answers are correct.
“It is clear from the theory of monopolistic competition that product development is not pushed to its efficient level.” This statement is
true because price exceeds marginal revenue in monopolistic competition.
Suppose that two clothing manufacturers, Frederick’s Fashions and Stephan’s Styles, announce that they plan to merge. The Herfindahl-Hirschman index is currently 1,500. After the merger, the HHI will rise to 1,560. This market is
moderately concentrated, but because the merger increases the HHI by less than 100 points, the government will probably not challenge the merger.
A natural monopoly occurs when
economies of scale allow one firm to supply the entire market at the lowest possible cost.
The primary reason why a monopoly can make a long-run economic profit is the existence of
barriers to entry.
Which of the following is a distinguishing characteristic of oligopoly?
Natural or legal barriers prevent the entry of new firms.
Firms in monopolistic competition have rivals that
set their prices according to the demand curves they face.
The iPhone 5 no longer comes pre-loaded with Google Maps and uses the Apple map application instead. Regulators might be concerned with this requirement because they might see it as an example of
a tying arrangement.
Ann and Lynn have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Ann and Lynn are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, she will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game?
Both confess
Which of the following differs between a perfectly competitive market and a market with a perfectly price discriminating monopoly?
The amount of producer surplus
Because consumers value product variety,
the inefficiency and deadweight loss created by monopolistic competition is offset.
Of the following, the best example of firm that might operate in a contestable market is a
ship owner operating on a major waterway.
The simplest prisoners’ dilemma is a game that, in part, requires
two players who are unable to communicate with each other.
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior.
A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm’s average variable cost and marginal cost is a constant $20 per book. What is the publisher’s profit-maximizing price?
Price wars can be the result of
new firms entering an industry and all firms then finding themselves in a prisoners’ dilemma.
If a natural monopoly has an average cost pricing rule imposed, the rule will
reduce the consumer surplus and generate a deadweight loss when compared to a marginal cost pricing rule.
Suppose a new vaccine for Lyme disease is developed by Merck, a large drug company. Which of the following is most likely to occur?
Merck will apply for a patent on the vaccine that grants it the monopoly rights to the vaccine for many years.
A monopolistically competitive firm will end up selling its output for a price such that
price is greater than marginal cost.
Buying a monopoly from the existing owner does not ensure an economic profit because
competition among buyers drives up the cost of buying the firm.
Which of the following is a characteristic of a single-price monopoly?
Price exceeds marginal revenue.
If the marginal private cost of producing one kilowatt of power in California equals five cents and the marginal social cost of each kilowatt equals nine cents, then the marginal external cost equals ________ per kilowatt.
four cents
For a good to be nonrival, then
one person’s consumption of that good does not decrease another person’s consumption of that good.
Rational ignorance suggests that voters will
be ignorant about issues that are of no special interest to them.
Consider a market in which there is an external cost. A tax can be used to arrive at the efficient market equilibrium because the tax will
decrease supply of the good.
The efficient quantity of a public good is provided when the economy’s
marginal social benefit from the good equals its marginal social cost.
Both firm A and firm B emit 300 tons of pollution. Suppose both firm A and firm B have permits that allow each to emit 100 tons of pollution. If it costs $5,000 for firm A to eliminate 100 tons of pollution and it costs firm B $6,000 to eliminate 100 tons of pollution, then
firm A will sell its permits to firm B for a price below $6,000.
The Atlantic City Expressway is a highway that runs from outside Philadelphia to Atlantic City, New Jersey. It is notoriously congested during the summer weekends when many people are driving to the beach about the same time. Because drivers who decide to take this road ignore the impact of their driving on overall traffic congestion the result is ________ cars on the road than the efficient number of cars and a deadweight loss is ________.
more; created
Free riding is not a problem in the market for a private good because
people who do not pay for the good can be excluded from consumption.
Which of the following applies to the tragedy of the commons?
I only
A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. The marginal social cost, private marginal cost, and marginal benefit from producing chemicals are in the figure above. Initially the lake is owned by no one. Keeping in mind the Coase theorem, if transactions costs are low then if the chemical factory owns the lake ________ tons of chemicals will be produced and if the fishing club owns the lake, ________ tons of chemicals will be produced.
4; 4
A tax equal to the external marginal cost of an activity yields the efficient level of production because the tax
forces producers to face all costs of production including the external cost.
Consider a market in which there is an external benefit. A private subsidy paid to producers can be used to arrive at the efficient market equilibrium because the subsidy will
increase the quantity produced.
For a common resource, efficiency requires that the ________ equals the ________.
marginal social benefit; marginal social cost
Generating electricity creates air pollution. This industry, if left unregulated, will produce at an inefficient market equilibrium because
there is a deadweight loss.
School vouchers can be used to arrive at the efficient market equilibrium because vouchers
increase demand for schooling.
If a good has zero external costs, then
marginal social cost equal marginal private cost.
Suppose your neighbor has a beautiful garden. The benefit that she enjoys from her garden is called ________ and the benefit the rest of the neighborhood enjoys is called ________.
marginal private benefit; marginal external benefit
Long Beach Island, off the coast of New Jersey, is considering enhancing its system of satellite towers to help communication during emergencies such as hurricanes. A study showed that in Superstorm Sandy the existing number of satellite towers resulted in the marginal social cost of a satellite tower being less than the marginal social benefit. To achieve efficiency, this study indicates that the
system should be expanded because the quantity of satellite towers is less than the efficient quantity
If the government assigns private property rights to a common resource, then the
marginal private cost becomes equal to the marginal social cost.
The concept of externalities means that subsidizing education can be justified on the grounds that as a student becomes better educated, the student will
enhance the lives of people around the student.
After Hurricane Sandy, FEMA (the Federal Emergency Management Agency) advertised in a New Jersey radio station how people affected by the hurricane could file for assistance. In the political marketplace, the decision makers in FEMA are best characterized as
An example of a good that is both rival and excludable is
a pair of pants.
When external costs are present,
a tax might be able to create efficiency.
A free-rider problem occurs when the
good is nonexcludable.
Resources are efficiently utilized when production is such that marginal social benefit
is equal to marginal social cost.
Which of the following is a possible government solution to the problem posed by a good with an external benefit?
Give a voucher to buyers of the good.
Which of the following is the BEST example of a private good?
a house
An example of an externality occurs when a chemical factory
is producing ethanol and dumps waste in a river upstream from a popular fishing spot.
The Coase theorem states that if transaction costs are low, the number of parties is small, and property rights are well established,
private transactions are efficient.
The tragedy of the commons is the absence of incentives to
prevent the overuse of commonly owned resources.
Which of the following lowers the current price of a nonrenewable natural resource?
an increase in the interest rate
Sue has human capital worth $500,000 and nonhuman capital of $100,000. Todd has human capital worth $10,000 and nonhuman capital of $50,000. The return on each type of capital is 10 percent a year. Sue’s income is ________ and Todd’s income is ________.
$60,000; $6,000
The change in total revenue that results from employing one more unit of labor is called the
value of marginal product of labor.
Information technologies are a ________ for low-skilled labor and a ________ for high-skilled labor.
substitute; complement