# Econ Final

### 156 terms by Sean_Parrish

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### B. Consumers ability to substitute different goods

The explanation for the law of demand involves:
A. The markets ability to equate supply demand
B. Consumers ability to substitute different goods
C. The governments ability to set prices
D.The suppliers ability to substitute inputs

### A. A normal good

John estimates that with every 20% increase in income, the quantity of grapes purchased rises by 11.2%. From this information one would conclude that grapes are

A. A normal good
D. Not demanded
C. An inferior good
D. Luxury

### C. Not maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic

In California the price elasticity for vanity license plates is .5 and their price is \$29. California is:

A. Maximizing revenue since elasticity is less then one and revenue will increase following a price increase when demand is inelastic

B. Not maximizing revenue since elasticity is less than one and revenue will get decrease following a price increase when demand is inelastic.

C. Not maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic

D. Maximizing revenue since elasticity is less than one and revenue will decrease following a price increase would demand is inelastic.

### C. Consumer surplus will decrease and there will be some lost surplus

If Price is increased by law from a market equilibrium value of \$5 to a higher value of \$6

A.There will be lost surplus, as both producer surplus and consumer surplus decrease

B. Both producer surplus and consumer surplus will increase

C. Consumer surplus will decrease and there will be some lost surplus

D. Producer surplus will decrease in there will be lost surplus

### C. The net benefit of the activity he would have chosen if you had not taken the course.

Your opportunity cost of taking this course is

A. The cost of the activity he would have chosen if you had not taken the course

B. The net benefit of taking this course

C. The net benefit of the activity you would have chosen if you had not taken the course.

D. the tuition you paid for the course

### B. Shortage of oranges as the price ceiling keeps the market from reaching equilibrium

Suppose the equilibrium price of oranges is \$.79, but government takes steps to prevent the price from exceeding \$.60. The likely result will be a

A. Surplus of oranges as the price ceiling keeps the market for reaching equilibrium

B. Shortage of oranges as the price ceiling keeps the market from reaching equilibrium

C.Lower equilibrium price for oranges as the supply curve for oranges shifts to the right

D. Higher equilibrium price for oranges as the demand curve for oranges shifts to the right

### B bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good

Increasing marginal opportunity cost means that the production possibility curve is

A. bowed out so that for every additional unit of one good given up, you get more and more units of the other good

B bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good

C. bowed in so that every additional unit of one good given up, you get fewer and fewer units of the other good

D bowed in so that for every additional unit of one good given up, you get more and more units of the other good

### B. Markets direct peoples selfish desires, Tempered by political and social forces, to the common good

Which statement best summarizes the indivisible hand theorem

A. Social, political, and economic Forces act against peoples selfish desires to promote the common good

B. Markets direct peoples selfish desires, Tempered by political and social forces, to the common good

C. Cultural norms direct peoples selfish desires, tempered by political and economic forces, to the common good

D. Government policies direct people selfish desires, tempered by social and economic forces, to the common good

### C. Leftward shift in supply and no shifting demand.

An increase in price and decrease in quantity are consistent with a

A. Rightward shift in supply and a rightward shift in demand

B. Leftward shift in demand and no shift in supply

C. Leftward shift in supply and no shifting demand.

D. Rightward shift in supply and they leftward shift in demand

### B. An inferior good

Jimmy estimates that with every 15% increase in income, the quantity of turkey purchased declines by 1.8%. From this information one can conclude that turkey is

A. A luxury

B. An inferior good

C. The necessity

D. Normal good

### C. Between the vertical axis, the supply curve and a horizontal line through the market price

Total producer surplus is measured as the area

A. above the supply curve

B between the supply curve and the horizontal axis

C. Between the vertical axis, the supply curve and a horizontal line through the market price

D. Between the demand curve supply curve

### C. And increase in family incomes

Which of the following would likely result in an increase in the demand for beef

A. A decrease in the price of pork

B. A decrease in the supply of beef

C. And increase in family incomes

D an increase in the price of feed grains for cattle

Marginal analysis suggests that you will engage in more of an activity if the

A. Total benefit of the activity is less than the total cost

B. Total benefit from the activity exceeds the total cost

### B. CONSUMER SURPLUS

THE DISTANCE BETWEEN THE DEMAND CURVE AND THE PRICE THE CONSUMER HAS TO PAY FOR A PRODUCT, (GIVEN QUANTITY DEMANDED), IS REFERRED TO AS

A. MARKET SHORTAGE

B. CONSUMER SURPLUS

C. PRODUCER SURPLUS

D. MARKET SURPLUS

### B. DEMAND IS REPRESENTED GRAPHICALLY BY CURVE AND QUANTITY DEMANDED AS A POINT ON THAT CURVE

THE DISTINCTION BETWEEN DEMAND AND THE QUANTITY DEMANDED IS BEST MADE BY SAYING THAT,

A THE QUANTITY DEMANDED IS IN A DIRECT RELATION WITH PRICES, WHEREAS DEMAND IS AN INVERSE RELATION

B. DEMAND IS REPRESENTED GRAPHICALLY BY CURVE AND QUANTITY DEMANDED AS A POINT ON THAT CURVE

C. THE QUANTITY DEMANDED IS REPRESENTED GRAPHICALLY BY A CURVE AND DEMAND AS A POINT ON THAT CURVE

D. THE QUANTITY DEMANDED IS IN ON INVERSE RELATION WITH PRICES, WHEREAS DEMAND IS IN A DIRECT RELATION

### D. The removal of a price floor

A surplus of a good could possibly be eliminated by

A. The removal of a price ceiling

B. A sufficient increase in supply keeping price constant.

C. A sufficient decrease in demand keeping price constant

D. The removal of a price floor

### A. Supply is represented graphically by a curve and quantity supplied as a point on that curve

The distinction between supply and the quantity supplied is best made by saying that,

A. Supply is represented graphically by a curve and quantity supplied as a point on that curve

B. The quantity supplied is an inverse relation with prices, whereas supply is in a direct relation.

C. The quantity supplied is represented graphically by a curved and supply as a point on that curve

D. The quantity supplied is in a direct relation with prices, whereas supply is in an inverse relation

### B. Increase the demand for diesel cars

Given that diesel cars get much better gas mileage than the typical car, an increase in the price of gasoline would be expected to

A. Decrease the demand for gasoline

B. Increase the demand for diesel cars

C. Increase the demand for gasoline

D. Decrease the demand for diesel cars

### B. Percentage change in demand divided by the percentage change in income

Income elasticity is defined as the

A. Percentage change in income divided by the percentage change in demand

B. Percentage change in demand divided by the percentage change in income

C. Change in demand divided by the changing income

D. Change in income divided by the change in demand

### C. Interfere with the allocation function of prices.

Price ceilings and price floors

A. Cause surpluses and shortages in markets respectively

B. Cause demand and supply curves to shift thus having no effect on the rationing functions of prices

C. Interfere with the allocation function of prices.

D. Make the Rationing function of markets more efficient

### B. ATC

If government regulators wanted natural monopolies to earn only zero economic profit, then they will set price equal to

K. AFC

B. ATC

C. AVC

D. marginal cost

### B. The marginal cost curve only if price exceeds average variable cost

The supply curve of a perfectly competitive firm is

A. The marginal cost curve only if price exceeds average total cost

B. The marginal cost curve only if price exceeds average variable cost

C. Nonexistent

D. The average total cost curve only if price exceeds average variable cost

### B price discrimination

All of the following can be barriers of entry except

A economies of scale

B price discrimination

C a firm superior production ability

D. Patents

### B. These profits will be eliminated in the long run as new firms entered industry

If a monopolistically competitive firm is earning economic profits in the short run, then

A. These profits will persist in the long run because of the firms limited monopoly power

B. These profits will be eliminated in the long run as new firms entered industry

C. Price will be driven down to minimum average total cost in the long run

D. It's output will increase in the long run

### A. Indivisible set up cost

Economies of scale are associated with

A. Indivisible set up cost

B. Zero setup costs

C. Diminishing marginal productivity

D. The short run

### B. Change as output changes

Variable costs

A. Are positive when a firm produces no output

B. Change as output changes

C. Exists only in the short run

D. Do not vary with output

### A. Although implicit cost do not show up in accounting profits, they nevertheless affect managerial decisions

the reason Economist and accountants have problems using cost analysis in the real world is that

A. Although implicit cost do not show up in accounting profits, they nevertheless affect managerial decisions

B. Although explicit cost do not show up in accounting profits, they nevertheless affect managerial decisions

C. Economists do not believe in the existence of explicit costs

D. Explicit costs cannot be measured

### A. The coffee drinkers who use the coupons have more elastic demand than the coffee drinkers who pay full price

Despite the fact that quick buzz coffee company provides a coupon in the local newspaper that can be redeemed for one dollar off the price of its best-selling coffee beans, not all buyers actually use the coupon. assuming everyone has a subscription to the newspaper from this we know that

A. The coffee drinkers who use the coupons have more elastic demand than the coffee drinkers who pay full price

B. The coffee drinkers who use the coupons have less elastic demand than that of coffee drinkers to pay full price

C. All coffee drinkers have a highly inelastic demand

D.All coffee drinkers have a highly elastic demand

### A other firms would find out about it immediately

If a firm in a perfectly competitive market experiences a technological breakthrough
A other firms would find out about it immediately
B some firms would find out about it but others would not
C other firms would not find out about it
D other firms would find out about it eventually

### B positive normal profit but zero economic profits

A perfectly competitive firm in the long run earns

A positive economic profits but zero normal profits

B positive normal profit but zero economic profits

C zero economic profits and zero normal profits

D positive economic profits and positive normal profits

### A Monopolistically competitive

There are many restaurants in the city of Oklahoma, each one offering food and services that differ from those of its competitors. There is also free entry of sellers into the market, and each seller serves a very small fraction of the total number of meals served each day. The restaurant industry Oklahoma is Best categorized as

A Monopolistically competitive

B. An oligoploy

C. A pure monopoly

D. Perfectly competitive

### A. Oligopoly

Strategic decision-making is most likely to occur in which market structure

A. Oligopoly

B. Perfect competition

C. All firms engage in strategic decision-making

D. Monopolistic competition

### C.Only her foregone salary of \$42,000 per year

Rachel left her job as a graphic artist, where she earned \$42,000 per year, to open her own graphics art firm. Her implicit costs of the new business include

A. Only the expenses incurred for office supplies, space, and equipment

Be. Neither the expenses incurred for office space, equipment, and supplies nor her for Don salary of \$42,000 per year

C.Only her foregone salary of \$42,000 per year

D. Both the expenses incurred for office space, equipment, and supplies and her foregone salary of \$42,000 per year

### D. The product of each seller is Differentiated from that of others

Under monopolistic competition, a firms ability to influence the price of the product it sells arises because

A. Sellers in the market have large market shares

B. each seller sells a standardized product

C. Sellers in the market have small market shares

D. The product of each seller is Differentiated from that of others

### B. Larger output at a larger profit

As compared to a normal monopolist, an effective price discriminating monopolist produces a

A. Smaller output at a larger profit

B. Larger output at a larger profit

C. Larger output but at a lower profit

D. Smaller output at a lower profit

### C. Large number of firms

Which of the following is one of the necessary conditions for perfect competition

A. Differentiated products

B. Indivisible set up costs

C. Large number of firms

D. Diminishing utility

### B. Rises when the point of diminishing marginal productivity is reached

The marginal cost curve

A. Declines until average total cost increases

B. Rises when the point of diminishing marginal productivity is reached

C. First rises and then declines

D. Rises when the average total cost curve lies above average variable cost curve

### P = MC. Response Feedback: Profits are maximized only when marginal revenue equals marginal cost. For a perfectly competitive firm price always equals marginal revenue and it can sell as much output as it wants at the market price, therefore, MR=P=MC.

The profit-maximizing condition for a perfectly competitive firm is:

### occurs when a single firm can supply the entire market demand for a product at a lower average total cost than would be possible if two or more firms supplied the market. Response Feedback: Natural monopolies exist because economies of scale make it less costly for one firm to supply an entire market than for multiple firms to do so.

A natural monopoly:

### rises as price rises. Response Feedback: Elasticity is infinite at the price axis intercept and declines to zero at the quantity axis intercept.

Along a straight-line demand curve elasticity:

### eventually declines. Response Feedback: Diminishing marginal productivity occurs when the marginal product of a variable input declines. This decline need not occur immediately, however, so that the marginal product of a variable input may rise at first before it begins to decline.

The law of diminishing marginal productivity implies that the marginal product of a variable input:

### additional net gains to society are possible by raising the level of education. Response Feedback: Since there is a positive externality, marginal social benefit exceeds marginal private benefit. The market equilibrium occurs where marginal private benefit equals marginal private cost, but the socially optimal level is where marginal social benefit equals marginal private cost.

If a positive externality exists in the provision of education when education is provided in a perfectly competitive market without government intervention, then at the market equilibrium level of education:

### producer surplus falls but consumer surplus rises. Response Feedback: Consumer surplus rises because the increase in output reduces the price. Producer surplus falls because profits are reduced by the reduction in price.

Suppose a monopolist is at the profit-maximizing output level. If the monopolist sells another unit of output, then:

### marginal social cost equals the marginal social benefit of pollution. Response Feedback: The optimal amount of pollution control is where MC=MB.

The optimal quantity of pollution control occurs at the point where the:

### the goods they can produce at the lowest opportunity cost. Response Feedback: The principle that the lowest cost rules is the basis for the gains from trade because countries that produce a good at the lowest cost have a comparative advantage in the production of that good.

Countries gain from trade by producing:

### marginal utility. Response Feedback: See definition of marginal utility.

The consumption of an additional unit of a good provides additional satisfaction, which is called:

### consumer of the good should receive a subsidy equal to the marginal external benefit resulting from production (or consumption) of the good. Response Feedback: To internalize a positive externality, MB must be increased by the amount of the externality. That is, consumers must be subsidized.

If a positive externality is to be taken full advantage of the:

### ATC. Response Feedback: If price exceeds average total cost or cost per unit, than a firm is making positive economic profits.

A perfectly competitive firm will be profitable if price at the profit-maximizing quantity is above:

### an appreciation of the yuan and a depreciation of the dollar. Response Feedback: The yuan should gain value, which implies that the dollar should lose value. Source of the quotation: "Chinese Are Losing Dollar Faith." by Peter Wonacott, The Wall Street Journal, Nov 18, 2004, p A16-17.

A 2004 Wall Street Journal article reported, "Chinese Are Losing Dollar Faith." It stated, "From black marketeers to anxious grandmothers, Chinese have become disenchanted with the dollar...Many Chinese view the yuan, also called the renminbi, as the safer currency to hold." If dollars and yuan traded freely, this change in attitude would lead to:

### larger the responsiveness of quantity to changes in price. Response Feedback: When either demand or supply is highly elastic, the quantity is very responsive to a change in price.

In general, the greater the elasticity the:

### The good is a large portion of one's total income. Response Feedback: Demand for goods that are a large portion of one's total income tend to be price elastic.

The demand for a good is elastic. Which of the following would be the most likely explanation for this?

### independent action is not necessarily the best joint action, but is the best independent action. Response Feedback: In the prisoner's dilemma game, cooperation is beneficial for both prisoners, but difficult to achieve. There are gains to both cooperative and independent action. Individuals don't always act in their best joint interest.

The prisoner's dilemma is a well-known game in which:

### makes zero economic profits. Response Feedback: In a perfectly competitive industry, firms enter or exit an industry in the long-run until economic profits becomes zero.

A perfectly competitive firm in the long run:

### more expensive for Americans to buy European products but cheaper for Europeans to buy American products. Response Feedback: The higher price of the euro means Americans must spend more dollars to buy the euros they use to buy European products. It also means that Europeans need fewer euros to buy dollars.

When Americans find that the euro is rising in price, it is getting:

### An emission tax Response Feedback: Taxes are more likely to equate marginal benefit and marginal cost.

Which policy is likely to be the most efficient in dealing with automobile emission pollution?

### new firms will enter the oat industry. Response Feedback: Since price exceeds minimum long-run average total cost, firms will be making positive economic profits, and this will induce additional firms to enter the market.

Suppose that the firms in the perfectly competitive oat industry are currently receiving a price of \$2 per bushel for their product. The minimum possible average total cost of producing oats in the long-run is \$1 per bushel. It follows that:

### a decrease in the cost of producing leather jackets. Response Feedback: A decrease in the cost of producing leather jackets will cause supply to increase or shift rightward. A change in price causes a movement along supply, not a shift. Increased popularity affects the demand for leather jackets. The expectation of a higher future price will motivate suppliers to store some of today's supply in order to sell it later and reap higher profits, to the current supply decreases.

The supply of leather jackets would be expected to increase as a result of:

### total utility. Response Feedback: See definition of total utility.

The total satisfaction one gets from one's consumption of a product is called:

### education. Response Feedback: Pollution is an example of a negative externality. Roller coaster rides and alcoholic beverages are private goods.

The best example of a positive externality is:

### The good is a necessity. Response Feedback: Necessities tend to be price inelastic.

The demand for a good is inelastic. Which of the following would be an explanation for this?

### Free markets yield results that economists do not consider socially optimal. Response Feedback: Economists define socially optimal in terms of economic efficiency. Market failure means that there is lost value--it is at least theoretically possible to change something to increase end value.

What do economists mean when they say there is "market failure"?

### cost equals marginal revenue. Response Feedback: If marginal cost equals marginal revenue, a firm cannot increase its profits by increasing or decreasing output. It is maximizing profit.

To maximize profits, a perfectly competitive firm should produce where marginal:

### price of one currency in terms of another. Response Feedback: The exchange rate is the price of foreign currency.

The exchange rate is the:

### Japanese goods will be cheaper in the United States. Response Feedback: An appreciation of the dollar decreases the price of yen in terms of dollars, making Japanese goods priced in yen cheaper in terms of dollars.

If the U.S. dollar appreciates against the Japanese yen, then:

### monopolistically competitive. Response Feedback: Although there are many sellers in a perfectly competitive industry, the products are not differentiated. Neither oligopoly nor monopoly can be characterized as having many sellers.

An industry that has many sellers offering slightly differentiated products is called:

### a shift downward (or to the right) of the supply curve. Response Feedback: Technology is a shift factor of supply.

If there is an improvement in technology one would expect

### A large shift in demand to the right and a small shift in supply to the left. Response Feedback: The recent interest in caviar is represented by a shift to the right in demand. The shrinking supply of Russian caviar shifts the supply curve to the left. The shift in supply, however, must be small relative to the shift in demand so that quantity sold remains higher than before.

In the mid 1990s, caviar sales soared as did its price. The Petrossian boutique in New York which serves the upscale fare says it has raised its price in reaction to a renewed interest in the food coupled with a shrinking supply of Russian caviar following the collapse of Soviet Communism. Given these facts, what most likely led to the higher quantity sold and higher price of caviar?

### rises then declines. Response Feedback: At each end-point (price and quantity axis intercepts), revenue is zero. At first revenue rises, hits a maximum where elasticity is one and then declines.

Along a downward-sloping straight line demand curve beginning at the price where demand intersects the price axis, as price declines revenue:

### few sellers. Response Feedback: In an oligopoly, the number of sellers is small.

Oligopoly is characterized by:

### the net benefit of the activity you would have chosen if you had not taken the course. Response Feedback: Opportunity cost is what you must sacrifice when you choose an activity. By taking this course, you are sacrificing the benefit you could have obtained from the activity you would have chosen if you had not taken the course.

Your opportunity cost of taking this course is:

### free rider problem. Response Feedback: See definition of free rider problem.

The unwillingness of individuals to share in the cost of a public good is called the:

### have decreasing long-run average cost curves. Response Feedback: If there are economies of scale in the online music business, the firms will have decreasing long-run average cost curves. The larger the firm, the more profitable it will be relative to rivals. Hence, one large seller will ultimately dominate the market.

In the early 2000s, analysts were predicting that although many legal music download sites would start up, that because of the technology, only a few, or perhaps even just one, would survive. A forecast that online music will end up with a few or only one seller will prove correct if online music firms:

### An increase in consumers' incomes. Response Feedback: An increase in consumers' incomes will shift the demand curve for personal computers, NOT the supply curve. All the other options clearly shift the supply curve for computers.

Which of the following is not likely to change the supply of personal computers?

### marginal cost. Response Feedback: If price equals marginal cost, than the social benefit from producing an additional unit of output just equals the social cost, so no improvement in welfare is possible.

At the socially optimum quantity of production price equals:

### Supply shifted to the left, price rose, and quantity demanded fell Response Feedback: The supply of Honus Wagner cards shifted to the left when Honus pulled his card from the cigarette packs. As a result price rose causing a decline in the quantity of cards demanded.

Honus Wagner, a major league baseball player from 1897 to 1917 and one of the first five men inducted into the Baseball Hall of fame, had his baseball card pulled from cigarette packs because he wasn't being paid for their distribution. What best describes the effect of his action on the market for his baseball card?

### value of the next-best activity forgone by attending college. Response Feedback: Opportunity cost is the benefit forgone by undertaking an activity.

The opportunity cost for a student of attending college for a year is best measured by the:

### equal to the selling price. Response Feedback: Since a perfectly competitive firm faces a horizontal demand curve, the sale of another unit of output increases total revenue by the selling price.

A perfectly competitive firm's marginal revenue is:

### a price ceiling on rent lower than equilibrium price. Response Feedback: In New York City, many apartments have government-imposed rents below market price. As a result, the quantity of apartments demanded exceeds quantity supplied. The price ceiling (rent control) has perpetuated the housing emergency

New York City has been experiencing a housing emergency for quite some time. Apartments are difficult to come by. In fact, the vacancy rate has been below 5 percent since World War II. The most likely cause of the housing emergency is:

### cut consumption more than an individual with a highly inelastic demand when price goes up. Response Feedback: Since that person finds it easy to conserve gasoline, he/she will reduce consumption of gasoline by a lot.

An individual with a highly elastic demand for gasoline will:

### producers' marginal costs should be increased by an amount equal to the marginal external cost resulting from production of the good. Response Feedback: To internalize a negative externality, MC must be increased by the amount of the externality.

If a negative externality is to be internalized to the decision maker the:

### Starbucks' customers are not as responsive to price changes as are the customers of the grocery brands. Response Feedback: A, B, and C would require income or cross-price elasticities, which are not given. Source: The Wall Street Journal, September 2, 2004.

In 2004, the Wall Street Journal reported that Starbucks was set to raise some of its prices. The article stated that "mass-market grocery brands such as Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic" than Starbucks' coffees. This information about elasticities is telling us that:

### hard to find. Response Feedback: Rent control is a government-imposed price ceiling on rent resulting in a shortage of apartments.

Rent control makes apartments:

### Basic research is largely a public good; benefits flow to the whole world, not just the state. Response Feedback: Basic research is usually funded by the federal government because it is often a public good. For this research to pass a cost-benefit test for California, the benefits must be much greater than the cost because most of them will flow out of the state. If the research results in a private good, then more of the benefits could be captured by California, but if the prospect of arriving at a private good, that is, something protected by patent, were high enough, private firms would be conducting it.

Basic research is more likely to be funded by the federal rather than state and local government because:

### P2. Response Feedback: The efficient price is where MSC= MSB, or, P2.

Assuming a marginal external cost equal to the tax shown in the above graph, the market price necessary to induce consumers to purchase the efficient quantity each year is:

### can increase profit by producing less. Response Feedback: Since marginal cost exceeds marginal revenue at this output level, profits can be increased by producing less.

Refer to the graph above. If this monopolist produces 700 units of output per day, it:

### the loss of surplus by consumers resulting from a monopoly. Response Feedback: The competitive price is Pc, the monopolist's price is Pm. Because they are buying less at a higher price, consumers lose areas C and D in consumer surplus.

Refer to the graph above. Areas C and D represent:

### 1, 1 Response Feedback: The equilibrium solution is where each player maximizes the expected payoff. A is best off choosing column 2. So, knowing that A will choose column 2, B will also choose column 2.

The equilibrium solution for the payoff below matrix is:

### D and B. Response Feedback: This is the welfare loss of monopoly. If a market were to become competitive, areas D and B would be gained.

Refer to the graph above. The areas that represent the net gain to society of eliminating monopoly are:

### X's production possibility curve is B while Y's is A. Response Feedback: Since the opportunity cost of producing agricultural goods is lower along B than A (and vice versa for industrial goods), trade based on comparative advantage will only occur if X's production possibility is B and Y's is A.

Refer to the graph above. Suppose Country X exports agricultural goods to Country Y in exchange for industrial goods. This pattern of trade increases consumption in both countries only if:

### fifth worker is hired. Response Feedback: The marginal product of the fifth worker is 7, which is 3 less than the marginal product of the fourth worker.

Refer to the table above. Diminishing marginal productivity begins when the:

### the number of job seekers will exceed the number of job vacancies, resulting in some unemployment. Response Feedback: At \$5.15 per hour, the quantity supplied exceeds the quantity demanded, resulting in a surplus of labor hours. The minimum wage imposes no requirement on how many workers firms must hire.

Refer to the graph above. If government establishes a minimum wage at \$5.15 per hour:

### III Response Feedback: The report will most likely reduce the demand for the device to the extent that patients and doctors perceive it as harmful. The FDA action will shift supply to the left. This is shown as a shift to the left in a demand and supply curves.

A recent report indicated that 50 intensive-care unit patients die for every 1,000 who are managed with a heart device known as the right heart catheter. Suppose as a result, the FDA limited supply of the heart catheters. The effect of the report and subsequent action by the FDA on the market for right heart catheters is best shown by which of the graphs above?

### Positive normal profits but zero economic profits

A perfectly competitive firm in the long run earns

### Although implicit costs do not show up in accounting profits they nevertheless affect managerial decisions

The reason economist and accountants have problems using cost analysis in the real world is that

### ATC

If government regulators want a natural monopolist to earn only zero economic profit and they will set price equal to

### The product of each seller is differentiated from that of the others

Under monopolistic competition a firm's ability to influence the price of the product it sells arises because

### Other firms would find out about it immediately

If a firm in a perfectly competitive market experiences a technological breakthrough

### A large number of firms

Which of the following is one of the necessary conditions for perfect competition

### Larger output at a larger profit

As compared to a normal monopolist an effective price discriminating monopolist produces a

### Only her foregone salary of 40 2K per year

Rachel left her job as a graphic artist where she earned 40 2K per year to open her own graphic arts for her implicit costs of the new business include

### Rises when the point of diminishing marginal productivity is reached

The marginal cost curve

### These prophets will be eliminated in the long run as new firms entering the industry

If a monopolistically competitive firm is earning economic profits in the short run then

Variable costs

### Indivisible set up costs

Economies of scale are associated with

### Oligopoly because they collude

Strategic decision-making is most likely to occur in which market structure

### The marginal cost curve only a price exceeds average variable cost

The supply curve of a perfectly competitive firm is

### Price discrimination

All of the following to be barriers to entry except

### An inferior good

John estimates that with every 15% increase in income the quantity of turkey purchased declines by 1.8% from this information one would conclude that turkey is

### The consumers ability to substitute different goods

The explanation for the law of demand involves

### Supplies represented graphically by a curving quantity supplied as a point on that curve

The distinction between supply and the quantity supplied is best made by saying

Marginal analysis suggests that you will engage in more of an activity if the

### Consumer surplus

The distance between the demand curve in the price the consumer has to pay for a product, given quantity demanded, is referred to as

### The removal of a price floor

a surplus of a good could possibly be eliminated by

### bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good

Increasing marginal opportunity cost means that the production possibilities curve is

### Markets direct people selfish desires, tempered by political and social forces, to the common good

Which statement that summarizes the invisible hand theorem

### the combined firm would have controlled between 30 and 50 percent of several telecommunications markets. Response Feedback: Only horizontal mergers that result in excessive market concentration are blocked.

A likely reason why the FTC blocked a proposed merger between telecommunication companies WorldCom and Sprint is:

### Microsoft. Response Feedback: IBM and Microsoft both were scrutinized because they had gained market share as a result of doing well through technological innovation.

Which of the following companies was the target of antitrust scrutiny because it had gained market share as a result of technological innovation?

### is not designed just for natural monopolies. Response Feedback: Social regulation applies to many firms, not just natural monopolies.

Social regulation differs from pricing regulation in that social regulation:

### of an ability to limit the access of other sellers to the market. Response Feedback: Vertically merged firms may be able to limit access of other buyers or sellers to the market.

A vertical merger between a shoe wholesaler and a chain of shoe retailers might be prohibited by the government because:

### achieve economies of scope and greater diversity. Response Feedback: Unrelated firms may want to merge to achieve economies of scope, to get a good buy, to diversify, to ward off a takeover bid, or to strengthen political-economic ties.

The motivation for a conglomerate merger would most likely be to:

### innocent of monopolizing the production of cellophane on the grounds that cellophane had many good substitutes. Response Feedback: The Court defined the relevant market as the market for flexible wrap, in which foil and wax paper were substitutes for cellophane (as documented by the cross-price elasticity).

In 1956, the Supreme Court found DuPont:

### Sears and K-Mart are not big and strong enough to control the market. Response Feedback: The Justice Department does not usually question mergers of weak competitors, and that is the status to which K-Mart and Sears have sunk.

K-Mart acquired Sears so that both companies could better compete with Wal-Mart. What is a likely reason the Justice Department did not oppose this merger?

### prohibits contracts and business combinations in restraint of trade. Response Feedback: The Sherman Antitrust Act does not explicitly prohibit monopolies, just restraints of trade.

The Sherman Antitrust Act:

### broadly defined the industry, the greater the number of firms in the market and the lower the level of market concentration. Response Feedback: A 2-digit NAICS industry is more generally specified and therefore the number of firms in the industry is likely to be larger than in a 6-digit NAICS industry. As a result, there is less likely to be a concern about the merger.

As an economist for a firm that wanted to merge, you would argue that a 2-digit NAICS industry is the relevant market rather than a 6-digit NAICS industry because the more:

### is an example of an activist industrial policy. Response Feedback: The military industrial complex is the close relationship between the military and its suppliers.

The U.S. military-industrial complex:

### concerned with the conditions under which goods and services are produced, the safety of those goods and the side effects of production on society. Response Feedback: This is how the text defines social regulation.

Social regulation is:

### whether or not the firm engaged in "unfair business practices." Response Feedback: Standard Oil, although it controlled 90% of the market, was found guilty of unfair business practices, not unfair control of market share.

In breaking up the Standard Oil Company, the U.S. Supreme Court established that a company's violation of the Sherman Antitrust Act was determined by:

### overlapping marketing expertise. Response Feedback: Economies of scope are when combining operations can unify some operations, lowering costs.

Economies of scope are most likely the result of:

### 1982 when AT&T agreed to divest itself in exchange for less regulation. Response Feedback: AT&T voluntarily broke up into the "Baby Bells."

The antitrust case against AT&T was settled in:

### Microsoft to share or license technical information about its operating system with competing software developers. Response Feedback: As part of the European Union decision, Microsoft was ordered to share or license technical information with other software developers.

In the European Union Microsoft case, the court ordered

### prevents the market from working efficiently. Response Feedback: Externalities are one type of market failure. As the text later shows, it is not always beneficial to have government intervention.

The existence of negative externalities:

### \$1.00. Response Feedback: Equilibrium is where MC = MB, point G.

Refer to the graph above. There is a 10-cent-per-gallon marginal external cost associated with the use of gasoline. Assuming that gasoline is sold in perfectly competitive markets, the market equilibrium price will be:

### making the price people pay reflect the cost of the externality. Response Feedback: Economists prefer programs that are market based. An unregulated market with negative externalities will not lead to an efficient solution.

Economists are most likely to suggest that societies address the inefficiencies created by negative externalities by:

### \$3.50 and 2,000 units. Response Feedback: Equilibrium would be where marginal social cost intersects marginal social benefit.

Refer to the graph above. The price and quantity that would prevail if all social costs and benefits were taken into account is:

### having the cost of the externality be paid by the government. Response Feedback: Economists tend to favor market-based programs. Requiring government to pay the cost of an externality is not such a program.

An economist is most likely to support all of the following methods to address the negative externalities created by the waste from newspapers except:

### education. Response Feedback: Pollution is an example of a negative externality. Roller coaster rides and alcoholic beverages are private goods.

The best example of a positive externality is:

### cost you bear when your neighbor has a noisy party and does not compensate you for your discomfort. Response Feedback: Negative externalities are negative effects of trades not taken into account by the decision makers. The smoke detector has a positive effect on a third party and is an example of a positive externality. The decrease in your real income from higher photographic equipment prices is a monetary externality that does not generate a net cost to society. It is not a negative externality.

An example of a negative externality is the:

### K. Response Feedback: The efficient point is where MSC = MSB, point K.

Refer to the graph above. If the marginal external cost associated with the use of gasoline is 10-cents-per-gallon, the point on the graph corresponding to the efficient quantity and price is:

### positive externality. Response Feedback: A positive externality is a spillover effect that benefits third parties.

Alex is playing his music at full volume in his dorm room. The other people living on his floor are enjoying his music, but Alex does not know or care. Alex's music playing is an example of a:

### an activity generates costs or benefits that are not reflected in market prices. Response Feedback: Externalities cause marginal social costs and benefits and marginal private costs and benefits to differ. Thus, marginal costs and benefits are not reflected in market prices.

An externality is present in a free market whenever:

### does not have important positive externalities. Response Feedback: The spillover effects of a person who is educated—making others around him more productive—is a positive externality. It is a primary justification for the state subsidizing higher education. Vedder's findings indicate that these positive externalities do not exist, or at least that they are outweighed by other costs.

Richard Vedder argues that the states that have spent the most on higher education in the past 25 years have experienced the least economic growth. One might conclude that higher education:

### equals the marginal benefit received by consumers of the good plus the marginal benefit to third parties. Response Feedback: Positive externalities are not included in the marginal benefit to those involved in the trade. The marginal social benefit is the benefit to the trader plus the benefit to third parties.

When positive externalities exist in the consumption of a good, the marginal social benefit:

### greater than P0. Response Feedback: If there is a negative externality, the marginal social cost is to the left of the supply curve. The competitive equilibrium remains at Q0, P0, where MSC>MC = P0.

Refer to the graph above. Say that there is a negative externality associated with the production of the good depicted. The marginal social cost from consuming this good at the competitive equilibrium output level is:

### the marginal external cost resulting from the activity is not reflected in the market price. Response Feedback: Externalities cause marginal social costs and marginal private costs to differ. Thus, costs and benefits are not reflected in market prices.

When negative externalities are present, market failure often occurs because:

### the marginal social benefit of smoke detectors exceeds their price. Response Feedback: A positive externality causes the marginal social benefit to exceed the marginal private benefit (and marginal private cost, or price).

If a positive externality is associated with the purchase of smoke detectors:

### additional net gains to society are possible by reducing the output of paper. Response Feedback: If negative externalities exist, the marginal social cost exceeds the marginal private cost and too much of the good is produced. Net social gains are possible by reducing production.

If a negative externality exists in the production of paper and paper is sold in a perfectly competitive market, then at the equilibrium output:

### A defective part that causes an automobile to break down three months after purchase. Response Feedback: An externality is the effect of a decision of a third party not taken into account by the decision-makers. The defective part is affecting one of the decision-makers, not a third party.

Which of the following is not an example of an externality?

### not confess because keeping silent ensures that they will not have to serve jail sentences. Response Feedback: Since they each do better by not confessing assuming the other person does not confess, their best strategy is not to confess. Draw the pay-off table to see this clearly.

Don and Dana have both been accused of insider trading. Don knows that if he confesses while Dana keeps silent, he will receive a one-month jail sentence. He also knows that if Dana confesses and he keeps silent, he will receive a twelve month jail sentence. If neither of them confesses, there will be insufficient evidence to convict either and they will serve no time. If both of them confess, they will both serve a three-month jail sentence. Don's best strategy is to:

Game theory:

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