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The Laffer curve illustrates the relationship between

tax rates and tax revenues.

A price floor set above an equilibrium price tends to cause persistent imbalances in the market because

Quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.

The deadweight loss (or excess burden) resulting from levying a tax on an economic activity is the

loss of potential gains from trade from activities forgone because of the tax.

A price ceiling set below an equilibrium price tends to cause persistent imbalances in the market because

Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

A market that operates outside the legal system either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a,

black market.

The term "deadweight loss" or "excess burden" is used to describe the

loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market.

The statutory incidence (or burden) of a tax refers to

who the tax is legally or statutorily imposed on.

A law establishing a maximum legal price for a good or service (rent controls for example) is known as

a price ceiling.

What are the two distinguishing characteristics of a public good?

nonrivalry in consumption and nonexcludability

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

economic efficiency.

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

public good.

A good is considered nonrival-in-consumption if

many individuals can share in the consumption of the same unit of the good.

When a good is non excludable

it is impossible or very costly to exclude non paying customers from receiving the good

A free-rider problem exists when a good that has the following characteristic?


Students in a class are assigned to groups to work on a project. A grade will be given for each project and everyone in the group will receive that grade. For the members of a particular group, the grade is a,

public good.

Externalities are fundamentally the result of

the lack of well-defined or enforced property rights.

In economics

a free rider is the term used for a person who, receives the benefit of a good without contributing to its costs of production.

The spillover effects of actions that affect the well-being of nonconsenting third parties are called


Firms that can choose what price they will charge for their product and can increase the number of units sold by reducing price are called

price searchers.

Which of the following is the best example of a business firm operating in a competitive price-taker market?

an Indiana hog farmer that raises pigs

When a law is passed that requires businesses to obtain permission from government officials in order to enter a market

this is an example of, a barrier to entry

Firms that are price takers

are small relative to the total market.

"Competitive price-taker markets" and "purely competitive markets" are

merely alternative names for the same concept.

Which of the following is a reason to study the decisions of price takers?

The price-taker model enhances our knowledge of competition as a dynamic process.

Competitive price-taker markets are characterized by

firms that all produce the same product.

Several states require cosmetologists to undertake 1

500 hours or more of training in order to obtain a license to provide hair styling or braiding services. This is an example of, a barrier to entry

Competition as a dynamic process implies that the individual firms in an industry

utilize a variety of techniques, such as product, style, and price, to win the dollar votes of consumers.

Which of the following is the best example of a business firm operating in a competitive price-taker market?

a Midwest farmer producing beef cattle

A tax tends to

reduce formal market activity because it lowers the return on such activity

Suppose that the federal government levies a 50 cent excise tax on gasoline and that the demand for gasoline is highly inelastic while the supply is highly elastic. Under these circumstances

the burden of the tax, will fall primarily on consumers.

The Laffer curve indicates that

when tax rates are high, an increase in tax rates is likely to a decrease in tax revenues.

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good

sellers will bear a larger share of the tax burden.

Under rent control

tenants can expect, lower rent and lower quality housing.

The actual benefit of a government subsidy is determined primarily by

the elasticities of demand and supply.

When a tax is imposed on a good

the equilibrium quantity of the good always decreases.

A subsidy on a product will generate more actual benefit for consumers (and less for producers) when

the supply of the product is relatively elastic.

Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?

A surplus of the good will develop.

Price controls will tend to cause misallocation of resources because

production (or opportunity) cost no longer corresponds to market price.

Which of the following best explains why making automobiles completely safe is not efficient?

After some level of safety is reached, making cars even safer will not be worth the additional cost.

Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce

too little of the good that generates external benefits and too much of the good that generates external costs.

Because of the free-rider problem

competitive markets will tend to undersupply public goods.

Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient

ideal equilibrium?, The efficient outcome would be less than 800 units.

Because the benefits derived from an activity decline as it is expanded

it is generally, efficient to stop well before perfection is achieved.

When externalities are present

competitive market outcomes may be inconsistent with ideal economic efficiency.

When a firm generates external benefits

a more efficient outcome would result if, the firm produced a larger output level.

From the standpoint of economic efficiency

competitive markets tend to provide, less of a public good than would be efficient.

A market transaction causes an externality if someone

not directly involved in the transaction receives uncompensated benefits or costs from it.

As a general rule

if pollution costs are external, firms will produce, too much of a polluting good.

Competition as a dynamic process implies that individual firms in a market

use price competition as well as other forms of competition to gain the dollar votes of consumers.

When the conditions in a competitive price-taker market are such that the firms are consistently unable to cover their production costs

some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.

A competitive price-taker firm would be willing to remain in the industry in the long run at zero economic profit because

it is covering all costs, including the opportunity cost of capital and labor.

The owners of a firm are earning economic profit if

they are earning a return on their capital that is higher than what can generally be earned in other markets.

When profits occur in a competitive market

this indicates that, consumers value the goods more than the resources used to produce them.

If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months

it should, operate during the summer but shut down during the winter months.

If a firm is losing money

this implies that, the value of the resources used to make the product is being reduced.

If profit-seeking entrepreneurs are going to be successful

they must, produce a product that the consumers value more than the resources required for its production.

If a firm is making zero economic profit

it, is doing as well as typical firms in other markets.

The dynamic process of competition

puts the profit motive of sellers to work for buyers.

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