Chapters 5-9 Macroeconomics

Economists would describe the U.S. automobile industry as:
An oligopoly
Which of the following industries most closely approximates pure competition?
In which of the following industry structures is the entry of new firms the most difficult?
An industry comprised of 40 firms, none of which has more than 3% of the total market for a differentiated product is an example of?
Monopolistic competition
1.) Only one seller
2.) Product can't be compared
3.) Price maker
4.) No exit/entry
Pure Competition:
1.) 1000's of other sellers
2.) Homogeneous product-ever product is the same
3.) Price taker
4.) Easy entry/exit
1.) Few sellers(3-5)
2.) Exactly the same of different product
3.) High degree of price control
4.) High barrier to enter
Monopolistic Competition-90% of all businesses:
1.) Many sellers(30-40)
2.) Differentiated product
3.) Same price control-slightly
4.) Fairly easy entrance/exit
Pure Competition and Average Revenue:
Price=Average Revenue
Total Revenue:
Found by multiplying price by the corresponding quantity the firm can sell.
Marginal Revenue:
Change in total revenue that results from selling 1 more unit of output.
MR, P, AR, D:
Market failure is said to occur whenever:
Private markets do not allocate resources in the most economically desirable way
Demand-side market failures occur when:
the demand and supply curves don't reflect consumers' full willingness to pay for a good or service
People enjoy outdoor holiday lighting displays, and would be willing to pay to see these displays, but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a:
demand-side market failure
Supply-side market failures occur when:
the demand and supply curves don't reflect the full cost of producing a good or service
From soceity's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically:
costs more to produce than it provides in benefits
the trains of the transcontinental railway company, when shipping goods, sometimes emit sparks that start fies along the tracks and damage the property of others. If transcontinental does not pay for the damage it causes, what has occurred?
supply-side market failure
What two conditions must hold for a competitive market to produce efficient outcomes?
Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay
If the demand curve reflects consumers' full willingess to pay, and the supply curve reflects all costs of production, then which of the following is true?
the benefit surpluses shared between consumers and producers will be maximized
Consumer surplus:
is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price
Producer surplus:
is the difference between he minimum prices producers are willng to accept for a product and the higher equilibrium price
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:
under the demand curve and above the actual price
Graphically, producer surplus is measured as the area:
above the supply curve and below the actual price
A producer's minimum acceptable price for a particular unit fo a good:
equals the marginal cost of producing that particular unit
allocative efficiency occurs only at that output where:
the combined amounts of consumer surplus and produceer surplus are maximized
At the output level defining allocative efficiency:
the maximum willingnes to pay for the last unit of output equals the minimum acceptable price of that unit of output
At the output where the combined amounts of consumer and producer surplus are largest:
the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output
An efficiency loss (or deadweight loss):
is measured as the combined loss of consumer surplus and producer surplus
An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which:
maximum willingness to pay exceeds minimum acceptable price
The two main characteristics of a public good are:
nonrivalry and nonexcludability
Nonrivalry and nonexcludability are the main characteristics of:
public goods
Unlike a private good, a public good:
has benefits available to all, including nonpayers
A public good:
is available to all and cannot be denied to anyone
The market system does not produce public because:
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them
Public goods are those for which there:
is nonrivalry and nonexcludability
If one person's consumption of a good does not preclude another's consumption, the good is said to be:
nonrival in consumption
Nonexcludability describes a condition where:
there is no effective way to keep people from using a good once it comes into being
Because of the free-rider problem:
the market demand for a public good is nonexistent or understated
At the optimal quantity of a public good:
marginal benefit equals marginal cost
A demand curve for a public good is determined by:
summing vertically the individual demand curves for the public good
Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the 3rd unit of a public good. Also, assume that the marginal cost of the 3rd unit is $17. We can conclude that:
the 3rd unit should be produced
Cost-benefit analysis attempts to:
compare the benefits and costs associated with any economic project or activity
accoding to the marginal-cost-marginal-benefit rule:
the optimal project size is the one for which MB = MC
Economists consider governments to be "wasteful:"
whenever they over-or underallocate resources to a project
A positive externality or spillover benefit occurs when:
the benefits associated with a product exceed those accruing to people who consume it
A negaitve externality or spilloveer cost occurs when:
the total cost of producing a good exceeds the cost borne by the producer
If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its:
price and output would increase
Suppose that the anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that:
resources and currently underallocated to the provision of holiday lighting in Anytown
The socially optimal amount of pollution abatement occurs where society's marginal:
benefit of abatemnt equals its marginal cost of abatement
The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of:
diminishing marginal utility
The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:
diminishing returns
The MC curves in the above diagram slope upward because of the law of:
diminishing returns
Suppose that Susie creates a work of art and displays it in a public place. Economists would expect:
those enjoying the art to "free ride" since they cannot be made to bear any of the cost
Brinley puts on an art show in a public space, asking for donations based on how much people enjoy his work. Economists would expect that:
people will understate their enjoyment of the art in order to "free ride"
According to the Coase Theorem:
private individuals can often negotiate their own resolution of externality problems
Darcy and Rachel live down the hal from each other in the same dorm. Darcy like to play her music loudly down the hall, and Rachel finds the music annoying. A coase theorem solution for this problem would be for:
Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music
Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes:
the coase theorem
In a cap-and-trade program:
government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other
A cap-and-trade program:
assigns a property right to polluting the atmosphere
Because there are so many sources of carbon dioxide, making monitoring difficult and costly, many economists:
prefer a carbon tax to cap-and-trade for reducing carbon dioxide emissions
The utility of a good or service:
is the satisfaction or pleasure one gets from consuming it
Marginal utility can be:
positive, negative, or zero
Mary says, "You would have to pay me $50 to attend that pro wrestling event." For Mary, the marginal utility of that event is:
The ability of a good or service to satisfy wants is called:
A product has utility if it:
satisfies consumer wants
The law of diminishing marginal utility states that:
beyond some point additional units of a product will yield less and less extra satisifacion to a consumer
If the price of product X rises, then the resulting decline in the amount purchased will:
increase the marginal utility of the last unit consumed of this good
Marginal utility is the:
change in total utility obtained by consuming one more unit of a good
Utility refers to the:
satisfaction that a consumer derives from a good or service
Total utility may be detrmined by:
summing the marginal utilities of each unit consumed
If total utility is increasing, marginal utility:
is positive, but may be either increasing or decreasing
Where total utility is at a maximum, marginal utility is:
The law of diminishing marginal utility explains why:
demand curves slope downward
While eating at Alex's "Pizza by the slice" restaurant., Kara experiences diminishing marginal utility. She gained 10 units of satisfaction from her first slice pizza consumed, and would only recieve 5 units of satisfaction from consuing a second slice. Based on this information we can conclude that:
Alex may have to lower the price to convince Kara to buy a second slice
The theory of consumer behavior assumes that:
consumers behave rationally, attempting to maximize their satisfaction
To maximize utility a consumer should allocate money income so that the:
marginal utility obtained from the last dollar spent on each product is the same
Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy:
more of X and less of Y
Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa = 5 and MUb/Pb = 8. Ben should purchase:
more of B and less of A
Suppose you have a limited money income and you are purchasing products products A and B whose prices happen to be the same. To maximize your utility you should purchase A and B in such amounts that:
their marginal utilities are the same
A consumer is maximizing her utility with a particular money income when:
MUa/Pa = MUb/Pb = MUc/Pc ... = MUn/Pn
Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of hte last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson:
should buy less B and more A
If a rational consumer is in equilibrium, which of the following conditions will hold true?
the marginal utility of the last dollar spent on each good purchased will be the same
A consumer who has a limited budget will maximize utility or satisfaction when the:
ratios of the marginal utility of each product purchased divided by its price are equal
An increase in the price of product A will:
decrease the marginal utility per dollar spend on A
The theory of consumer behavior assumes that consumers attempt to maximize:
total utility
When a consumer shifts purchases from product X to product Y the marginal utility of:
X rises and the marginal utility of Y falls
Prashanth decides to buy a $75 ticket to a particular New York professional hockey game rather than $50 ticket for a particular Broadway play. We can conclude that Prashanth:
has a higher "marginal utility to price ratio" for the hockey game than for the play
Diminishing marginal utility explains why:
demand curves are downsloping
What do the income effect, the substitution effect, and diminishing marginal utility have in common?
they all help explain the downsloping demand curve
A consumer's demand curve for a product is downsloping because
marginal utility diminishes as more of a product is consumed
In introducing the opportunity cost of time into the theory of consumer we find that, all else equal:
one should consume less of time-intensive goods
How did Apple overcome consumers' diminishing marginal utility for iPods?
Apple introduced new features to entice previous buyers to purchase new models
The diamond-water paradox arises because:
essential goods may be cheap while nonessential goods may be expensive
The diamond-water paradox occurs because:
the price of a product is related to its marginal utility, not its total utility
"Essential" water is cheaper than "nonessential" diamonds because:
the supply of water is great relative to demand and the supply of diamonds is small relative to demand
The fact that most medical purchases are financed through insurance:
increases the amount of health care consumed by reducing the price of additional units of care
who do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?
once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero
Most economists contend that:
noncash transfers are less efficient than cash transfers
Noncash gifts:
reduce recipient utility to a cash gift because noncash gifts often fail to match recipient preferences
If you recieve a gift whose market price is $20, but you consider it to be worth only $10, then:
there is a $10 or 50% value loss
According to economists, gift registries, returning gifts for cash refunds, and "recycling gifts."
increase the efficiency of gift-giving because they allow the recipient to consume goods
According to behavioral economics:
each successive unit of loss hurts, but less than the previous unit
Last month Laura saw the value of her stock portfolio rise by $20,000. this month, she saw the value of her portfolio decline by $20,000. According to behavioral economics:
the positive utility Laua received from seeing her portfoli value rise was less than the disutility she felt when its value declined
According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging their goods, when faced with rising production costs
Firms will reduce package sizes, but keep prices the same, thus increasing the per unit price of the good
According to prospect theory, firms are more likely to shrink packages than raise prices because:
consumers feels the loss of a price increase more than they feel the loss of buying a smaller package for their money
According to the concept of framing effects:
whether a new situation is viewed as a gain or a loss depends on one's starting position
Suppose that dairy barn foods produces a regular sour cream with 10 grams of fat per serving, and a "low fat" sour cream with only 5 grams of fat per serving (assume that this still considered a lot of fat to consume per serving). According to prospect theory, how should Dairy Barn promote its "low fat" sour cream.
it should advertise that the "low fat" sour cream has only "half the fat" of the regular sour cream
Josh will recieve a salary of $300,000 next year. According to prospect theory:
Josh's satisfaction with that salary depends on how much he made in the past
Who do credit card companies typically require small minimum payment amounts on their customers' monthly credit card statements?
Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements
Can influence decision-making with irrelevant information
Because of "mental accounting"
people isolate purchases and sometimes make irrational decisions
The process by which people isolate purchases and fail to consider all consumption options simultaneously is known as
mental accounting
According to the "endowment effect:"
people assign higher values to things they own than things they don't
Newspaper dispensing devices seemingly "trust" people to take only a single paper but the devices actually rely on the law of:
diminishing marginal utility
Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can or bottle with each payment. The reason is that the:
marginal utility of extra soft drink cans or bottles declines slowly, particularly because they are storable and can be consumed later
The hedonic trendmill refers to a phenomenon where:
increasing our level of consumption doesn't make us any happier in the long term
participation in company retirement saving programs has increased dramatically because:
enrollment in these programs was set as the default option and workers had to request to be unenrolled
"Nudges" refer to:
subtle changes in policies or practices that result in large behavioral changes
The budget line shows:
all possible combinations of two goods that can be purchased, given money income and the prices of the goods
In moving along a given budget line:
the prices of both products and money income are assumed to be constant
Increases in product prices shift the consume's:
budget line to the left
A change in the slope of a budget line is solely the result of a change in:
the price of one good relative to the other
Any combination of goods lying outside of the budget line
is unattainable, given the consumer's income
if money income increases and the prices of products A and B both increase, then the budget line:
may shift either to the right or the left, or not at all
a budget line shows the:
alternative combinations of two goods that a consumer can purchase with a given money income
The slope of a budget line reflects the:
price ratio of the two products
Edith is buying products X and Y with her money income. Suppose her budget line shifts rightward (outward). This might be the result of:
her money income increasing more than proportionately to increases in the prices of X and Y
An indifference curve shows all:
combinations of two products yielding the same total utility to a consumer
An indifference curve:
is downsloping and convex to the origin
An indifference map implies that:
curves farther from the origin yield higher levels of total utility
The marginal rate of substitution measures the:
consumer's willingnes to substitute one product for another so that total utility will remain constant
The marginal rate of substitution
declines as one moves southeast along an indifference curve
Indifference curve analysis:
presumes only that the consumer can say one combination of two goods yields more or less utility than some ohter combination
Assume a diagram in which a budget line is imposed on an indifference map. A consumer will maximize her utility:
Where the budget line is tangent to an indifference curve
the lines on a topographical map are analogous to a(n):
indifference map
a topographical map shows successively higher equal-elevation lines, whereas an indifference map shows successively higher levels of total:
Costs to an economist:
may or may not involve monetary outlays
Implicit costs are:
"payments" for self-employed resources
cash expenditures a firm makes to pay for resources are called:
explicit costs
in the short run, output:
can vary as the result of using a fixed amount of plant and equipment more or less intensively
the main difference between the short run and the long run is that:
in the short run, one or more inputs is fixed
which of the following is most like likely to be a fixed cost?
property insurance premiums
if you know that when a firm produces 10 units of output, total costs are $1,030 and average fixed costs are $10, then total fixed costs are:
$100 - AFT=TFC/Q or TFC = ($10)(10 units)
economies and diseconomies of scale explain:
why the firm's long-run average total cost curve is U-shaped
when diseconomies of scale occur:
the long-run average total cost curve rises
when a firm doubles its inputs and finds that its output has more than doubled, this is known as:
economies of scale
an industry comprised of a very large number of sellers producing a standardized product is known as:
pure competition
a purely competitive seller is:
a "price taker"
for a purely competitive firm total revenue:
is price times quantity sold, increases by a constant absolute amount as output expands, and graphs as a straight upsloping line from the origin
the marginal revenue curve of a purely competitive firm:
is horizontal at the market price
a perfectly elastic demand curve implies that the firm:
can sell as much output as it chooses at the existing price
profit-maximizing output for a firm is:
(from a graph with TC and TR) where there is the biggest gap between the two lines
short-run data graph;
any level of output between the two intersecting points on a TC and TR graph will yield an economic profit
which of the following distinguishes the short run from the long run in pure competition?
firms can enter and exit the market in the long run, but not the short run
suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:
should continue producing in the short run, but leave the industry in the long run if the situation persists
long-run competitive equilibrium:
results in zero economic profits
a constant cost industry is one in which:
if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200 and so forth
a purely competitive firm is precluded from making economic profit in the long run because:
of unimpeded entry to the industry
a decreasing cost industry is one which:
input prices fall or technology improves as the industry expands
when LCD tvs first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that:
the LCD tv industry is a decreasing cost industry
Purely competitive industry X has constant cost and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be:
an increase in output but not in the price, of the product
Using a graph of Average total cost, at the long-run equilibrium level of output, the firm's total REVENUE
is price times quantity and the lowest point on ATC line
same graph, ATC for purely competitive firm, the firms total COST
is the cost at the lowest point on the ATC line