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FINAL EXAM Micro

STUDY
PLAY
the characteristic from which all economic problems arise is
scarcity
scarcity results from the fact that
people's wants exceed the resources available to satisfy them.
To economists, scarcity means that
unlimited wants cannot be satisfied by the limited resources.
If a decision is made and it is the best choice for society, the decision is said to be
made in social interest
Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is
the Pepsi or the bag of chips, whichever
the best alternative given up.
The benefit of an activity is
the gain or pleasure that it brings.
The marginal benefit of an activity is
i. the benefit from a one-unit increase in the activity.

iii. measured by what the person is willing to give up to get one additional unit of the activity.
The cost of a one-unit increase in an activity
is called the marginal cost.
If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will
eat the slice of pizza.
When people make rational choices, they
weigh the costs and benefits of their options and act to satisfy their wants.
A positive statement
can be tested against the facts.
The production possibilities frontier is a graph showing the
maximum combinations of goods and services that can be produced.
The production possibilities frontier is a boundary that separates
attainable combinations of goods and services that can be produced from unattainable combinations.
Points inside the PPF are all
attainable and have some unemployed resources.
Points on the PPF are all
production efficient.
During a time with high unemployment, a country can increase the production of one good or service
without decreasing the production of
something else.
Moving along the production possibilities frontier itself illustrates
the existence of tradeoffs.
The opportunity cost of one more slice of pizza in terms of sodas is the
number of sodas we have to give up to get one extra slice of pizza.
Moving between two points on a PPF, a country gains 6 automobiles and forgoes 3 trucks. The opportunity cost of 1 automobile is
(what you give up/what you gain)
1/2 of a truck
Opportunity Cost Equation
What you give up/what you gain
Moving between two points on a PPF, a country gains 8 desktop computers and for- goes 4 laptop computers. The opportunity cost of 1 desktop computer is
(what you give up/what you gain)
1/2 of a laptop
A country produces only cans of soup and ink pens. If the country produces on its bowed outward PPF and increases the production of cans of soup, the opportunity cost of additional
cans of soup is increasing.
Moving along a country's PPF, a reason opportunity costs increase is that
some resources are better suited for producing one good rather than the other.
Increasing opportunity costs exist
in the real world.
To increase its economic growth, a nation should
encourage education because that increases the quality of labor.
Other things equal, if Mexico devotes more resources to train its population than Spain
Mexico will grow faster than Spain.
If a nation devotes a larger share of its current production to consumption goods, then
its economic growth will slow down.
Which of the following about economic growth is correct?
i. As an economy grows, the opportunity
costs of economic growth decrease.

iii. The opportunity cost of economic growth is current consumption forgone.
When a country's production possibilities frontier shifts outward over time, the country is experiencing
economic growth.
The opportunity cost of economic growth is ____ and the benefit of economic growth is ____.
decreased current consumption; increased future consumption
"Comparative advantage" is defined as a situation in which one person can produce
a good for a lower opportunity cost than another person.
in one hour John can produce 20 loaves of bread or 8 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?
Phyllis has an absolute advantage in both goods.
In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?
John has a comparative advantage in producing cakes.
In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. John and Phyllis will reap the largest gains from specialization and trade if John produces ____ and Phyllis produces ____.
only bread; only cakes
The "law of demand" indicates that if the University of Maine increases the tuition, all other things remaining the same,
he quantity of classes demanded will decrease at the University of Maine.
Other things remaining the same, the quantity of a good or service demanded will increase if the price of the good or service
falls
Teenagers demand more soda than other age groups. If the number of teenagers increases, everything else remaining the same,
market demand for soda increases.
One reason the demand for laptop computers might increase is a
a change in preferences as laptops have become more portable, with faster processors and larger hard drives.
The number of buyers of sport utility vehicles, SUVs, decreases sharply. So the
demand curve for SUVs shifts leftward.
When moving along a demand curve, which of the following changes?
the prices of the good
If the price of a DVD falls,
ii. the demand curve for DVDs will not shift.

iii. there is a movement along the demand curve for DVDs.
Pizza and tacos are substitutes and the price of a pizza increases. Which of the following correctly indicates what happens?
The quantity of pizza demanded decreases and the demand for tacos increases.
The quantity supplied of a good, service, or resource is ____ during a specified period and at a specified price.
he amount that people are willing and able to sell
One reason supply curves have an upward slope is because
a higher price brings a greater profit, so firms want to sell more of that good.
Which of the following indicates that the law of supply applies to makers of soda?
An increase in the price of a soda leads to an increase in the quantity of soda supplied.
4. The market supply curve is the ____ of the ____.
horizontal sum; individual supply curves
If the costs to produce pizza increase, which will occur?
The supply of pizza will decrease.
A rise in the price of a substitute in production for a good leads to
a decrease in the supply of that good.
An increase in the productivity of producing jeans results in
the supply of jeans increasing.
A rightward shift of the supply curve of pizza could be the result of
an increase in the productivity of the
firms producing pizza.
The price of leather used to produce shoes rises, so the supply of shoes ____ and the supply curve of shoes ____.
decreases; shifts leftward
The equilibrium price of a good occurs if the
quantity of the good demanded equals the quantity of the good supplied.
Which of the following is correct?
i. A surplus puts downward pressure on the price of a good.

ii. A shortage puts upward pressure on the
price of a good

iii. There is no surplus or shortage at equilib-
rium.
i, ii, iii
The number of people looking to buy ceiling fans increases, so there is an increase in the
demand for ceiling fans and a rise in the price of a ceiling fan.
Which of the following is the best explanation for why the price of gasoline increases during the summer months?
There is increased driving by families going on vacation.
Suppose that the price of lettuce used to produce tacos increases. This change means that the equilibrium price of a taco ____ and the equilibrium quantity ____.
rises; decreases
The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ____ and the quantity ____.
falling; increasing
Candy makers accurately anticipate the increase in demand for candy for Halloween so that the supply of candy and the demand for candy increase the same amount. As a result, the price of candy ____ and the quantity of candy ____.
does not change; increases
During 2010 the supply of gasoline de- creased while at the same time the demand for gasoline increased. If the magnitude of the increase in demand was greater than the magnitude of the decrease in supply, then the equilibrium price of gasoline ____ and the equilibrium quantity ___
increased; increased
The price elasticity of demand is a measure of the extent to which the quantity demand- ed of a good changes when ____ changes and all other influences on buyers' plans remain the same.
the price of the good
Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the percentage change in price?
-25%
Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the percentage change in price?
20%
Demand is elastic if
consumers respond strongly to changes in the product's price.
During the winter of 2011-2012, the price of fuel oil increased enormously but the quantity demanded decreased only a little. This response indicates that the demand for fuel oil was
inelastic.
If substitutes for a good are readily available, the demand for that good is
elastic
If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is
1
The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. What is the price elasticity of demand?
1.25
When a firm raises the price of its product, what happens to total revenue?
If demand is elastic, total revenue decreases.
The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when only the
price of the good changes.
When the percentage change in the quantity supplied exceeds the percentage change in price, then supply is
elastic
The supply of beachfront property on St. Simon's Island is
inelastic
For a product with a rapidly increasing opportunity cost of producing additional units,
supply is price inelastic.
The greater the amount of time that passes after a price change, the
more elastic supply becomes.
The price elasticity of supply equals the percentage change in the
quantity supplied divided by the percentage change in price.
The measure used to determine whether two goods are complements or substitutes is called the
cross elasticity of demand.
If beef and pork are substitutes, the cross elasticity of demand between the two goods is
positive
When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the price of pizza is $15, the quantity of soda demanded is 100 drinks. The cross elasticity of demand equals
-2.50.
If two goods have a cross elasticity of demand of −2, then when the price of the one increases, the demand curve of the other good
shifts leftward
The income elasticity of demand is the percentage change in the ____ divided by the percentage change in ____.
quantity demanded; income
When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The income elasticity of demand for potatoes equals
-0.33
If a product is a normal good, then its income elasticity of demand is
positive
The income elasticity of demand for used cars is less than zero. So, used cars are
an inferior good.
If a landlord will rent an apartment only to married couples over 30 years old, the landlord is allocating resources using a ____ allocation method.
personal characteristics
Allocative efficiency occurs when
the most highly valued goods and services
are produced.
Marginal benefit equals the
benefit that a person receives from con-
suming another unit of a good.
In general, the marginal cost curve
has a positive slope.
Allocative efficiency is achieved when the marginal benefit of a good
equals the marginal cost.
Value is
the difference between the price paid for a good and the marginal cost of producing
that unit of the good.
A marginal benefit curve
is the same as a demand curve.
In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service
decreases.
The difference between the marginal benefit from a new pair of shoes and the price of the new pair of shoes is
the consumer surplus from that pair of
shoes.
If the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed ____ the consumer surplus from the second pizza consumed.
is greater than
Cost is
is what the seller must give up to produce
the good.
If a firm is willing to supply the 1,000th unit of a good at a price of $23 or more, we know that $23 is the
minimum price the seller must receive to
produce this unit.
A supply curve shows the ____ of producing one more unit of a good or service.
marginal cost
The producer surplus on a unit of a good is
equal to the price of the good minus the
marginal cost of producing it.
Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus?
$5 an hour
In a figure that shows a supply curve and a demand curve, producer surplus is the area
above the supply curve and below the
market price.
When a market is efficient the
sum of consumer surplus and producer
surplus is maximized.
Which of the following occurs when a market is efficient?
scarce resources are used to produce the
goods and services that people value most
highly
The concept of "the invisible hand" suggests that markets
produce the efficient quantity
When underproduction occurs,
there is a deadweight loss that is borne by
the entire society.
When production moves from the efficient quantity to a point of overproduction,
there is a deadweight loss.
Which of the following can result in market failure?
ii. an external cost or an external benefit
iii. a tax
A price ceiling is a government regulation that makes it illegal to charge a price
above some specified level.
When a price ceiling is set below the equilibrium price, the quantity supplied ____ the quantity demanded and ____ exists.
is less than; a shortage
In a housing market with a rent ceiling set below the equilibrium rent,
some people seeking an apartment to rent
will not be able to find one.
A rent ceiling on housing creates a problem of allocating the housing units because
a shortage of apartments occurs.
Rent ceilings
increase search activity AND benefit renters living in rent-controlled apartments.
Suppose that the government imposes a price ceiling on gasoline that is below the equilibrium price. The black market for gasoline is ____ market in which the price ____ the ceiling price.
an illegal; exceeds
A rent ceiling creates a deadweight loss if....
it is set below the equilibrium rent.
A price floor is...
the lowest price at which it is legal to
trade a particular good, service, or factor of production.
To be effective in raising people's wages, a minimum wage must be set
above the equilibrium wage rate.
A minimum wage set above the equilibrium wage rate
increases the quantity of labor services supplied.
Suppose the current equilibrium wage rate for lifeguards in Houston is $7.85 an hour. A minimum wage law that creates a price floor of $8.50 an hour leads to
a surplus of lifeguards in Houston.
If the minimum wage is above the equilibri- um wage rate, then an increase in the minimum wage ______ employment and ______ unemployment.
decreases; increases
If a minimum wage is introduced that is above the equilibrium wage rate,
job search activity increases.
The minimum wage is set above the equilibrium wage rate. Does the minimum wage create inefficiency?
YES
When the minimum wage is raised, the ____ union labor ____.
demand for; increases
Price supports are generally used in what kind of market?
agricultural markets.
To have an effective price support program, the government must:

i. isolate the domestic market from the world market

ii. pay the farmers a subsidy

iii. introduce a price floor
i, ii, iii
A price support directly sets the
lowest price for which the good may be sold.
To keep the price at the level set by the price support, the government must
buy some of the good.
With a price support program, who receives a subsidy?
only producers
When a price support is set above the equilibrium price, producers ____ the quantity supplied and consumers ____ the quantity demanded.
increase; decrease
A price support ____ producers and ____ a deadweight loss.
benefits; creates
Which of the following best describes an externality?
an effect of a transaction felt by someone other than the consumer or producer
Pollution is an example of a ____ externality.
negative production
Which of the following is an example of an external cost?

i. second-hand smoke

ii. sulfur emitting from a smoke stack.

iii. garbage on the roadside
i, ii, iii
The cost of producing one more unit of a good or service that is borne by the producer of that good or service is...
is the marginal private cost.
The cost of producing an additional unit of a good or service that falls on people other than the producer is
the marginal external cost.
The marginal cost of production that is borne by the entire society is the marginal
social cost.
If the marginal private cost of producing one kilowatt of power in California is 8¢ and the marginal social cost of each kilowatt is 13¢, then the marginal external cost equals ____ a kilowatt.
When the production of a good has a marginal external cost, which of the following will occur in an unregulated market?

i. Overproduction relative to the efficient level will occur

ii. The market price will be less than the marginal social cost at the equilibrium quantity

iii. A deadweight loss will occur
i, ii, iii
The Coase theorem is the proposition that if property rights exist, a small number of people are involved, and transactions costs are low, then private transactions are
efficient
If a polluting producers are required to pay a pollution charge or a pollution tax, what is the effect on the supply and demand curves for the product?
The supply curve shifts leftward.
A marketable pollution permit does what?
allows firms to buy and sell the right to pollute from other firms.
If we compare air pollution today to air pollution in 1980, we see that...
pollution of most types has been
decreased.
The benefit the consumer of a good or service receives is the
private benefit.
An external benefit is a benefit from a good or service that someone other than the ____ receives.
consumer
When Ronald takes another economics class, other people in society benefit. The benefit to these other people is called the marginal ____ benefit of the class.
external
Marginal social benefit equals
marginal private benefit plus marginal external benefit
If an external benefit is present, then the ____________ curve lies above the ____________ curve.
marginal social benefit;marginal private benefit
In an unregulated market with an external benefit, the
quantity produced is less than the efficient quantity.
If all education in the United States were provided by private, tuition charging schools, then...
too little education would be consumed.
Which of the following is a method used by government to cope with the situation in which production of a good creates an external benefit?

a. removing property rights
b. paying subsidies
c. issuing marketable permits d. running a lottery
e. imposing a Coasian tax
b. paying subsidies
If tuition at a college is $30,000 and the external benefit of graduating from this college is $10,000, then

i. in the absence of any gov. intervention, the number of students graduating is less than the efficient number

ii. the gov. could increase the # of graduates by giving the college a $10,000 subsidy per student

iii. gov. could increase the number of graduates by giving the students $10,000 vouchers
i, ii, iii
Which of the following is an example of a voucher?

a. the postal service
b. police services
c. social security
d. food stamps
e. a tax on gasoline
d. food stamps
The fact that Heidi's enjoyment of a sunset on Saint Simon's Island does not preclude Mounette from enjoying the same sunset is an example of
a good that is nonrival.
When use of a good decreases the quantity available for someone else, the good is
rival.
A private good is ____ and ____.
rival; excludable
If I order a pizza and invite my neighbors to eat it, the pizza is ______
a private good.
A public good is ____ and ____.
nonrival; nonexcludable
A public good...
can be consumed simultaneously by
many people.
Which of the following is the best example of a public good?
national defense
Which of the following is the best example of a common resource?
Yosemite national park
When someone enjoys the benefit of a good or service but does not pay for it, that person
is a free rider.
The marginal social benefit of a public good is the
sum of the marginal benefits of all the individuals at each quantity.
The marginal social benefit curve of a public good slopes..
Downward
Sue and Mark are the only two members of a community. Sue's marginal benefit from one lighthouse is $2,000 and Mark's marginal benefit is $1,000. If the marginal social cost of one lighthouse is $2,500 and if a lighthouse is a public good, then for effi- ciency the lighthouse should
be built and both Sue and Mark should be allowed to use it.
The efficient quantity of a public good is
the quantity at which the marginal social benefit equals the marginal social cost.
The efficient quantity of a public good can't be produced by private firms because
consumers have an incentive to free ride and not pay for their share of the good.
If the two political parties propose similar or identical policies, they are following the principle of
minimum differentiation.
____ is the decision not to acquire information because the marginal cost of doing so exceeds expected marginal benefit.
Rational ignorance
Government bureaucracies overprovide public goods and grow larger because of their goal of ____ combined with ____ of the voters.
budget maximization; rational ignorance
The tragedy of the commons is the absence of incentives to prebent...
overuse and depletion of the
common resource.
For a common resource such as fish, the marginal private benefit ____ the marginal social benefit and the marginal private cost ____ the marginal social cost.
equals; is less than
For a common resource, the marginal private cost curve ____ and the marginal social cost curve ____.
slopes upward; slopes upward
For a common resource, the equilibrium with no government intervention is such that ____ equals ____ cost.
marginal social benefit; marginal private cost
For a common resource, efficiency requires that the ____ equals the ____.
marginal social benefit; marginal social cost
Which of the following is not a potential solution to the tragedy of the commons?

a. Subsidizing use of the resource
b. Setting a production quota
c. Granting individual transferable quotas
d. Establish property rights to the resource
a. Subsidizing use of the resource
If the government assigns private property rights to a common resource, then the
marginal private cost becomes equal to the marginal social cost.
The market price of an individual transferable quota is equal to the
marginal social benefit minus the marginal cost.
The paramount goal of a firm is to...
maximize profit.
For a business, opportunity cost measures
the cost of all the factors of production the firm employs.
Costs paid in money to hire a resource is a _________ cost
an explicit cost.
Whats an example of an implicit cost?
the cost of using capital an owner donates to the business
The opportunity cost of a firm using its own capital is
economic depreciation.
The difference between a firm's total revenue and its total cost is its ____ profit.
economic
Total cost is equal to the sum of
total variable cost and total fixed cost.
Total fixed cost is the cost of
a firm's fixed factors of production.
Jay set up a hot dog stand near the business district. His total variable cost includes the:

a. annual insurance for hot dog stand.
b. cost of buying the hot dog stand.
c. cost of the hot dogs and condiments.
d. interest he pays on the funds he borrowed
to pay for advertising.
cost of the hot dogs and condiments.
Marginal cost is equal to
the change in total cost that results from a one-unit increase in output.
To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The marginal cost of the 11th shirt is equal to
$19
Average total cost equals
average fixed cost plus average variable cost.
To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The average total cost of the 11th shirt is equal to
$9
One of the major reasons for the U-shaped average total cost curve is the fact that
there eventually are decreasing returns to labor as more workers are employed
Economies of scale definitely occur whenever a firm's technology is such that when the firm increases its output, its
average total cost falls.
The main source of economies of scale is
specialization
Diseconomies of scale can occur as a result of which of the following?
management difficulties as the firm increases its size
In the long run, constant returns to scale necessarily occur when the firm increases its production and the firm's
average total cost does not change.
A firm's long-run average cost curve shows the ____ average cost at which it is possible to produce each output when the firm has had ____ time to change both its labor force and its plant.
lowest; sufficient
Economies of scale and diseconomies of scale explain....
the U-shape of the long-run cost curve.
The four market types in a competitive firm are:
perfect competition, monopoly, monopolistic competition, and oligopoly.
A requirement of perfect competition is that:

i. many firms sell an identical product to many buyers.

ii. there are no restrictions on entry/exit into the market, and established firms have no advantage over new firms.

iii. sellers and buyers are well informed about
prices
i, i, iii
A perfectly competitive firm is a price taker because
many other firms produce the same product.
The demand curve faced by a perfectly competitive firm is
horizontal.
For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is
the same as its demand curve.
A perfectly competitive firm maximizes its profit by producing at the point where..
marginal revenue is equal to marginal cost.
If the market price is lower than a perfectly competitive firm's average total cost, the firm will
continue to produce if the price exceeds the average variable cost.
One part of a perfectly competitive trout farm's supply curve is its
marginal cost curve above the shutdown point.
If the market supply curve and market demand curve for a good intersect at 600,000 units and there are 10,000 identical firms in the market, then each firm is producing
60 units.
In the short run, a perfectly competitive firm

a. must make an economic profit.
b. must incur an economic loss. c. must make zero economic profit.
d. might make an economic profit, an economic loss, or zero economic profit.
might make an economic profit, an economic loss, or zero economic profit.
A perfectly competitive firm definitely makes an economic profit in the short run if price is
greater than average total cost.
If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct?
i. price equals marginal revenue

ii. marginal revenue equals marginal cost

iii. price is greater than average total cost
i, ii, and iii.
The market for watermelons in Alabama is perfectly competitive. A watermelon producer making zero economic profit could make an economic profit if the
average total cost of selling watermelons rises.
Juan's Software Service Company is in a perfectly competitive market. Juan's total fixed cost is $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit?
$5,000
If a perfectly competitive firm finds that price is less than its ATC, then the firm
is incurring an economic loss.
A perfectly competitive furniture rental firm in Phoenix incurs an economic loss if the average total cost of each rental is
greater than the price of each rental.
In the long run, new firms enter a perfectly competitive market when
economic profit is greater than zero.
If perfectly competitive firms are making an economic profit, the economic profit
attracts entry by more firms, which lowers the price.
If perfectly competitive firms are making an economic profit, then
new firms enter the market and the economic profit of the firms already in the market decreases.
Firms exit a competitive market when they incur an economic loss. In the long run, this exit means that the economic losses of the surviving firms
decrease until they equal zero.
If firms in a perfectly competitive market incur economic losses, then as time passes firms ____ and the market ____.
exit; supply curve shifts leftward
As a result of firms leaving the perfectly competitive frozen yogurt market in the early 2000s, the market
supply curve shifted leftward.
In the long run, a firm in a perfectly competitive market will make..
make zero economic profit, so that its owners earn a normal profit.
Technological change brings a to firms that adopt the new technology.
temporary economic profit
A monopoly market has how many firms?
a single firm.
Two types of barriers to entry are called ____ barriers to entry and ____ barriers to entry.
natural; legal
A natural monopoly is one that arises from
economies of scale.
A legal barrier is created when a firm
is granted a public franchise, government license, patent, or copyright.
Pizza producers charge one price for a single pizza and almost give away a second one. This is an example of
price discrimination.
For a single-price monopoly, price is
greater than marginal revenue.
A single-price monopoly can sell 1 unit for $9.00. To sell 2 units, the price must be $8.50 per unit. The marginal revenue from selling the second unit is
$8.00
When demand is elastic, marginal revenue is

a. positive.
b. negative.
c. zero.
d. increasing as output increases. e. undefined.
positive
To maximize its profit, a single price monopoly produces the quantity at which
marginal revenue equals marginal cost.
Once a monopoly has determined how much it produces, it will charge a price that..
is determined by its demand curve.
If a perfectly competitive industry is taken over by a single firm that operates as a single- price monopoly, the price will ____ and the quantity will ____.
rise; decrease
Comparing single-price monopoly to perfect competition, monopoly
decreases the amount of consumer surplus.
Is a single-price monopoly efficient? why?
No, because it creates a deadweight loss.
Monopolies ____ fair and ____ efficient.
might be; might be
In equilibrium, rent seeking eliminates the
economic profit.
Which of the following must a firm be able
to do to successfully price discriminate?

i. divide buyers into different groups according to their willingness to pay

ii. prevent resale of the good/service

iii. identify into which group (high willingness to pay or low willingness to pay) a buyer belongs
i, ii, and iii.
Which of the following is (are) price discrimination?

i. charging different prices based on differences in production cost

ii. charging business flyers a higher airfare than tourists

iii. charging more for the first pizza than the second
ii and iii.
When a monopoly price discriminates, it
converts consumer surplus into economic profit.
If a monopoly is able to perfectly price discriminate, then consumer surplus is
equal to zero.
With perfect price discrimination, the quantity of output produced by a monopoly is ____ the quantity produced by a perfectly competitive market.
equal to but not greater than
In monopolistic competition there are how many firms
are a large number of firms.
A firm in monopolistic competition has a ____ market share and ____ influence the price of its good or service.
small; can
Product differentiation means
making a product that is slightly different from products of competing firms.
A firm in monopolistic competition has ____ demand curve.
a downward-sloping
Firms in monopolistic competition compete on:

i. quality.
ii. price.
iii. marketing.
i, ii, and iii.
The absence of barriers to entry in monopolistic competition means that in the long run firms what kind of profit
make zero economic profit.
A firm in monopolistic competition maximizes profit by producing the quantity at which
marginal revenue and marginal cost.
Once a firm in monopolistic competition has determined how much to produce, the firm determines its price by referring to its
demand curve.
A firm in monopolistic competition definitely incurs an economic loss if
price is less than average total cost.
In the long run, a firm in monopolistic competition
makes zero economic profit.
A firm's efficient scale of production is the output at which its
average total cost is at a minimum.
In the long run, a firm in monopolistic competition ____ excess capacity and a firm in perfect competition ____ excess capacity
has; does not have
Oligopoly is a market structure in which
a small number of firms compete.
The fact that firms in oligopoly are interdependent means that
one firm's profits are affected by other firms' actions.
Collusion results when a group of firms

i. act separately to limit output, lower price, and decrease economic profit.

ii. act together to limit output, raise price, and increase economic profit.

iii. in the United States legally fix prices.
ii only.
A cartel is a group of firms
acting together to limit output, raise
price, and increase economic profit.
A market with only two firms is called a
duopoly
The efficient scale of one firm is 20 units and the average total cost at the efficient scale is $30. The quantity demanded in the market as a whole at $30 is 40 units. This market is
a natural duopoly.
Even though four firms can profitably sell hotdogs downtown, the government licenses only two firms. This market is a
legal duopoly.
To determine if a market is an oligopoly, we need to determine if..
the firms are so few that they recognize their mutual interdependencies.
For a duopoly, the highest price is charged when the duopoly achieves..
the monopoly outcome.
For a duopoly, the smallest total quantity is produced when the duopoly achieves
the monopoly outcome.
For a duopoly, the maximum total profit is reached when the duopoly produces
the same amount of output as the monopoly outcome.
If a duopoly has reached the monopoly outcome, a firm can increase its profit if it and it alone ____ its price and ____ its production.
lowers; increases
If a duopoly has reached the monopoly outcome and only one firm increases its production, that firm's profit ____ and the other firm's profit ____.
increases; decreases
Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit ____ and the first firm's profit ____.
increases; decreases
If both firms in a duopoly increase their production by one unit beyond the monopoly output, each firm's profit ____ and the total profit of the duopoly ____.
decreases; decreases
The very best outcome possible for the firms in a duopoly is to produce the
monopoly level of output.
Asymmetric information means that
either the buyer has information that the seller does not have or the seller has information that the buyer does not have.
The lemons problem in the used car market is that
only lemons are bought and sold.
The fact that people who know they are risky drivers are more likely to buy auto insurance reflects
adverse selection.
JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing. This guarantee is an example of
signaling.
If buyers cannot assess the quality of used cars and there are no warranties,
only lemons are sold.
In the used car market, with a pooling equilibrium the price of a lemon is ____ the price of a good used car and with a separating equilibrium the price of a lemon is ____ the price of a good used car.
equal to; less than
In the United States, of all types of insurance, people spend the most on ____ insurance.
health
Insurance companies (regarding risk)
pool risk and enable everyone to share the costs of bad outcomes.
When Sam makes an agreement and then behaves after the agreement in a way to in- crease his benefits and harm the other party to the agreement, Sam is illustrating
moral hazard.
Ben is an aggressive driver so he is more likely to buy auto insurance. This situation illustrates the idea of
adverse selection.
If you have private information that you are a riskier driver than your record indicates, you are likely to buy from your insurance company a policy that has a ____ deductible and a ____ premium.
low; high
Screening....
explains why insurance companies offer
low-premium, high-deductible policies and high-premium, low-deductible poli- cies.
Which of the following is NOT a problem in health-care markets?

a. hospitals are not trying to maximize their profit

b. asymmetric information

c. public-health externalities

d. a missing insurance market
hospitals are not trying to maximize their profit
Moral hazard in the market for health-care services leads
to providers over treating patients.
The missing insurance market is the insurance market for
people who have pre-existing health problems.
Vaccination against infectious diseases ___, so private markets will provide ____ efficient quantity of vaccination.
has a positive externality; less than the
Compared to other major nations, the United States spends ____ on health care and achieves ____ efficiency.
more; less
Which of the following is correct about the United States regarding income?
Both wealth and income are unequally distributed.
If the income distribution is more unequal than the wealth distribution, then the
Lorenz curve for income will be farther away from the line of equality than the Lorenz curve for wealth.
In the United States in 2004, the wealthiest 1 percent of households owned approximately ____ percent of all wealth.
34
In the United States since 1970, the share of money income received by the richest 20 percent of households has ____ and the share received by the lowest 20 percent of households has ____.
increased; decreased
The inequality of annual income
overstates the degree of lifetime inequality.
Of all the characteristics that lead to income inequality, the factor with the largest impact is
education
Which of the following statements about poverty is (are) correct?

i. Blacks and Hispanics have higher poverty rates than whites.

ii. Over the last 40 years, poverty rates for all
groups have generally increased.

iii. Most household spells of poverty last much longer than 1 year
i. only
Differences in skills

i. can arise from differences in education and/or from differences in on-the-job
training.

ii. can lead to large differences in earnings

iii. result in different demand curves for high-skilled and low-skilled labor.
i, ii, and iii.
The cost of acquiring a skill accounts for why the
supply of high-skilled workers is different than the supply of low-skilled workers.
If decreased student aid increases the cost of acquiring skills, the equilibrium wage rate paid high-skilled workers ____ and the em- ployment of high-skilled workers ____.
rises; decreases
If the value of marginal product of skill increases, the wage rate paid high-skilled workers ____ and the employment of high- skilled workers ____.
rises; increases
If discrimination against women decreases their value of marginal product, then women will have ____ wage rate than men and there will be ____ high-paying jobs for women.
a lower; fewer
Inequality in the distribution of income and wealth is increased by
the point that the children of the poorest find it difficult to get into college.
Which of the following is a way income is redistributed in the United States?

i. subsidizing services

ii. income taxes

iii. income maintenance programs
i, ii, and iii.
A ____ tax is one that taxes income at an average rate that increases with the level of income.
progressive
Of the following types of income tax systems, the one that provides the greatest amount of redistribution from the rich to the poor is a
progressive income tax.
The three major types of income mainte- nance programs are
Social Security programs, unemployment compensation, and welfare programs.
A household's income earned from the markets for factors of production and with no government redistribution is its
market income.
The median voter theorem says government
does not face the big tradeoff.
When government redistributes income, one dollar collected from a rich person translates into ____ received by a poor person.
less than one dollar
With a negative income tax that has a $10,000 guaranteed minimum income and a 25 percent tax rate, a household that has earned income of $16,000 has a total income of
$22,000.